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CASE STUDY PAKISTAN STATE OIL Pakistan State Oil (PSO) is the oil market leader in Pakistan.

The well established infrastructure, built at par with international standards, representing 82% of countrys storage, provides PSO an edge over its competitors. PSO came into being in the mid-70s when the Government of Pakistan amalgamated three Oil Marketing Companies: Esso Eastern, Pakistan National Oil (PNO) and Dawood Petroleum as part of its Nationalization Plan.

From 1999 to 2008, PSO had undergone radical changes, both internal and external and has emerged with a new look and as a market leader with a long term vision. The company is the only public sector entity in Pakistan that has been competing effectively with three multinationals (Shell, Caltex and Total) which are supported technically by their parent organizations. PSO is currently enjoying over 73% share of Black Oil market and 59% share of White Oil market. It is engaged in import, storage, distribution and marketing of various POL products including petrol, high speed diesel (HSD), fuel oil, jet fuel, kerosene, liquified petroleum gas (LPG), compressed natural gas (CNG) and petrochemicals. PSO also enjoys around 35% market participation in lubricants ( motor oil) and is blending/marketing Castrol brands, in addition to a wide array of its own. It is considered as one of the most successful mergers in the history of Pakistan. The company has retail coverage of over 3,800 outlets, representing 80% participation in total industry network. The company has been the winner of Karachi Stock Exchange Top Companies Award for many years and is a member of World Economic Forum. PSO top management also claims that the company believes in Corporate Social Responsibility and practicing Corporate Governance. PSO serves a wide range of customers throughout Pakistan including retail, industrial, aviation, marine and government/defense sectors. PSO has been meeting the countrys fuel needs by merging sound business sense with national obligation. About the PSO's focus on non-fuel retail business, Managing Director was of the view that the fuel business is becoming very competitive in Pakistan. There are 12 players in the market of liquid fuels that entails HSD and petrol "Challenge for PSO is to maintain and increase the sales volumes and market share and the company management is trying to supplement income by investing in the non-fuel areas like Quick Service Restaurants - KFC, Pizza Hut etc, Banking services such as branchless banking, ATM services and utility bills acceptance, auto-car wash facility and convenience stores (shopstop)". MD also added "We are already market leaders in CNG business and in the near future we shall be coming up with LPG auto-gas stations. So these are our priority areas". Out of 3,800 outlets, PSO has 1600 modern stations known as New Vision Retail Outlets - the

largest number that any Oil Marketing Company has in Pakistan and all these modern stations have automated dispensing facilities,. auto car wash, convenience stores, business centers with internet facility. "PSO has also come up with plastic technology and are offering pre-paid, loyalty, corporate and fleet cards. These cards were able to attract lot of customers in the past. PSO has been able to increase its market share because of innovative marketing strategies, organizational restructuring, enhanced product mix, revamping of internal processes. Pakistan is energy deficient country, diesel and furnace oil imports almost 9 million metric tons every year. PSO is looking for some substitute within the country for these products that would be helpful", For this purpose PSO is looking at the possibility of extracting bio diesel from a plant and have tested planting Jetropha plant, the seeds have been imported and a nursery has been developed at Pipri at an area of 70 acres. Almost one third of this area has already been cultivated. Roughly it takes 1.5 years for this plant to grow into a tree which produces the seed from which oil can be extracted. The oil from these seeds is very low in sulphur and can be blended with normal diesel. PSO is looking forward to go for a pilot project at 1000 acres of land". MD recently stated in a press conference that this project shall be beneficial for Pakistan in many ways. The cultivation will create a lot of job opportunities for poor people and also will result in cutting down on imports and almost Rs 1 billion of foreign exchange shall be saved. He said crude oil went up to $147 and luckily it has come down to $48 dollars per barrel. But it is always good to have some indigenous source to withstand difficult times. Oil analyst world wide feel that the oil industry will be able to generate profit both in short term and long term. They feel that the moment world financial crunch will ease out prices of oil will start increasing. This is a strong industry and will remain one in the long term also but the prices of this industry will remain uncertain. MD also narrated that PSO has the largest CNG stations network which is very profitable for the company and dealers. We shall be launching LPG auto-gas stations in six months time". One economic analyst wrote in his column the country's economic situation is expected to improve after the IMF loan. Now the reserves have gone up to 9 billion dollars which had hit an alarmingly low level of 6 billion dollars. PSO has incurred losses in the first quarter of 2009; MD said that the primary reason for reporting a loss was sharp decline in crude oil prices. "Being a market leader we carry a huge inventory which resulted in huge inventory losses", he said and added this was supplemented by the increase in rupee and dollar parity. "Also the circular debt situation led us to borrow from the banks resulting in payment of huge financial borrowing costs" The overall receivable of Pakistan State Oil Company (PSO) has also increased to Rs 94 billion in February 2009, which has created huge problems for PSO to arrange the products and keep the supply chain running smoothly.

Out of the total receivables, HUBCO has to pay Rs 38 billion, KAPCO Rs 14 billion and WAPDA Rs 8 billion. Apart from the power sector, PIA has to pay Rs 3.4 billion and Government Rs 7 billion on the subsidy account. "PSO is the only company which is supplying fuel to the IPPs", PSO's market share of 85 percent in furnace oil indicates its leadership of supplying fuel to the power sector. PSO is to pay over Rs 60 billion to oil refineries. Sources said that PSO would transfer the said amount to oil refineries as soon as it received it. Despite the financial crunch, the new management of PSO increased the furnace oil supply to power sector from 20,000 tons to 32000 tons per day in an effort to enhance power generation to overcome load shedding. PSO has faced a dramatic decline in oil reserves during the last financial year due to non payment of billions of rupees of price differential claims (PDC) to Oil Marketing Companies (OMCs) and the country is still grappling with the circular debt. The circular debt between the OMCs, oil refineries and power producers is leading to supply problems. PSO is the worst sufferer as it is the only supplier to electricity generating companies, other oil marketing companies have refused to supply to power sector companies as they are aware of their financial problems. Customers of PSO in Punjab are coming across dry petrol pumps because of companys low stock position and to compound the problem CNG supply is also irregular in this province The present Government has also announced that large number of people sacked from PSO nine years back on political reasons will be reinstated in the company with three years of salaries and one promotion. This will add to financial problems of PSO in future. The new MD sitting in his posh office at head office of PSO in Clifton, Karachi was looking outside the window and thinking that should he stop the supplies to this power generation sector to reduce his short run problems and what long term strategies he needs to adopt to ensure survival and growth of the company. He wanted to call meeting of top management to discuss the issues and develop strategies to remain competitive in the present financial crunch times. He is also aware of Shell Oils push towards implementing backward and forward integration strategies world wide and pursuing bio fuel as alternative energy. PSO Financial Data is as follows:
Rs. Million (unless noted) 2008
Sales Volume (Million Tons) Profit & Loss Account Sales Revenue Net Revenue Gross Profit Operating Profit Marketing & Administrative Expenses Profit before Tax Profit after Tax Earning before Interest, taxes, depreciation & Amortization (EBITDA) 583,214 411,058 352,515 253,777 195,130 206,376 182,323195,039135,040115,636 495,279 349,706 298,250 212,504 161,538 172,446 153,111 143,306102,467 61,697 30,024 12,259 17,207 13,746 9,191 22,451 7,950 4,425 21,377 3,748 7,122 11,264 9,340 6,452 3,428 11,418 7,525 3,219 9,191 5,656 2,634 4,212 8,955 6,484 2,465 4,030 7,113 6,777 5,709 1,907 5,137 3,188 6,328 6,372 3,822 2,065 3,451 2,251 4,347 5,670 5,245 3,927 3,646 1,788 3,581 2,231 1,428 3,356 2,671 13.0

2007 2006 2005 2004 2003 2002 2001 2000 1999

11.8 9.8 9.7 8.6 10.8 11.5 12.6 12.7 12.1

6,263 6,209

14,054 4,690

23,912 9,420 13,385 10,546 7,244

4,368 4,063

Balance Sheet Share Capital Reserves Shareholders' Equity Property Plant & Equipment Net current assets 1,715 1,715 1,715 1,715 1,715 1,715 1,429 1,429 8,379 4,625 5,356 1,429 7,557 3,897 5,590 1,191 6,993 3,352 5,181 29,250 19,224 19,098 15,830 13,731 11,348 9,823 7,567 8,138 7,674 8,256 7,738 6,437 4,531 5,427 4,181

30,965 20,939 20,813 17,545 15,446 14,264 12,396 10,666 9,987 8,899 22,143 11,128 10,978 7,970 6,309