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Yacoob_suttar Reasonable OMC & Refining Sector Margins Imperative for Investment in Energy Sector

Yacoob_suttar Reasonable OMC & Refining Sector Margins Imperative for Investment in Energy Sector

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Pakistan Energy Conference 2011

Reasonable OMC & Refining Sector Margins Imperative for Investment in Energy Sector

Monday April 11th, 2011

Pakistan Oil Market Overview
• •

Pakistan is an energy deficit country Petroleum Product demand in 2009-10 was 20.16 million M. Tons

Local crude 14%
2.88 million M. Tons 10.4 million M. Tons

6.88 million M. Tons

Imported refined product 52%

Imported crude 34%

Pakistan Energy Conference 2011 April 11, 2011 | Slide 2

Oil Marketing Sector statement
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: • 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 2011 April 11, 2011 | Slide 3

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 2011 April 11, 2011 | Slide 4

Areas that require Major Investments
 

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

Pakistan Energy Conference 2011 April 11, 2011 | Slide 5

Margin of refineries
• • 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
Pakistan Energy Conference 2011 April 11, 2011 | Slide 6

Frequent changes in refinery price formula
• Removal /Reduction of deemed duty protection

• • •

Hypothetical formula of Ex-refinery Price of PMG (price allowed to exrefinery 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)
Pakistan Energy Conference 2011 April 11, 2011 | Slide 7

Margins of OMCs

OMCs were allowed in 2002 a margin of 3.5% of consumer price Since 2006, Govt has tweaked OMC margin 7 times Such adhoc changes in margins have shattered the confidence of existing and future investors

Pakistan Energy Conference 2011 April 11, 2011 | Slide 8

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 prevailing level

Aug 2008 - The margin was reduced to and capped @ AG light US$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 2011 April 11, 2011 | Slide 9

Margins* history – Motor gasoline
6.0% 5.0%
3.5% margins on end selling price till March 15, 2006

4.0%
Shift from fixed margin regime to % basis

GST & PDL exclusion from margin calculation

% was increased from 3.5% to 4%

3.0%

2.0%
Current decline in oil prices effecting profitability

1.0%

Margin is fixed in Rs. per liter

0.0% 1903Aug- Nov93 93 1315140116Feb- Dec- Mar- Jul-02 Mar95 99 01 06 25Aug07 012101Apr- Jul-08 Aug08 08 01Oct08 01Jan09 01Jan10 01Dec10 01Apr11

* Margins plotted as % of retail price Pakistan Energy Conference 2011 April 11, 2011 | Slide 10

Margins* history – Diesel
6.0% 5.0%

4.0%
Shift from fixed margin regime to % basis

3.5% margins on selling price till March 15, 2006

GST exclusion from margin calculation

3.0%

Margins were fixed in rupee per liter

2.0%
Decline in oil prices effected profitability

1.0%

0.0%
19Aug93 03Nov93 13Feb95 1514- 01-Jul- 162501- 21-Jul- 010101010101Dec- Mar-01 02 Mar-06 Aug- Apr-08 08 Aug- Oct-08 Jan-09 Jan-10 Dec- Apr-11 99 07 08 10

* Margins plotted as % of retail price Pakistan Energy Conference 2011 April 11, 2011 | Slide 11

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 2011 April 11, 2011 | Slide 12

Consumer Price Index

Source: www.tradingeconomics.com
Pakistan Energy Conference 2011 April 11, 2011 | Slide 13

Linking of OMC margins with price has brought in investment in the country
5 40

Annual Capex Rs billion

4

3

Shift of fixed margin regime to % basis – an impetus for growth in investment

30 Asia Petroleum and ZOT

25

20

2

15

10

1
5

1995/6 (18mth)

0 1993 1994 1985 1986 1987 1988 1989 1990 1991 1992

0 2003 2004 2005

Modernization of Retail Outlets by Chevron & Shell

Introduction of New Vision Retail Outlets by PSO

Pakistan Energy Conference 2011 April 11, 2011 | Slide 14

2007

1997

1998

1999

2000

2001

2002

2006

Cumulative Capex Rs billion

Total Capex

Cumulative Capex

WOPP

35

Capping / Reducing margin did not have any material impact on the customer price but will be detrimental to investment
PMG Cost of product IFEM OMC Margins Dealers Commission Petroleum Levy 59.35 5.54 1.50 1.87 3.16 HSD 73.80 2.30 1.35 1.50 0.44

Sales Tax Net Taxes/(Subsidy) Selling Price
OMC Margins %age

12.14 15.30 83.56
1.80%

13.50 13.94 92.89
1.45%

   

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
Pakistan Energy Conference 2011 April 11, 2011 | Slide 15

Net Margin comparison – different industrial sectors

70.0% 60.0% 50.0% 40.0% 30.0% 20.0%

Net Margin

Gross Margin

10.0%
0.0%

Source: Elixir securities Year : 2010
Pakistan Energy Conference 2011 April 11, 2011 | Slide 16

Recommendation
 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 structure  Unfair 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

Pakistan Energy Conference 2011 April 11, 2011 | Slide 17

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