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Pakistan Energy Conference 2011
Reasonable OMC & Refining Sector
Margins Imperative for Investmentin Energy Sector
Monday April 11th, 2011
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Pakistan Oil Market Overview
• Pakistan is an energy deficit country
• Petroleum Product demand in 2009-10 was 20.16 million M. Tons
Pakistan Energy Conference 2011April 11, 2011 | Slide 2
Imported
crude
34%
Importedrefined
product
52%
Local crude
14%
10.4 million M. Tons6.88 million M. Tons
2.88 million M. Tons
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Due to progressive policies adopted a decade ago,
the oil sector in Pakistan attained international
quality service standards and is driving the country’s
economy by:
Oil Marketing Sector statement
•
Making oil products available across the country• Ensuring safety in handling dangerous oil products
• Assuring quality and quantity of oil products
• Enhancing the image of the country (quality retail
stations)• Introducing world class standards and
technological innovations
Pakistan Energy Conference 2011April 11, 2011 | Slide 3
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Out look of POL Demand in Pakistan
Demand of POL products in Pakistan is Expected to grow by 3%
per annum (PMG~6%, HSD~2%, FO~4%) Such increase would require additional investment in
infrastructure
A forced reduction in oil consumption due to inadequate
infrastructure will potentially slowdown economic growth We have already experienced growing Gas outages during the
winter months, these are expected to increase in coming years,
thereby impacting industrial output
Shortage of Gas will only be compensated through oil Therefore investment in timely development of the oil sector
infrastructure is extremely important to support GDP growth
Pakistan Energy Conference 2011April 11, 2011 | Slide 4
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Areas that require Major Investments
Pakistan Energy Conference 2011April 11, 2011 | Slide 5
Refineries
Increasing storage capacities
Increase ship handling capacity at port
Increase in capacity for conversion of Naphtha into
PMG
Pipeline to link Keamari Port with Port Qasim
Refineries upgradation to produce products of Euro II
standard Development of LPG Autogas station
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Margin of refineries
Pakistan Energy Conference 2011April 11, 2011 | Slide 6
• Ex-Refinery price of POL products are determined on the basis
of import parity price (IPPS)• Therefore refinery margin in Pakistan are dependant on
difference of cost and IPP
• Government has given the protection to local refineries in the form of
Deemed duty- But
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Frequent changes in refinery price formula
Pakistan Energy Conference 2011April 11, 2011 | Slide 7
• Removal /Reduction of deemed duty protection
• Hypothetical formula of Ex-refinery Price of PMG (price allowed to ex-
refinery is lower than international market)
• Removal of incidental charges from Import Parity Price (IPP) formula in
Dec 2010
• Ex-refinery price of SKO & LDO as announced by OGRA is even lower
than IPP (Shifting the burden from GoP to Refineries)
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Margins of OMCs
OMCs were allowed in 2002 a margin of
3.5% of consumer price
Since 2006, Govt has tweaked OMC margin7 times
Such adhoc changes in margins haveshattered the confidence of existing andfuture investors
Pakistan Energy Conference 2011April 11, 2011 | Slide 8
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Amendment in OMC Margins
Year 2002 - OMC were allowed a margin of 3.5% of consumer price
Year 2006 - the margin was fixed @ 3.5% of price before GST
Year 2006, the margin was fixed @ 3.5% of price before Petroleum levy &Sales Tax
July 2008 -The margin was frozen in Rupee term at the then prevailinglevel
Aug 2008 - The margin was reduced to and capped @ AG lightUS$100/BBL
Feb 2009 - Fixed margin of Rs. 1.35/ltr in HSD and on rest of the product 4%of price excluding GST & PDL (It was fixed for the oil price range of US$45-$80) - Current price is in the range of US$110-US$120/BBL
Dec 2010 - Margin on all products were fixed in rupee terms
Pakistan Energy Conference 2011April 11, 2011 | Slide 9
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Margins* history – Motor gasoline
* Margins plotted as % of retail price
Pakistan Energy Conference 2011April 11, 2011 | Slide 10
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
19-
Aug-
93
03-
Nov-
93
13-
Feb-
95
15-
Dec-
99
14-
Mar-
01
01-
Jul-02
16-
Mar-
06
25-
Aug-
07
01-
Apr-
08
21-
Jul-08
01-
Aug-
08
01-
Oct-
08
01-
Jan-
09
01-
Jan-
10
01-
Dec-
10
01-
Apr-
11
Shift fromfixed margin
regime to %basis
3.5% marginson end sellingprice till March
15, 2006
GST & PDLexclusion
from margincalculation
Current declinein oil prices
effectingprofitability
% wasincreased from
3.5% to 4%
Margin is fixedin Rs. per liter
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Margins* history – Diesel
* Margins plotted as % of retail price
Pakistan Energy Conference 2011April 11, 2011 | Slide 11
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
19-
Aug-
93
03-
Nov-
93
13-
Feb-
95
15-
Dec-
99
14-
Mar-01
01-Jul-
02
16-
Mar-06
25-
Aug-
07
01-
Apr-08
21-Jul-
08
01-
Aug-
08
01-
Oct-08
01-
Jan-09
01-
Jan-10
01-
Dec-
10
01-
Apr-11
Shift from
fixed marginregime to %
basis
3.5% marginson selling pricetill March 15,
2006
GSTexclusion
from margincalculation
Decline in oilprices effected
profitability
Margins were
fixed in rupeeper liter
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Margins cover OMCs investments and expenses
Capital expenditure on storages, pipelines and retail outlets
Investment in inventory
Rising cost of doing business:
Interest rates, KIBOR: 14%
Rs/US$ parity: Rs 86+
Electricity, gas, fuel
Insurance cost
Traveling
Human Resource
Land leases
Advertisement
Repairs & Maintenance
Pakistan Energy Conference 2011April 11, 2011 | Slide 12
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Consumer Price Index
Pakistan Energy Conference 2011April 11, 2011 | Slide 13
Source: www.tradingeconomics.com
Li ki f OMC i ith i h b ht i
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Linking of OMC margins with price has brought ininvestment in the country
Shift of fixedmargin regime to
% basis – animpetus forgrowth in
investment
0
1
2
3
4
5
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5 / 6 ( 1 8 m t h )
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
A n n u a l C a p e x R s b i l l i o n
0
5
10
15
20
25
30
35
40
C u m u l a t i v
e C a p e x R s b i l l i o n
Total Capex Cumulative Capex WOPP
Asia
Petroleum
and ZOT
Modernization of Retail
Outlets by Chevron & Shell Introduction of New Vision
Retail Outlets by PSO
Pakistan Energy Conference 2011April 11, 2011 | Slide 14
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This sample calculation is based on the prices effective April 1, 2011
GoP revenues are linked to Oil prices e.g. Custom Duty, PDL, GST and Income tax
A reduction in OMC margins will not have a significant impact on the consumer,
Reduction in margin is also a cause of increasing the tendency of malpractices in
the industry
Capping / Reducing margin did not have any material impact on thecustomer price but will be detrimental to investment
PMG HSD
Cost of product 59.35 73.80
IFEM 5.54 2.30
OMC Margins 1.50 1.35
Dealers Commission 1.87 1.50
Petroleum Levy 3.16 0.44
Sales Tax 12.14 13.50Net Taxes/(Subsidy) 15.30 13.94
Selling Price 83.56 92.89
OMC Margins %age 1.80% 1.45%
Pakistan Energy Conference 2011April 11, 2011 | Slide 15
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Net Margin comparison – different industrial sectors
Pakistan Energy Conference 2011April 11, 2011 | Slide 16
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Net Margin Gross Margin
Source: Elixir securitiesYear : 2010
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Recommendation
Pakistan Energy Conference 2011April 11 2011 | Slide 17
GoP should announce a long term and sustainable
policy on Refinery Price and OMC Margin
Give a legal protection to investors against:
Adhoc changes in Government Policies
Changes in taxation structureUnfair burden on oil sector in the form of Price
Differential Claims and Circular Debt
Providing a level playing field to all players of industry
Fully deregulating the petroleum sector in the longer term