Contents

1.0 Introduction ............................................................................................................................... 3 1.1 Background: .......................................................................................................................... 3 1.2 Objectives: ............................................................................................................................ 3 1.3 Justification: .......................................................................................................................... 3 1.4 Limitations: ........................................................................................................................... 3 2.0 Pakistan State Oil .....................................................................Error! Bookmark not defined. 2.1 Company Profile ..................................................................Error! Bookmark not defined. 2.2 Excellence in Customer Service ..........................................Error! Bookmark not defined. 2.3 Short History of PSO ...........................................................Error! Bookmark not defined. 2.4 Companys Core Values (as stated by the PSO itself):........Error! Bookmark not defined. 3.0 Shell Pakistan Limited .............................................................Error! Bookmark not defined. 3.1 Business Operations .............................................................Error! Bookmark not defined. 3.3 Operating Performance and Efficiency: ...............................Error! Bookmark not defined. 3.4 Liquidity Position: ...............................................................Error! Bookmark not defined. 4.0 Methodology of Research: ........................................................................................................ 4 4.1 Research Design : ................................................................................................................. 4 4.2 Procedure : ............................................................................................................................ 4 4.3 Population : ........................................................................................................................... 4 4.4 Sampling : ............................................................................................................................. 4 Research Questions : ....................................................................................................................... 5 Literature Review : ......................................................................................................................... 6 Article 1: Cost Savings through Centralized Treasury ............................................................... 6 Article 2: Refining Shells Treasury ............................................................................................ 6 Tax Structure :................................................................................................................................. 7 Shell Pakistan Limited ................................................................................................................ 7 Pakistan State Oil ........................................................................................................................ 7 OMC Pricing Formula ................................................................................................................ 7 Organization Structure : .................................................................................................................. 8 Pakistan State Oil ........................................................................................................................ 8

General Banking ..................................................................................................................... 9 Trade Finance........................................................................................................................ 12 Collections ............................................................................................................................ 15 Insurance ............................................................................................................................... 15 Bank Reconciliation .............................................................................................................. 16 Funds Management ............................................................................................................... 16 Shell Pakistan Limited .............................................................................................................. 17 Risk Mitigating Strategies..................................................................................................... 18 Internal Auditing System ...................................................................................................... 18 Software used by the Treasury Department ...........................Error! Bookmark not defined. Cash Management ................................................................................................................. 18 In-House Banking ................................................................................................................. 19 Assessment of Customer/ Vendor related risks .................................................................... 20 Corporate Funds .................................................................................................................... 20 Excess Funds ......................................................................................................................... 21 Maintenance of Cash Liquidity............................................................................................. 21 Funds Transfer Protocol ........................................................................................................ 21 Market Risks ..........................................................................Error! Bookmark not defined. Taxation Policy ......................................................................Error! Bookmark not defined. Pricing Policy .........................................................................Error! Bookmark not defined. Preparation of Financial Statements ......................................Error! Bookmark not defined.

1.0 Introduction:
1.1 Background:
Treasury management refers to the fund and revenue possessed by a company and its day-today management by the treasury department. It has to constantly monitor the cash inflow and outflow. Treasury management involves estimating financial risk, managing foreign currency risk (when investing in foreign currencies), maintain liquidity and providing quick finance. Funds that are not utilized are usually considered a source of loss. Therefore these funds need to be managed and invested very carefully so as to increase profitability. In this report we are going to compare the organizational differences in the Treasury Management department of PSO and Shell Pakistan Limited. After data collection, we will conduct an analysis by which we will get to know which company is maintaining its Treasury Department more efficiently. We have identified few research questions as well for both the companies, which will be worked on accordingly. For detailed information we are gathering the taxation and pricing rate of both the companies in order to know the tax paid by PSO and Shell Pakistan Limited in different years.

1.2 Objectives:
Identifying which companys treasury department is performing effectively, PSO or SPLs?

1.3 Justification:
This report will help us to gain valuable insight in the working of the treasury department of these two leading companies. It will also help us to conduct similar researches in the future to analyze and identify differences between treasury departments of different companies.

1.4 Limitations:
This research will not be able to analyze each and every aspect of the treasury department as it is a qualitative research. Also the information regarding the treasury department is very confidential therefore we cannot get access to all relevant data but can only get an overview.

4.0 Methodology of Research:

4.1 Research Design:

A qualitative research shall be conducted in order to gain insight into the working of each organizations treasury department.

4.2 Procedure:
The research shall include the comparison of the organizational charts/structures of the treasury department at PSO and Shell and discussions with employees concerned regarding the branches of treasury management that each organization considers in its operations. Interviews and detailed discussions with Human Resource Business Partner (treasury) of both the organizations and a representative of the treasury shall provide the required information and data.

4.3 Population:
Number of Employees in the treasury department Pakistan State Oil: 32 Shell Pakistan Limited: 5

4.4 Sampling:
Sampling Method: Convenience sampling. Sample Size: 2 from each company.

Research Questions :
1. What are the main functions performed by the Treasury Department of each company?

2. Treasury Automation Makes Centralization Possible Are the companies following the latest technology trends relating to treasury management?

Literature Review:

Article 1: Cost Savings through Centralized Treasury

The article is relevant to the research topic as it clearly states the benefits that have been achieved by Shell after centralizing its treasury operations all over the world including Asia (Pakistan as in our interest). It had opted to centralize its local currency cash management by awarding a mandate to a regional bank namely Standard Chartered Bank. By centralizing all cash payments and collection to one bank, Shell had been successful in reducing the fees by roughly 20% to 30%.

Article 2: Refining Shells Treasury

This article also shows relevancy to the research topic as it defines how Shell have globally inducted IT (Information Technology) i.e. the implementation of Quantum Treasury Management Software in its Treasury operations in order to improve its functions; resulting in Centralized Funding, improved Cash Management as well as Centralized Treasury Operations. The benefits achieved include cost savings, time savings and improved performance due to streamlining of Treasury related processes.

Tax Structure:
Shell Pakistan Limited Tax Rate & Tax Paid For The Years (2007 - 2011)
Year 2007 2008 2009 2010 2011 Tax Paid (PKR in Millions) 1270 1586 1347 1428 1927 Tax Rate 36.0 % 33.4 % 34.4 % 46.9 % 68.0 % Average Tax Rate For the past 5 years

43.74 %

Pakistan State Oil Tax Rate & Tax Paid For The Years (2007 - 2011)
Year 2007 2008 2009 2010 2011 Tax Paid (PKR in Millions) 2432 7323 4658 8913 3195 Tax Rate 34.4 % 34.2 % 41.0 % 49.6 % 20.0 % Average Tax Rate For the past 5 years

36.84%

* Tax Rate Computation: ( Tax Paid/ Profit Before Tax ) x 100

OMC Pricing Formula

After April 16th, 2006 (Ex-Refinery Prices + Exercise Duty + Petroleum Development Levy + Inland Freight) x 3.5% *

* Where 3.5% is the OMC Margin. Source(s): www.igisecurities.com.pk PSO and Shell Pakistan Limited Annual Reports

Organizational Structure :

Pakistan State Oil

The treasury structure of PSO is divided into 6 heads.

General Banking

Trade Finance
Collections Bank Reconciliation Insurance Funds Management

The treasury structure of Pakistan State Oil limited is discussed below. General Banking General banking consists of the following components:PSO has banking relationships with 20 banks, utilizing their different facilities including running finance, letter of credits, performance bank guarantees, cash management and inward/outward remittances. The relationships include services from commercial banking to Islamic banking. The panels of banks are mentioned below:

Panel of banks & facilities

Habib Bank Limited Allied Bank Limited United Bank Limited Muslim Commercial Bank Limited Askari Bank Limited Standard Chartered Bank Limited Bank Alfalah Citibank N.A Deutsche Bank AG Samba Bank Limited Royal Bank of Scotland Habib Metropolitan Bank HSBC Bank Meezan Bank Limited Faysal Bank Limited JS Bank Limited (Formerly American Express Bank) Bank Islami Pakistan NIB Bank Pakistan Bank Al Habib

General Banking Bank accounts are opened as and when the need for it arises. The Treasury Department assesses the needs for opening a bank account. The head of the respective department identifies the need for opening an account and sends the request to the DGMT. A Note for Approval is prepared by Authorized OfficeTreasury and signed by Deputy General Manager-Treasury (DGM-T) for the approval of General Manager-Finance (GM-F)/Executive Director-Finance & Information Technology (ED-F&IT) and final approval of Managing Director (MD). The entire process is done electronically.

Opening of Bank Accounts

Simultaneously, a letter of opening a bank account is signed by MD (PSO being governed by the Marketing of Petroleum Products (Federal Control) Act, 1974, is only required to provide approval of MD who under Section 6 of the Act, exercises and perform all the powers and functions of the Board of Directors of the Company as specified in Companies Ordinance 1984, therefore he singly signs the letter for opening/closing of bank accounts). The following documents are sent back along with the signed letter of opening an account to the bank; Authorized signatories list Specimen signatures Cheques of initial deposit (if required) Certificate of incorporation Certificate of business commencement Memorandum and articles of association Latest Annual Report Bank accounts are closed after assessment by the Treasury Department or the concerned departments like dividend account, etc The HOD is the one who identifies the need for closing of an account as per requirement of the business and sends a requisition to the Deputy General Manager Treasury through respective General Manager. A Note for Approval is prepared and signed by DGM-T is sent to the bank with a request to transfer any funds in the account to another PSO account nominated in the letter Bank sends a letter confirming the closing of the relevant bank account. On the basis of financial needs of the company, Treasury Department contacts the banks and arranges credit facility along with mark-up agreement.

a) b) c) d) e) f) g)

Closing of Bank Accounts

Credit Arrangement

General Banking Bank guarantees are required for tenders etc an e-mail is received from the concerned department identifying the reason for obtaining guarantee along with the specimen from the party in favor of which Bank Guarantee is to be issued. In case of guarantee in foreign currency special permission from State Bank of Pakistan is required. Original guarantee is sent to the concerned department and a copy is retained by the Treasury Department. Before expiry, Treasury Department either renews the guarantee or returns the original instrument. In case of renewal, an authorized letter is sent to the bank. Amendment is obtained by an Authorized officer from the bank. In case of expiry, Treasury Department delivers the instrument to the bank for cancellation. The mark-up is of two types, short-term and running finance. The mark-up on running finance is paid on quarterly basis and on short-term it is paid on the maturity of the facility. Mark-up account is debited and vendor is
credited.

Bank Guarantees

Mark-up

The bank claims the mark up on the maturity of the mark up facility. The assistant, General Banking, verifies it and a payment voucher is prepared and approved. It is then sent to accounts payable for preparing the cheques.

Trade Finance

PSOs major imports include deficit Petroleum, Oil and Lubricants (POL) Products are

High Sulphur Furnace Oil (HSFO)

High Speed Diesel (HSD)

Low Sulphur Furnace Oil (LSFO) Motor Gasoline (Mogas)

Jet Fuel

In addition to above PSO often imports Chemicals, Parts and Machinery. Fuel Oil (F.O.) import was started in 1991. Before 2001 the Government of Pakistan (GOP) was importing Fuel Oil and PSO was acting as handling agent.

Fuel Oil

Trade Finance
Information related to port, name of vessel, origin of product etc is provided by the supplier at least 7 working days prior to the loading of vessel at the port. PSO supply chain department reviews the operational history of the vessel and considers either accepting the nominated one or requests for a substitution within two days after receipt of information of vessel. A copy of vessel acceptance is then forwarded to Treasury Department for opening of L/Cs. Supplier provides the details of the advising bank. As per contract L/C is opened at least two days prior to the start of loading a vessel. L/Cs are opened under Uniform Customs and Practices (UCP) 600. L/C becomes operable when all the terms and conditions specified in the contract are incorporated in the L/C. The supplier requests Treasury Dept. for amendments if required. These amendments are then forwarded to PSO Supply chain department for their approval. Treasury Dept. has specific Panel of Banks for opening of LCs, keeping in view the funded lines available with banks and overall banking relationships. The following points are also given consideration: 1. Bank with lowest L/C opening commission is selected 2. Availability of L/C line 3. In case of same commission, L/C is opened on rotation basis 4. Overall banking relationship and pricing on other services particularly Over Draft rates 5. Availability of foreign currency loan 6. Open L/Cs below the amount of lower limit Before the due payment date the supplier submits the documents to the Negotiating Bank to check them as per L/C terms and conditions and lodge the payment claims. On receipt of documents, L/C opening bank checks and forward the documents to the Treasury Department to approve them.

Opening of L/Cs Fuel Oil

Selection of Banks

Payments of L/Cs

Arrangement of Funds

If discrepancies are pointed out by either bank, they are forwarded to PSO for acceptance or rejection. Trade Finance forwards these discrepancies to the Supply Chain department, who may demand the supporting documents from the supplier. The letter of acceptance is sent to the bank by the Treasury Dept. after discrepancies are accepted by the Supply Chain Dept. Treasury Dept. prepares acceptance letter authorizing the bank to debit the companys account at an exchange rate previously agreed by PSO.

Trade Finance
Since 1976, PSO has been meeting the fuel needs of various international airlines and marine ships, which comes under the PSOs export. PSO is also exporting fuel to Afghanistan since 2002. There are two main exports; 1. Aviation & Bunker Sales and 2. Afghanistan Sales. In case of Aviation, Marine and Bunker sales, the payment is received in the form of cheques / DDs or telegraphic transfer. In case of cash/cheques/DDs, the Payment Deposit Slip for Aviation / Marine Customers (CSH 19-is a document in which all the remittance are mentioned from different marine and aviation customers, it includes instrument number sap posting number cheques or draft number client name posting date etc.) is also handed over to treasury department. Any exchange rate differences are charged directly to P&L. On a monthly basis, Statement A and Statement B are prepared by Treasury Dept. by taking the data from SAP. After verification from each airport and seaport these are sent back to Treasury Dept. which enters the details of PRCs through SAP. Verified Statement A & B along with PRC and other attachments are sent to State Bank of Pakistan.

Exports

Collections
Department is responsible for collecting the proceeds from supply points all over the country (45 depots). This is mainly from Retail customers and generally from Industrial customers, except for collections from credit customers who are either paying through local-in-hand L/Cs or through DDs/Pay Order/Cheques directly at head office. In order to accomplish work expeditiously department closely liaises with CCB department, retail and all installations and depots under Operation department.

Insurance
Insurance is one of the many areas of a centralized treasury functions. It plays an important role towards the risk management of company. The insurance section is divided into following areas:

Assets

Products

Product in Pipeline

Cash

Marine/Transit

Aviation

In house settlement of Inland Product Movement loses

Bank Reconciliation
This is a bookkeeping system that is most commonly used for checking the accuracy of the bookkeeping. Bank reconciliation is the process of matching and comparing figures from accounting records to that presented on a bank statement. The balance of the accounting ledger must reconcile to the balance of the bank statement. It enables individuals to uncover any differences that may arise mainly due to timing differences between data entry in PSOs system and the bank system. The aim is to determine whether the difference is due to error or fraud rather than timing. At PSO data entry through various departments and through a variety of banks makes the process of reconciliation more complicated. Therefore the possibility of making errors increases and effective control becomes difficult. To resolve this, the monthly reconciliation is shifted to daily reconciliation. A significant portion of the procedures has become automated after the implementation of SAP. Errors have also been reduced.

Funds Management

Cash Flows
Daily cash flows through (SODs) Realization of funds through credit sales of Industrial or other customers IR/Proceeds from Aviation/Bunker Sales/Export to Afghanistan Advance from IPP customers through DDs & Cheques Payments on a fortnightly basis to local refineries. Payment of LC of KPC( Kuwait Petroleum Limited, along terms contract for HSD and furnace oil international supplier) for import of Furnace oil and High Speed Diesel (HSD) on as and when due basis Dividend payments Customs/ Income Taxes/Excise Duty payments Payments of Accounts Payable section

Major Cash Inflows

Major Cash Outflows

Utilization of credit facilities based on funding requirements is strictly based on mark up rates of Running Finance. Utilization of credit increases as the mark up rate decreases. The forecasting of Cash flow is done 5 days average of actual cash inflows and updated on daily basis. As the company is in net borrowing position it is mainly exposed to short term loans as financial liabilities. The company is also exposed to interest rate risk as the rates will increase, the financial charges will also increase.

Shell Pakistan Limited

The treasury of Shell Pakistan is divided into six heads:

- Management of Borrowing for financing of Working Capital requirements - Management of relationships with SPLs panel of banks

- Customer collections management - Cash Flow forecasting and arrangement of cash in relevant bank accounts for payments - Import documentation (L/C and Bank Contract) and execution of payments - Settlement of Inward remittances from foreign customers - Issuance and management of Bank / Performance Guarantees submitted to vendors / government entities

Risk Mitigating Strategies The regional office at Singapore deals with analyzing risk and mitigation strategies. The regional office has full-fledged department whose main task is to analyze the risk faced by each market and to devise mitigation strategy according to market environment prevailing at particular time. Hedging is not practiced as a rule according to the Shell Group guidelines.

Shell started its operations in Singapore in 1891. Today, Shells refinery Bukom that produces 500,000 barrels/day is the largest refinery of Shell in the world based on capacity for crude distillation. The Pulau Bukom is the largest petrochemical and export centre. 90% of the products are exported to Asia Pacific region and Beyond. This is the important reason why Singapore was chosen as the main trading region and supply centre for the Shell in the Eastern part of the world. Shells single-branded retail network in Singapore is one of the largest. For Shells Asia businesses, it uses its Upstream International office.

Why Singapore as the Regional Office?

Internal Auditing System Treasury Department in Pakistan is Skelton office while full-fledged treasury department is based at the Regional Office in Singapore. The Pakistan office is monitored online and has a separate Internal Audit department for that purpose. Cash Management Cash forecasting activities are performed manually on a daily basis by the Treasury Back Office Team in Kuala Lampur, Malaysia, primarily using excel based models. Inputs for the forecast are provided by various functions: Sales forecasts by Sales function and Payments forecasts by the Accounts Payable team which based is in Manila, Philippines.

In-House Banking Treasury function is broken into three teams out of which two are out-sourced to Shell entities abroad:

In-House Banking

Onshore Treasury

Treasury Manager and Front Office

Local team to manage middleoffice activities and operational interaction with banks.

Located in Singapore, the Treasury Manager is responsible for managing relationships with banks while the Front Office team deals with banks Treasury for FX and Loan transactions.

Assessment of Customer/ Vendor related risks Credit risk may take place due to a number of reasons some of them are due to cash and its equivalents and some due to deposits in banks as well as other financial institutions and other risks may be due to credit terms given to customers, including trade receivables and committed transactions.

The carrying amount of financial assets is equal to the maximum credit risk. From the financial assets totaling Rs. 6,917,987,000 (In 2009, Rs. 4,865,491,000) the financial assets that were exposed to credit risk aggregated to Rs. 6,902,712,000 (2009: Rs. 4,840,187,000).

For banks and other financial institutions, only parties that are independently rated with a minimum rating of A are accepted. For trade receivables, internal risk assessment process determines the credit quality of a customer by taking assessing its financial position, past experience and some other related factors.

Limits for the risk are set using internal or external ratings also taking into consideration the limits set by the management of Shell. Monitoring of the credit limits is done regularly. The risks associated with the concentration of credit arises when few of engaging parties are involved in similar economic activities or have same economic setting(such as fluctuations in the economy, political situation or other conditions)that would affect their ability to meet the obligations that they had contracted.

The Concentrations of risk associated with credit will show the actual sensitivity of the Shell's performance to developments that could affect an industry. The most significant financial asset exposed to credit risk is the trade debts and other receivables of the Company. There is regular monitoring on how the credit limits are used. Corporate Funds Corporate funds are utilized in working capital requirements and are not invested.

Excess Funds Excess funds such as the Employee Benefit Funds are managed in-house. Investment strategies are decided by a panel of 3 trustees during an annual meeting and executed by Treasury. Investment strategy is formulated with current market conditions in mind, to safeguard the returns on employee benefit funds, and varies according to current trends in financial markets.

Maintenance of Cash Liquidity Shell has very slim structure in Pakistan. Huge amount of cash is not required to accomplish day to day work. However, banking facilities are secured to pay the local and overseas vendors. Small amounts are paid in cash while bank pay-orders are used to pay to the local vendors.

For import payments, banks are asked to arrange the foreign exchange from inter-bank market at due date. Active cash forecasting and maintenance of bank borrowing lines combined ensure sustainable liquidity for the company.

Funds Transfer Protocol Funds are transferred manually through cheques from one bank account to another in order to manage liquidity requirements for payments from different bank accounts.

Payments to external vendors are executed electronically via Standard Chartered Banks Straight2Bank facility.

Approval of State Bank of Pakistan is needed before any fund transfer to either the Regional office or the Head Office.

Research Question 2
Software Used By Treasury Department Of Pakistan State Oil Ltd. Treasury is using online system it has got access from banks to see what balances are uploaded each day and reconciliation is done on daily basis to make sure all the cash movement is monitored.

Centralization Of Treasury In Pakistan State Oil Ltd. Every transaction is authorized and approved by the relevant personnel according to LAM (Limits of authority Manual) in which every person's limit is mentioned. Every Transaction is approved by Deputy General Manager and General Manager of Treasury Department.

Software Used By Treasury Department Of Shell Pakistan Ltd. Global SAP is used for back office accounting, while a separate, net-based portal called Virtual Treasury is used for Front Office activities such as Foreign Exchange and Borrowing Deal booking, exchange rate review and others.

Centralization Of Treasury In Shell Pakistan Ltd. Shell has a centralized treasury all over the world including Asia (Pakistan as in our interest). It had opted to centralize its local currency cash management by awarding a mandate to a regional bank namely Standard Chartered Bank. By centralizing all cash payments and collection to one bank, Shell had been successful in reducing the fees by roughly 20% to 30%. The implementation of Quantum Treasury Management Software in its Treasury operations in order to improve its functions; resulting in Centralized Funding, improved Cash Management as well as Centralized Treasury Operations. The benefits achieved include cost savings, time savings and improved performance due to streamlining of Treasury related processes.