ANALYSIS OF PAKISTANI

INDUSTRIES

GROUP MEMBERS:

 Nabeel Ahsan Rizvi

 Ibad Imran Soleja
 Ayman Siddiqui
 Bareera Siddiqi
 Haneefa Soomro
EXECUTIVE SUMMARY

This report has been written as part of our Analysis of Pakistani Industries course with

Ma’am Sarah Nasir. We have covered all aspects of the Oil Industry of Pakistan that seemed

relevant to the course. Please note that we have not covered the edible oil part of the industry

in this analysis.

For the purpose of collecting primary data, we conducted our first interview with the training

and development department at Pakistan State Oil (PSO). The audio link of the interview is

enclosed in the appendix of this report. We conducted our second interview with Mr. Ahsan

Rizvi, a former employee of British Petroleum (BP) Pakistan and New Horizon Exploration

and Production Limited (NHEPL). The references for our secondary data are cited at the end

of the report.

We have covered the significance, trends, imports/exports, government roles, issues and

solutions in detail. For analyzing the industry, we have used three models namely Porters

Diamond Model, SWOT Analysis and Porters Five Forces Model.

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TABLE OF CONTENTS

Executive Summary ......................................................................................................................... 2

Introduction ............................................................................................................................................. 5
An Economic Overview of Pakistan’s Oil Industry: .......................................................................................... 5
Importance.......................................................................................................................................................... 7
Basic Structure of the Industry ........................................................................................................................... 9
Upstream ...................................................................................................................................................... 10
Downstream ................................................................................................................................................. 11
The Process .................................................................................................................................................. 13
Trend Analysis ................................................................................................................................................. 14
Consumption Trend: .................................................................................................................................... 14
Production Trend ......................................................................................................................................... 15
Marketing Trend .......................................................................................................................................... 16

Decade Wise Analysis ................................................................................................................... 17

Balance of Trade (Imports/Exports) ............................................................................ 21
Imports ............................................................................................................................................................. 21
Why is there a need for Imports? ................................................................................................................. 23
Which countries do Pakistan rely on for Oil Imports? ................................................................................. 23
Why can’t Pakistan use its oil resources? .................................................................................................... 24
Exports ............................................................................................................................................................. 26

Models ...................................................................................................................................................... 27
Porter’s Diamond Model .................................................................................................................................. 27
Factor Conditions ......................................................................................................................................... 28
Demand Conditions ..................................................................................................................................... 33
Firm Strategy, Structure and Rivalry ............................................................................................................ 35
Related and Supporting Industries .............................................................................................................. 43
SWOT Analysis .................................................................................................................................................. 45
Strengths ...................................................................................................................................................... 45
Weaknesses ................................................................................................................................................. 47
Opportunities ............................................................................................................................................... 49

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 Threats ......................................................................................................................................................... 51
Porters Five Forces Model ................................................................................................................................ 53
Intensity of Existing Rivalry .......................................................................................................................... 55
Threat of Substitutes ................................................................................................................................... 57
Threat of New Competitors ......................................................................................................................... 58
Bargaining Power of suppliers ..................................................................................................................... 61
Bargaining Power of Customers ................................................................................................................... 62

Restrictions and Regulations ................................................................................................ 64

Issues and Solutions ....................................................................................................................... 66
Appendix ................................................................................................................................................... 69
References ................................................................................................................................................ 70

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Chapter 1 Introduction

INTRODUCTION

AN ECONOMIC OVERVIEW OF
PAKISTAN’S OIL INDUSTRY:

Pakistan’s economy is growing consistently. This growth demands higher energy

consumption and that in turn, puts high pressure on the country’s economy. Pakistan mainly

depends upon oil and gas resources to fulfil energy requirements. Local resources of Oil are

not enough to support the energy requirements of the country. Hence, Pakistan needs to

import immense quantity of oil and oil-based products from the Middle East. Gas reserves in

the country are enough for present gas requirements. So natural gas is playing a key role in

the power sector. Currently, in oil upstream and downstream sector there are some local and

international companies involved and government of Pakistan is establishing such policies

that it can attract more international investors in this sector but the steady pace of change,

high degree of uncertainty and unstable political situation of the country, present significant

challenges and risk to foreign investment.

Pakistan, due to its optimal location, is the regional gateway for energy. The energy sector

continues to dominate the overall structural character of Pakistan’s economy. The

Government has declared the Power Sector as one of the top priorities for investment and is

taking all necessary measures to build a more conducive environment by simplifying

procedures to facilitate potential investors. These policies had resulted in US$ 605 million of

foreign direct investment in the Oil & Gas sector for the year 2009-10.

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Chapter 1 Introduction

Oil & Gas Sector Pakistan’s proliferating demand for oil and gas has triggered the need for

large-scale exploration and expansion projects and investments to help boost oil and gas

production. Pakistan mainly depends on Oil & Gas for its energy generation. These two

components of energy contribute 77.40% to the energy requirement of Pakistan. Pakistan has

estimated oil reserves of 303.63 million barrels while its current production is 65,531 barrels

per day. The gas reserves of Pakistan are estimated to be 28.32 TCF while its current

production is 4 billion cubic feet per day.

Currently, seven refineries are operating in the country, having the capacity to refine 248,506

bpd. Three more oil refining companies would be established with their total capacity of

refining crude of 465,000 barrels per day (bpd) to enhance the existing quantity produced by

seven companies. After the establishment of these companies the country’s refining capacity

would reach up to 713,506 bpd.

Gas is the major source of energy in Pakistan. Pakistan has a well-developed gas transmission

infrastructure. The gas distribution companies plan to invest US$ 285 million over the next

five years in gas sector.

The move to CNG has been highly popular which is quite evident by the fact that the number

of CNG vehicles has reached two million, giving Pakistan the distinction of having the

highest number of natural gas vehicles in the world. In order to promote LPG as a potential

energy fuel, the Government of Pakistan deregulated the sector in 2000 to attract investment

and give the LPG market a much needed boost. As a result, an investment of US$ 200 million

has been made to develop LPG infrastructure.

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Chapter 1 Introduction

According to Oil and Gas Journal (OGJ), Pakistan had proven oil reserves of 300 million

barrels as of January 2006. Most of the produced oil is gained from proven reserves located

in the southern half of the country, with the three largest oil producing fields located in the

Southern Indus Basin. Additional producing fields are located in the Middle and Upper Indus

Basins [EIA, 2006]. Since the late 1980s, Pakistan has not experienced many new oil fields

coming online. As a result, oil production has remained fairly flat, at around 60,000 barrels

per day (bbl/d) till around early 2000s.

IMPORTANCE

Pakistan’s oil Industry is one of the most significant part of country’s economy. As discussed

above its contributions to our economy are immense. First and the foremost reason for this is

the nature of the industry which links it with rest of the sectors of the economy as well. In one

way or the other, high proportions of sectors and industries are somehow linked to it in one

way or the other. Let it be agricultural sector, which is dependent on it for fuel for machines

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Chapter 1 Introduction

such as tractors or harvesters or power and energy. Whether it be industrial sector depending

upon the petroleum sector for furnace oil or transport sector for its operations, all are directly

or indirectly linked to the industry.

Secondly, it attracts by far the highest level of FDIs (i.e. Foreign Direct Investments).

Particularly when we talk about the Oil Exploration and Production Companies and Oil

servicing Companies, they generate high level of FDIs as we are heavily dependent upon

them for research and development and exploration process. Recently Marketing Companies

has also played an important role in attracting foreign investors towards the country.

Moreover, the proportion of the petroleum products in the import bill also signifies its

importance to the economy. A very high percentage is allocated on its import bills. Around

12% of the import bill is spent on import of refined petroleum where as crude oil contributes

to 4%. Overall if we look at Pakistan’s import bill, more than 50% is due to the imports of

machine, chemical and petroleum products telling about its importance. It negatively effects

the Balance of Payments of the country. Plus, annual economic cost of guarantees and

subsidies in this sector is significant which is nearly 33 billion.

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Chapter 1 Introduction

If we look at Pakistan’s oil production of 2015-2016, it was around 100,000 barrels per day

which was quite high than the usual. It was around 80,000 barrels per day in 2013. The

increase was seen and observed majorly after oil and gas exploration and production

companies geared up their drive to find new deposits of hydrocarbons in the country. The

surge in production became possible with find of new oil reserves from Nashpa and Mardan

Khel fields. The consumption in the year 2015-2016 was around 350,000 barrels per day. The

difference therefore was imported. High imports or high prices directly effects the economy

as oil is a major cost for many of the other sectors and industries. The Impact of oil prices to

Pakistan economy can be seen from the figure above.

BASIC STRUCTURE OF THE INDUSTRY

The overall structure of petroleum sector is split upon two different parts; Upstream sector

and Downstream sector.

Pakistan however needs to improve its upstream production and service to be globally

competitive and reduce its reliance and dependence in other countries for foreign aid and

imports.

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Chapter 1 Introduction

UPSTREAM

The upstream sector of petroleum industry consists of Exploration and Production companies

and Service companies.

The job of an exploration company is to drill, pump out and extract the oil reserves which is

discussed in a lot detail in report ahead. Below is the picture showing the list of multinational

and national production and exploration companies.

Major national chunk of exploration and production companies is controlled by Pakistan

Oilfields LTD (POL). It is leading oil and gas exploration and production company listed on

Pakistan’s stock exchange (earlier leading all the exchanges). It was a subsidiary of Attock

Oil Company initially. In 1978, it took over and gained independent status. OGDCL (Oil and

Gas development Company Ltd) is another emerging oil and gas exploration company. When

it came into being in1961, it wasn’t a publicly listed company and was named as OGDC. In

1997 it gained the status of public limited company.

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Chapter 1 Introduction

The task of oil servicing company is to assist the production companies by helping them in

research and development processes. They must play three major roles:

a) Seismic testing: Mapping geological structure beneath the surface

b) Transport service: Both land and water rigs need to be move around at some point in time

c) Directional Service: Oil wells are not drilled straight down. This is a specialized job which requires a

lot of research and developments

Below is the list of multinationals oil servicing companies operating in Pakistan:

The problem with Pakistan is that it doesn’t have its own major servicing company due to

which we completely rely on multinationals. We do have one of our own in Islamabad named

as Wellserve Oilfield Service Company, but its not that competitive globally. This therefore,

results in outflow of money and increased cost of production which brings price differentials

as well with the cheap imports.

DOWNSTREAM

The downstream sector of petroleum industry consists of Oil Refineries and Oil Marketing

Companies (OMCs).

The purpose of oil refinery is processing and purifying oil and gas. It transforms crude oil and

refine this raw form of oil into useful finished and semi-finished products such as naphta,
11
Chapter 1 Introduction

gasoline, diesel, heating oil, jet fuel, fuel oil, etc. Below is the list of major oil refineries of

the country and the capacity to which each of them work upon.

The list indicates the major problem which we have with our refineries i.e. poor utilization of

resources. We are unable to use our full capacity that’s we majorly rely on imports for our

oil.

The role of Oil Marketing Companies is to distribute the final product and dispatch it to the

consumers through advertising or any sort of promotions.

Companies like Pakistan State Oil (PSO), Shell, Caltex, Total, Hascol have been playing a

major role in this department since years with PSO leading the market. OMCs with their own

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Chapter 1 Introduction

refineries gets a margin to play advertising games such as Byco ran an add couple of years

ago promoting it 2 Rs cheaper product. Other OMCs with their own refineries includes

TOTAL which has Pak-Arab Refinery (PARCO). Similarly, Attock Petroleum (APL) has

Attock Refinery Ltd (ARL) and National Refinery Ltd (NRL) as their own refineries. PSO

was leading the market single handedly four five years ago but competition has increased

since then. Still PSO is having the highest share by far.

THE PROCESS

The diagram above shows how upstream and downstream sector gets linked and how the

overall process works. The process begins with the Research and development and ends with

the final good being sold to the consumer. Each of the four types of organizations plays a

significant role in making this industry work effectively and efficiently.

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Chapter 1 Introduction

TREND ANALYSIS

The trend has been divided into three parts to understand the past performance of each of the

sectors fully. How the industry has performed in the past has been split upon three basic

trends; Consumption trend, Production trend, and Marketing trend.

CONSUMPTION TREND:

The chart above shows how different sectors are linked to oil industry and which sector has

consumes most of the products throughout the history. The pattern has been same throughout

with transport sector being the most dependent with average 57% of the consumptions

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Chapter 1 Introduction

followed by Energy and power sector with 33% and other industries 8%. So that has been the

pattern pretty much throughout the history.

PRODUCTION TREND

Oil production has been very costly throughout due to the role of multinationals in service

companies. Apart from this, poor maintenance and investing in this industry has resulted in

low production and over dependence on imports. According to a recent survey we work only

upon our 60% capacity. If we use our full capacity, we can easily cater 84% of our local

demand as the bar graph above shows. The difference between the consumptions and refined

oil production would have been much less than it actually is. Consumption is expected to

increase overtime due to increased population and increased growth overtime.

However, to cater this, a proposal was made couple of years ago proposing 2 new oil

refineries (one in Baluchistan and other in Eastern Punjab). It will be a five to seven-year

project which will enable us to increase the refined capacity by 24 million tons annually.

Currently only sic to seven refineries are active even which are not working to full of their

capacity due to machinery maintenance and other management issues.

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Chapter 1 Introduction

MARKETING TREND

PSO has been a market leader despite of not having any of its own refineries and despite of

its total reliance on imports. The have an effective information system with strong links with

multinationals globally which gives them the advantage of price differentials and help them

lead the market.

Apart from this, PSO keeps its profit margin very low relative to others giving it the high

position in the market. It can not play on the advertising margins to increase the share so to

eliminate any sort of price difference with the OMCs with their own refineries, it must rely

on keeping the profit margin low. That’s the reason behind their such high capture of market

share. The competition has increased overtime giving a strong and positive image of

Pakistan’s economy.

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Chapter 2 Decade wise Analysis

DECADE WISE ANALYSIS

1952: The primary oil field in Pakistan was found within the territory of

Baluchistan, close to Sui gas field.

During the same time period, Sui gas field, which remains the greatest natural gas field in

Pakistan, was discovered.

1955: Commercial drilling and exploration at the Sui gas had begun. Sui gas field plays a

mighty role in fulfilling Pakistan’s fuel needs. It has a daily production of approximately 550

MMscf.

Moreover, Pakistan Petroleum Limited (PPL) unearthed gas reserves at the Uch gas field.

1964: The Toot Oilfields, situated in the Potwar region of Punjab, were found. During Ayub

Khan’s sovereignty, Pakistan Petroleum and Pakistan Oilfields explored and drilled the first

well.

Toot Oilfields have an imprecise capacity to produce 60 million barrels of oil.

1967: The commercial production from Toot Oilfields began in 1967.

1976: Dhodak gas field was uncovered in the province of Punjab.

1981: Union Texas Pakistan found an oil field in lower Sindh.

1983: Dakni gas field, located about 135 kilometres in the south-west of Islamabad, was

found in 1983.
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Chapter 2 Decade wise Analysis

1984: Tando Adam oil field, based in Hyderabad, was drilled and finished.

1986: The year observed the zenith in the oil production from Toot Oilfields, which was

2,400 barrels per day.

Furthermore, Chak Naurang field located 90 kilometers away from Islamabad, was found in

the June of 1986.

1989: Dakni gas field began the commercial production in December 1989.

1990: Qadirpur gas field was unearthed in the province of Sindh. It remains the third biggest

gas field in Pakistan.

1994: Rajjan oil field, located in Gujjar Khan, was discovered.

1998-1999: The oil fields owned by Union Texas Pakistan were producing more oil than the

Potwar wells.

2000: Balochistan Liberation Army reportedly bombed one of the smaller pipelines

transferring gas from Sui gas fields.

2004: Chanda oil fields, situated in Khyber Pakhtunkhwa, began oil production.

2005: International Sovereign Energy, a Canadian company, signed an MoU with Oil and

Gas Development Company Limited. The memorandum necessiatedd further development of

Toot Oil Fields.

Pakistan was hit by one of its most catastrophic earthquakes, which ensued in a gigantic

damage to the infrastructural capital responsible for channeling fuel.

In the December of 2005, Karachi electric Supply Company, one of the largest vertically

integrated power supply companies of Pakistan, was privatized.

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Chapter 2 Decade wise Analysis

2006: Mela oil fields were found in the area of Kohat based in the province of KPK.

2007: Pakistan came across one of the greatest power breakdowns of all time, after Bhutto’s

extermination, in which production decreased by 6,000 megawatts.

2008: The demand and supply gap concerned with electricity in Pakistan raised by 15 per

cent.

2009: NASHPA oil fields were unearthed in the Karak district of KPK.

During the same year, Karachi encountered one of its most pivotal power failures on June 17,

in which the whole city was without power for 21 hours and more.

Additionally, the country experienced a power deficiency of 4,500 MW in the same year with

the domestic demand rising up to 11,000 Megawatts. However, just 6,500 Megawatts of

generated power was accommodating to the whole demand.

2010: Sheikhan gas field, which is based in Kohat, KPK, was found.

Furthermore, the torrential rainfall in the year caused floods, which did a lot of damage to the

existing infrastructure transmitting energy and fuel.

Towards the end of the year, country’s first rental power plant (RPP), with the capacity of

232 Megawatts, was established in Karachi.

2011: The year began with the closure of Uch power plant generation 585 Megawatts of

electricity, as one of the pipelines supplying fuel was blown up in the district of Jaffarabad.

Pakistan faced one of its most pivotal gas crises, with the deficiency increasing up to 1.8

billion cubic feet (bcf).

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Chapter 2 Decade wise Analysis

Moreover, the year also faced the most unfortunate CNG load shedding causing losses and

troubles for the consumers. However, OGRA raised the gas tariff by 14% in the starting of

the year, which was one of the greatest tariff increases in the history of Pakistan.

Furthermore, the energy shortfall went up to 2,700 MW.

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Chapter 3 Balance of Trade

BALANCE OF TRADE
(IMPORTS/EXPORTS)
One of the major reasons for Pakistan’s high balance of trade deficit is oil industry. Our

import bill consists of very high proportion of petroleum products. Whereas the export of

petroleum product is close to none if we keep Afghanistan aside.

IMPORTS

When we talk about OMCs, PSO is a major fuel importer contributing immensely on high

negative import bills. Overall if we see, Pakistan is an energy-hungry country, whose imports

bill is constantly on the rise. Its imports bill stands at $9.89 billion (July -May 2016-2017)

compared to $7.42 billion in last financial year. The graph below shows the extent of our

imports of oil throughout our history and predicted import in future as well if worked on full

capacity.

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Chapter 3 Balance of Trade

In 2016 Pakistan imported $45.9B, making it the 44th largest importer in the world. During

the last five years the imports of Pakistan have increased at an annualized rate of 6.63%, from

$44.6B in 2011 to $45.9B in 2016. The most recent imports are led by Refined

Petroleum which represent 12% of the total imports of Pakistan, followed by Crude

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Chapter 3 Balance of Trade

Petroleum, which account for 4%. Our other major petroleum import demand is for HSGP,

BMG, Jet fuel, FO, and LNG.

WHY IS THERE A NEED FOR IMPORTS?

There are three major reason of why we import so much of petroleum products;

a) Price differentials

b) Lack of capacity of local market

c) Imbalance of demand and supply

There is a lack of capacity in local market as we don’t work on our full capacity. Low

investments and maintenance budget leads to poor production. Plus, interference of

multinationals in production process increases the cost bringing price differentials into

account which makes imports cheaper particularly for OMCs like PSO which doesn’t has its

own refinery. This gap between the demand and supply is fulfilled through imports.

WHICH COUNTRIES DO PAKISTAN RELY ON FOR

OIL IMPORTS?

Following are the countries on which Pakistan rely on for its imports:

a) Fujairah, UAE

b) Qatar for LNG

c) Kuwait for HSD

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Chapter 3 Balance of Trade

So mainly the reliance is on the middle east for petroleum imports. Pakistan imports crude

oil maximum from United Arab Emirates, followed by Saudi Arabia and Qatar. Here are

trade figures of these countries recorded in the year 2016.

• United Arab Emirates: USD 1099 million

• Saudi Arabia: USD 869 million

• Qatar: USD 14 million

WHY CAN’T PAKISTAN USE ITS OIL RESOURCES?

Pakistan doesn’t have the money nor the investors to get to the oil. You must understand that

getting a business license in Pakistan takes a long time. Fortunately, now with CPEC, the

government is working towards helping people start businesses and hopefully in the near

future, we can access our massive gas reserves. The reasons for lack of investments and lack

of use of oil resources may include:

1) Baluchistan Insurgency: -

Pakistan`s major source of Oil resources lie within the Sui oil fields within the

troubled region of Baluchistan where persistent militancy has scared away any hopes

of investment within this region (although some State run production units are present

but are still undercapitalized).

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Chapter 3 Balance of Trade

2) Major Dependence on Gas:

Pakistan unlike its neighbor India opted for Gas based power plants which has been

encouraged by the government by providing the infrastructure and logistics to

facilitate the ecosystem for Gas based fulfilment of energy needs which in turn killed

the incentive for development of an alternative energy resource based ecosystem. But

currently Pakistan`s gas reserves are predicted to vanish in 20 years which has shifted

the focus back on oil.

3) Disastrous circular debt:

In order to insulate domestic consumers from volatile international oil prices the

Govt. of Pakistan provides a subsidy to the consumers which is paid to the electricity

producers(this difference between the international prices and the low domestic tariffs

for customers is known as Circular Debt).This economically disastrous but politically

populist policy has led to a massive drain on Pakistan`s exchequer and consequently

the delay in payment to the producers have led to a friction between the producers and

the government which again discourages private players to venture into the field of

exploration of oil.

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Chapter 3 Balance of Trade

EXPORTS

According to the United States Energy Information Administration (EIA), Pakistan may have

over 9 billion barrels of petroleum oil and 105 trillion cubic feet in shale oil and natural gas

reserves.

There always exists a misconception that if country can not cater its domestic need it won’t

be able to export. But that’s not the case always. Pakistan do export some of the petroleum

products to countries like Afghanistan. We export Jet Fuel to Afghanistan. Around 60,000-

65,000 bpd of oil is consumed by local refineries, leaving a surplus of 24,000-25,000 bpd for

export. Mainly multinational firms such as United Energy Pakistan, OMV and MOL are

involved in exports.

We resumed export of crude oil after a gap of 10 years in 2014. We started exporting as our

output touched all time high of 98000 barrels per day in 2014. Even for the exports, first we

ourselves import oil, refine it and then dispatch it to countries like Afghanistan. Around

70518 tons of ultra-light crude oil was exported in that year. At least one ship 32000-ton

capacity leaves port every month

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Chapter 4 Models

Models

PORTER’S DIAMOND MODEL

In this section, we will be discussing how Porters Diamond model can be applied to the Oil

Industry in Pakistan.

The model is based on 4 important categories:

i. Factor Conditions

ii. Demand Conditions

iii. Firm Strategy, Structure and Rivalry

iv. Related and Supporting Industries

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Chapter 4 Models

FACTOR CONDITIONS

Oil Reserves

According to the United States Energy Information Administration (EIA), Pakistan may have

over 9 billion barrels of petroleum oil and 105 trillion cubic feet in shale oil and natural

gas reserves. Pakistan is a land with immense amount of resources. There is a dire need to tap

into these resources so that we can compete with other countries globally.

There are numerous reserves in the lower and middle Indus basin and the government is

trying to find ways to extract oil from these reserves. They are forming effective strategies

such as forming a consortium of state owned companies like OGDCL and PPL to undertake

these projects.

Oil Exploration and Production

Oil is not something which can be formed in a few days. Oil formation takes place over

millions of years and is considered an elaborate geological process. Oil deposits are found by

geologists by studying the Geological and Geophysical characteristics of the earth. The

government of Pakistan divides the land into different blocks. Bidding processes are

conducted over these blocks to see which company is ready to invest the most funds. Once

the blocks of land are divided among companies, it is their job to have seismic surveys

conducted to find out where exactly to dig wells.

Seismic surveys are detailed images of the earth to determine the location and size of possible

oil and gas reservoirs. Sound waves are bounced off rock formations and the waves that

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Chapter 4 Models

reflect to the surface are captured by recording sensors and are then analyzed. Once the

location of the well has been figured out, the digging process starts.

An Oil Rig is set up which is a tall structure used to

drill the earth. It has pipes attached to it which are

inserted into the well to extract the oil. The flow is

created due the difference in pressure of the

atmosphere and the hydrocarbon. The flow is measured

to assess the volume and pressure of oil present and to

study the feasibility of production. Filtration plants are

also set up near the production facilities.

The customers of Oil production companies are refineries and we will discuss how the oil is

transported to the refineries in the next section.

Transportation of Oil

When the oil is produced on the fields, it is carried by short pipes to a nearby filtration plant.

From there, it is carried by bowsers and tank lorries to the refineries.

But as we have already discussed, our production does not meet the local demand. This

means that most of the oil must be imported from other countries. When oil arrives at the port

is carried to the refineries by pipelines. For further upcountry transportation, feasibility of

pipelines and tank lorries must be studied carefully.

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Chapter 4 Models

Transportation by pipelines is the fastest and safest mode that can be used. However, huge

amounts of initial investment and maintenance cost is required for pipelines. So, due to lack

of investments and funds, road transportation by tank lorries is the most widely used mode in

Pakistan for upcountry movement of oil.

Mode of transportation Million Tonnes % Value in Rs m %

Pipelines 7.5 42% 3625 30%

Road 8.5 47% 6581 55%

Rail 2.0 11% 1726 15%

Total 18.0 100% 11932 100%

Port Handling capacity

There are 4 oil jetties currently in operation in Pakistan. Three are at Kemari and one is at

Port Qasim. The one at Port Qasim suffers from dredging while all other jetties are also not

operating at their full capacity. As the oil demand is increasing, there is a dire need to

increase the jetties’ capacity and to improve their structures.

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Chapter 4 Models

Storage capacity

The current oil storage capacity is only 14-15 days, and this will be further reduced as the oil

demand continues to rise. At present both, Pakistan State Oil and Shell Pakistan Limited are

investing funds to increase storage capacity. The government of Pakistan aims to increase the

capacity to 30-40 days cover. For this target, these OMCs will have to invest more than $100

million.

White Oil Pipeline

This pipeline has been constructed from

Port Qasim, Karachi to PARCO’s mid-

country refinery near Mahmoodkot,

Punjab to transport white oil. The project

was first given to Pakistan Petroleum

Limited (PPL) but due to some financial

problems it was later given to PARCO.

The cost of this pipeline was around $700 million.

Technology

The Oil Industry in Pakistan is severely lacking in technology. Oil exploration lacks

advanced methods such as 3D seismic operations and production lacks the ability to dig

horizontal wells or wells at an angle. The weaknesses in the industry will be covered in detail

later in the report.

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Chapter 4 Models

Labour

The Oil Industry is a huge industry and obviously all kinds of labour is used. Skilled,

semiskilled and unskilled workers are all employed somewhere or the other in the industry. In

Oil Exploration and Production, skilled engineers are employed to make intense studies of the

earth. For digging purposes, semiskilled or unskilled labour is mainly used. Professionals in

OMC’s are highly skilled.

Pricing

The following graph shows the trend in oil prices from 1986 to 2015.

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Chapter 4 Models

DEMAND CONDITIONS

Pakistan has total reserves of 0.31 billion barrels of oil. The production of oil in the country is

only 59.08 thousand bbl/day and the consumption is 426.72 thousands bbl/day, rest of the

demand is fulfilled by oil imports. As you can see the huge difference between the consumption

and demand it is evident that we are not able to fulfill the demand of oil through home resources

and we majorly rely on imports.

Pakistan is suffering the worst shortage of oil. The reason behind is improper channelizing of

energy, less exploration activities in oil and gas sector, inappropriate distribution of resources,

poor management, law and order situation and bad governance. Tha major demand for oil is

derived from Transport, Powerhouses and Railways, Industries (textile), Aviation, Retail

Customers, Pakistan Government and Armed Forces

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Chapter 4 Models

Presently the oil industry of Pakistan is not facing any type of perpetual deficiency in public

sector. However the artificial shortage of oil is occasionally created by some elements

momentarily due to pricing of petroleum products for the sake of profiting and blackmailing.

While in the power sector the stock of oil is at dangerously minimum level and it is facing a

serious crisis due to the disagreements between PSO and WAPDA

According to the ‘Pakistan Oil Report 2016-17’ prepared by Oil Companies’ Advisory

Council’s (OCAC), in 2016-17, the consumption of petroleum products was around 27 million

tons, an increase of 9.64%. PMG and High-Speed Diesel (HSD) were the key drivers with a

growth rate of 15% and 10%, respectively, over 2015-16, leading to greater imports and burden

on the country’s ports.

Based on a GDP growth of 7%, OCAC said that the estimated annual demand of petroleum

products will reach around 55 million tons in 2030, from the 2018’s projected demand of 29.6

million tons.

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FIRM STRATEGY, STRUCTURE AND RIVALRY

The Oil sector in Pakistan is made up of the Oil and Gas Exploration companies, Oil Refineries

and Oil Marketing companies. The market is oligopolistic. Some companies in the oil and gas

exploration sector such Union Texas Pakistan (UTP) and OGDC which are important, are not

listed, they supply more than 60% of the oil produced in the country. There are only 5 refineries

at present (PARCO, NRL, ARL, PRL, BYCO)

Major companies in each sub-sector are as follows:

Oil Sector Structure

• Oil and Gas Exploration • Pakistan Oilfields, Mari Gas, SSGC,

companies SNGPL

• Oil Refineries • Attock, National, Pakistan Refinery

• Oil Marketing companies • PSO, Shell Pak, Caltex

Since 2016, Oil and Gas Regulatory Authority (OGRA) has distributed 11 new marketing

licenses taking the total number of Oil Marketing Companies (OMCs) from 11 in 2016 to 22

in 2017. It also issued 12 construction licenses to new firms. Based on submission to regulatory

requirement for storage capacity, these licenses may be transformed to marketing licenses in

coming years. Despite new entrants, industry structure has persisted at a semi-oligopolistic

level, with few players dominating the market.

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During 2017, Pakistan State Oil Company Limited (PSO) maintained its place as the largest

OMC with a market share of 54.4%, though diminishing over past three years. Along with

PSO, five key players including Shell Pakistan Limited (Shell), Total Parco Marketing

Limited/Total Parco Pakistan Limited (Total), Attock Petroleum Limited (APL) and Hascol

Petroleum Limited (Hascol) constitute almost nine-tenth of industry sales.

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Transportation segment is the main user of petroleum products followed by power sector. Over

past five years, petroleum sales amplified at a compounded annual growth rate (CAGR) of

around 5% to 26.1m tons

In the framework of sizeable market growth, two largest OMCs (PSO and Shell) have

witnessed decline in market share over past five years. This is credited to larger competition

from smaller firms particularly Hascol, which has showcased enhancement in market share

through firm retail footprint and storage capacity expansion. PSO remained the largest supplier

of petroleum products accounting for over half of industry’s volumetric sales.

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PSO’s sales improved by 7.8% in 2017 with an industry growth of 10.9% while its total market

share declined from 55.9% in 2016 to 54.4%. Retail market share persisted to drift downwards;

this was offset by 10.8% growth in FO volumes. During 2018, PSO’s market share illustrated

sharp recovery to 58% on the basis of 57% growth in HSD sales.

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Shell’s market share declined in 2017 as its overall volumes were largely unchanged. In line

with focus on retail business, MS volumes showed largest growth while market share in FO

segment remains nominal at 0.8%. Shell’s whole market share further fell to 5% during 2018.

Shell’s market position has also been affected by the Bahawalpur tanker fire incident in

June’2017. Shell still celebrates greater penetration in lubricants business with other top tier

OMCs with a market share of around 34% as at end-2016.

Total reserved its place as the third largest OMC with its overall market share increasing

slightly during 2017. Major percentage of Total’s sales is generated through retail segments

(Total has market shares of 15.5% and 10.9% in MS and HSD categories respectively).

APL’s general market share somewhat improved in 2017 after witnessing a decline in previous

year. Its market position enhanced across all segments. Hascol continued to beat the industry

in terms of overall volumetric growth which was reported at 43.9% during 2017. Consequently,

Hascol’s market share increased from 6.5 % in 2016 to 8.5% in 2017. Also, the company

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surpassed Shell as the second largest OMC in 2018 with over 10% market share during the

period. Growth in total sales was attained through dealer discounts, rise in storage and retail

footprint. Hascol’s retail sales showed maximum growth in the market while 26.9% growth in

FO sales was also witnessed.

STORAGE CAPACITY

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PSO has the leading storage capacity in the country. During 2017, Hascol exceeded Shell in

terms of storage capacity with new installations in strategic locations including Mehmood

Kot (Punjab) and Daulatpur (Sindh) along with expansion of existing facilities. With

substantial capital expenditure planned by PSO and Hascol, their storage capacities are

projected to grow further over next two years.

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RETAIL NETWORK

Retail Network
PSO

Shell

Total

APL

As far as retail outlet dispersion is concerned, PSO continues to enjoy the major retail footprint

in the country with 49.7% of total outlets, followed by Shell, Total and APL with 10.6%, 11.0%

and 7.7% share, respectively. Hascol which has improved substantially in terms of storage

capacity expansion still lags as compared to other large players in terms of retail footprint

expansion.

PROFITABILITY

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The general sales of the OMC sector increased due to significant volumetric growth during

2017. The inventory losses were mostly insignificant with oil prices being range bound in 2016.

The enhancement in gross margins was caused by a transformation in product mix towards

high margin categories. Thus, healthy growth in overall productivity and profitability of the

sector was noticed. Past few years proved to be lucrative for oil sector but still a lot of

improvement and work is needed for sustained development and self-sufficiency in this sector.

Some of the companies operating in Pakistan are foreign owned and hence their management

skills help them to thrive but PSO faces crucial management issues and hence it needs to work

on it. The major advantage PSO enjoys is that it’s a state-owned and government backed

company. So to continue to be the largest OMC it needs to work over its loopholes immediately.

Pakistan does not have a competitive position on a global scale in oil sector as it is not even

able to meet its home demand as per date. The firms in oil sector needs to develop strategies to

improve themselves so that the overall oil sector of Pakistan advances as well.

RELATED AND SUPPORTING INDUSTRIES

The Oil Industry is one of the most important industries of a nation. The significance of the oil

sector in Pakistan has been discussed in previous sections. Numerous industries would not be

able to run properly without oil. Some of these are mentioned below:

 Automobile Industry

 Aviation Industry

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 Textile Industry

 Agriculture Industry

Besides these related industries, there are industries which provide support to the oil industry.

Example of this are Drilling companies and companies which provide seismic exploration

services.

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SWOT ANALYSIS

STRENGTHS

Oil Reserves

As discussed earlier, Pakistan does not lack oil reserves and other natural resources. The

geographic plate on which Pakistan is located on is rich in oil and other minerals. This belt of

land has the resources and it the responsibility of the nation to properly tap into those

resources.

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Low Operational costs

The overall costs of operations related to the production of oil are low in Pakistan, so this can

be considered as a strength. Labour is also available at low rates. Due to plentiful resources,

wells do not have to be dug too deep, so the costs automatically come down.

Capabilities

Our Production and Exploration companies such as OGDCL, PPL and POL are extremely

capable. They just lack the appropriate amount of funds and investments needed to fully use

those capabilities.

Distribution Network

Our Oil Marketing Companies (OMC’s) have huge distribution networks. Pakistan State Oil

(PSO) has the largest distribution network in the country. They have more than 3500 outlets.

Government Relations

The Oil Production and Marketing companies, both have strong relations with the

government. This allows them to get proper legal protection

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Regulated Environment

The environment in the Oil industry of Pakistan is heavily regulated. This can be a strength as

it is beneficial for the end consumers when the government regulates oil prices and does not

let them rise too high.

Product Quality

The oil that is produced locally is not of substandard quality. The quality is overall

outstanding, but the production is not sufficient enough to fulfil the increasing demand of the

whole nation. Proper quality controls are implemented when oil is produced and refined

before it is sold.

WEAKNESSES

Low number of refineries:

We have a low number of refineries due to which we are not able to extract and produce oil in

our home ground despite of having the natural resources required. Currently, the refineries are

not even operating on their full potential; only 60% of their total capacity is being used.

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Lack of technology:

We also lack in advanced factor conditions. The technology for horizontal and angled digging

and technology for 3D seismic survey of soil are not available in Pakistan. We only have basic

vertical digging technology no horizontal or angled leads to low extraction of oil than it has the

potential. The machinery which is being used in Pakistan for oil extraction and production are

not well-maintained and leads to lower production and inefficient oil sector. We suffer from a

huge inefficiency and unproductivity due to lack of technology.

Weal network of pipelines:

We have a weak network of pipelines. This pipelines network is established recently, and the

transport of oil has started but more work has to be done to improve the quality and for wide

dispersion of pipelines. The transportation of oil provides very affordable rates; hence we need

to strengthen this loophole to increase our efficiency.

Poor Management:

We are habitual of delaying repair tasks and we waste resources. We have a lack of

maintenance in almost every department of this sector. Even our management needs to more

prudent and efficient for improvement in this sector.

Non-Execution of Developmental Programs:

Many programs for the development of oil sector have been introduced but they are not being

implemented. This is a very huge weakness of almost every sector in Pakistan as it impedes
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the development and productivity. The regulatory system of oil sector needs to be more

efficient. A system should be adopted that keeps a check on all the machinery and puts charges

on using impaired and inefficient machinery.

Waste of Resources:

Pakistan is blessed with the natural resources for oil, mostly in Baluchistan and KPK but we

don’t have the resources to capitalize over them. We waste a huge amount of resources, oil in

transportation due to lack of proper railways, roads and weak network of pipelines.

OPPORTUNITIES

Role of Government:

The Government of Pakistan is vigorously pursuing investment in onshore and offshore

exploration activities, development of explored wells and construction of gas pipelines.

Pakistan midstream and downstream sectors also propose business prospects. Pakistan has a

total refining capacity to process around 400,000 barrels per day or about 19 million

tonnes/year of crude oil, against the current demand of 24 million tonnes/year. The gap will

expand in coming years, due to at least 5 percent demand growth per annum. Government of

Pakistan has declared setting up new refinery ventures to fulfill fast mounting demand of

petroleum oil and lubricant products and is also focusing on capacity expansion of the existing

refineries that offer worthy opportunities for the foreign companies.

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Role of CPEC:

CPEC will also introduce new opportunities for oil sector of Pakistan. The demand from the

transport as well as the industry sector would rise which would lead to make the firms strive

for producing good quality oil and increased efficiency. Community developed in CPEC would

require more oil products in transport and infrastructure development hence benefiting the

market. This would increase the profitability of all the firms, prompting them to invest more in

oil sector.

Future Prospects of OMCs:

The major OMCs in Pakistan have developed plans for future and are working to improve the

pipeline structure and expansion of capacity and storage facilities. In August 2017, PSO

announced a three-year capital expenditure plan worth Rs. 44b which focuses on recovery of

existing storage facilities & pipeline structure, capacity expansion, supply chain efficiency

improvement and product diversification. Shell is anticipated to focus on retail business and

development of lubricant sale. APL would focus on higher bitumen sales. Hascol is offering in

import/marketing of lubricants, bitumen, LNG and LPG while maintaining growth in retail

sales. Across all major players, retail fuels and non-energy products (including lubricants and

bitumen) are expected to be significant income drivers.

Role of Oil Companies’ Advisory Committee (OCAC):

Deep conversion refineries, de-bottlenecking of the existing ports including Byco’s SPM, and

the addition of another oil pier at Port Qasim, cross-country pipelines geared to handle dual

fuels, adding corresponding oil depots installations and storages are the ingredients for

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Pakistan’s future success. Thus Pakistan can improve in this sector by working on these fore-

mentioned opportunities. OCAC is in the procedure of confirming an oil industry master plan,

covering the above-mentioned elements and the period up to 2030. If this plan is successfully

executed, the same model can continue past 2030 to guarantee sustained supply of energy to

Pakistan.

THREATS

Geological

The biggest threat during Oil exploration is the risk of a dry well. Unless the geological and

seismic surveys are top-notch, this threat will always exist.

Security

The land on which exploration is carried out is acquired by the government from big

landlords. So, there is always a security threat as those landlords may want their land back

and may make efforts to do so. There is also a security threat from different political parties.

Competitors

New competitors for Oil exploration companies and marketing companies are entering the

industry. The threats associated with competitors will be discussed in detail under the Porters

Five Forces model.

Environment

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There is a constant threat to the environment by the oil industry. Oil production leads to

excessive pollution and transportation at sea may lead to oil spills. Organizations like the

WWF are working hard to create awareness about the threats the industry has towards the

environment.

Pricing

Variations in Oil prices is also a major threat to the industry. There are great impacts on

Pakistan’s oil sector by global events such as the Oil Shock as prices increase.

Government Regulation

This is a threat to the OMC’s like PSO as the government can impose restrictions on imports.

An example of such a restriction is the ban on imports of Furnace Oil (FO) on which PSO

was relying on heavily.

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PORTERS FIVE FORCES MODEL

The last of the three models we used for analyzing oil industry is the Porters five forces

model. This model tells us how different industries are able to sustain different level of

profitability in the market and how the competition is measured in the market. This

framework is a tool which is used to gauge the competitiveness of the businesses. It helps you

becoming more observant of the space you move around in, allowing you to make sound

decisions for your enterprise or your company. This tool is meant to maximize profitability

by adding a clear picture of the environment, going beyond the behavior and activities of

competing companies.

It is a convenient framework that

analyze and explore various

economic factors that contributes

to profitability and increased prices

of an industry. This model is based

on the concept that we use five

forces to determine the competitive

intensity and the attraction of the

market. These five forces of porter

help us to identify where the power

lies within a business situation.

This model is very useful as it helps us to understand the strength of an organization’s current

competitive position comparing it with the strength of the position the company may look to

move into. Moreover, the strategic analysts often use this model to understand whether new

products or services are potentially profitable.

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The five forces of Porter’s model are:

 Intensity of existing rivalry

 Threat of new entrants

 Threat of substitutes

 Bargaining power of suppliers

 Bargaining power of buyers

All these factors when used systematically and efficiently can give in depth insight of the

industry in which we analyze, how the firms make profits? The opportunities to success and

the threats to success? A basis for generating strategic choices and applies these bases to

service sectors and industrial sectors.

According to our interviewee, our oil industry can not be competitive as we are not efficient

enough to utilize our available resources properly. Apart from this our extraction capacity is

very low, like we don’t even extract the oil which is there under our land. Because of which

we need to import a huge amount of oil to meet the domestic demand. So, when even our

domestic demand is not fulfilled by our oil industry then how could we become competitive

in this sector? We cannot produce the oil which is good enough in quality and quantity that

we have its international demand.

Breaking down the analysis of oil industry further into the five forces of Porter, describing all

the possible factors that could be or that are beneficial to increase the competitive intensity of

our industry.

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INTENSITY OF EXISTING RIVALRY

This is the main driving force that identifies the numbers of competitors and their capabilities

to give competition in the market. The large no. and capability of the competitors dictates the

power of the competitor in the in the industry. Many competitors offer undifferentiated

products which affects the attractiveness of the market. Apart from this the factors that

increases the rivalry among the companies are:

 When consumers can switch brads easily.

 When barriers to leaving the market are high.

 When fixed costs are high.

 When the product is perishable.

 When consumer demand is growing slow or declines such that the rivals have excess

capacity or inventory.

 When the products being sold are commodities (not easily differentiated, such as

gasoline);

 When rival firms are diverse in strategies, origins, and culture;

 And when mergers and acquisitions are common in the industry.

As far as oil industry is concerned,

we have a very few competitors in

the market. Which means that a

very few firms are competing for

same customers and resources.

Currently there are 22 OMCs

competing in the oil industry.

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Among all the companies PSO is the leading brand with maximum share of the market,

which is quite obvious as it is the state representing company. Apart from this other

companies such as Total, Hascol, Byco, Shell are also the big competitors in the industry and

have a significant share in the market. Such large brands have their footprints in all over the

Pakistan. However, if we observe the highway sides of the country, we could witness a large

no. of outlets of various unknown brands such as Zoom and Askar. These small companies

occupy a very low shar in the market and their outlets are only available in particular area or

region and are not spread throughout the Pakistan. So, having few major competitors is a very

positive factor for the competitiveness of oil industry.

Moreover, oil is a very fast growing industrial sector, and when the industries are growing

revenues quickly they are less likely to compete. Another positive factor for the competitive

intensity of oil industry is its large industry size, that allows multiple firms to produce and

prosper in the market without having to steal the share of other competitors in the industry.

This creates a healthy competition among the competitors in the industry since the

competition in domestic market is very important if we have to be competitive in the

international market. Finally, the government policies and regulations can also dictate a level

of competition in the industry. As the oil industry is regulated by OGRA, which is oil and gas

regulatory authority, it limits the competition in the industry to a certain level so that all the

companies in the industry can prosper. For example, the limits the no. of outlets a company

can open in a year when that limit is reach the company is restricted from opening more

outlets for certain number of years. This restriction is currently applied on PSO for not

opening more outlets in the country as they already have many of them everywhere. This

limiting competition has a positive and significant on the oil industry.

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THREAT OF SUBSTITUTES

When substitute products are available in the market, so it increases that the customer will

switch to the alternatives available to him/her rather than buying your product. This reduces

both suppliers power and the attractiveness of the market. It imposes a great threat to the

industry and the company. For example, if customers rely on a company to provide a tool or

service that can be substituted with another tool or service or by performing the task

manually, and this substitution is fairly easy and of low cost, a company's power can be

weakened.

The substitute products tend to steal you share in the market they also exacerbate the internal

competition among the competitors. They may reflect new technologies with low unit costs

because of the learning curve. They also impose a large threat to already established products

that seem to be incompatible, such as polaroid v/s digital photography. Your position and

profitability of your industry can be threatened by easily available and cheap substitutes.

Most of the time the customers only switch to the substitutes in response to the price changes

only.

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Analyzing the oil industry, oil is very different product and the customers are least likely to

find another product that meets their needs in a way oil do. So, it is highly unlikely to be

completely substituted. However, there are some of the substitutes that might be use on

behalf of oil. In Aviation, we have no choice instead of using Jet fuel only, as there is no

substitute available that is even close to Jet fuel. Nd all the Jet fuel is imported in Pakistan

because we don’t have the capacity to extract it on our own. Apart from that, as far as furnace

is concerned we have generated a substitute which is LNG, the liquid natural gas. Though

this substitute is not being used currently as the internal rivalry of Sui gas and Oil industry.

because the use of LNG is creating shortage of domestic gas in the houses. Since the LNG is

imported and distributed through the pipelines of Sui Gas Company which affect the

distribution of gas to the domestic kitchens. Which is why there is a conflict over the

distribution of LNG so it is not being used. Moreover, in coming 2 year the concept of

electronic cars will be there in the market. So if we get a good response on them from the

market, so another substitute of oil would be generated automatically in form of hybrid cars.

It means that oil have very limited number of substitutes and the customers are unable to find

comparable products and services to fulfil their needs. In addition to the limited number of

substitutes the cost of switching to other substitutes of oil is also very high, as the LNG itself

is an expensive product and the price of hybrid cars are also very high. So, the customers

cannot find and cannot switch to substitutes with same price and same benefits as the oil.

THREAT OF NEW COMPETITORS

The problem with the profitable markets is that they attract new companies to enter the

market. The entry of new competitors erodes profitability of the market. They do so I

following ways:
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o reductions in sales and shares, and

o reductions in market concentration, which → greater internal (industry)

rivalry, and

o often reducing cost-price margins.

If people can easily enter your industry so this can affect your position in the market. So, we

should analyze how easy it is for new entrants to get footholds in your industry? What will be

the cost of entering your industry? And how tightly your sector is regulated?

However, if there are strong and durable barriers to entry in your industry sector that stops

new entrants to enter the market easily so it could secure your company’s position in the

market. These barriers could be:

o Economies of scale

o Technology and specialized know-how,

o Strong customer loyalty,

o Strong brand preferences,

o Large capital requirements

In case of oil industry, we have some very strong barriers that resist new companies to enter

the market. First of all, the industry spent a huge amount of money on building strong

distribution channel because the expense

of building integrated railways, pipelines,

and tank lorries is way more less than the

expense of moving the goods through

weak distribution network. Currently the

most beneficial and economical mean of distribution is through pipelines. The cost of

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building pipelines is very high but the benefits it provides and its life span is very high. The

oil is first transported from port to the storage houses through pipes and fuel oil is transported

through railways after that the oil is transported in tank lorries to different outlets. So, our

industry has a very integrated, efficient and strong distribution network which acts as a

barrier to entry for new competitors.

Other than that, high capital requirements and high sunk costs also acts as barrier to entry.

Which means that the new company should spent and invest a huge amount of money with no

guarantee of returns in the end. Moreover, strong brands like PSO, Shell, Total that already

exists in the market are not easy to compete. The new competitor will have to improve their

brand value in order to effectively compete in the market, and it requires a lot of time and

money to build a new brand since the cost of building a new brand is really high so it again

acts as a barrier for the industry.

Apart from that, the advanced technologies that ae required in extraction process, marketing

process and marketing strategies also limits the competition in the industry. So, when barriers

are high in the industry then it is more difficult for the competitors to enter the market.

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BARGAINING POWER OF SUPPLIERS

This force is basically an assessment of how easily the suppliers can lift or drive the prices

up. This incorporates the number of suppliers and their essential inputs, the difference of the

products they offer, the relative size, strength and

the share of supplier in the market., it also includes

the cost related to switching the suppliers. The

bargaining power of suppliers affect our

company’s competitive intensity when:

o when there are few suppliers,

o when there are few good

substitute raw materials, or

o when the cost of switching raw materials is especially high.

The more the number of suppliers in the market the less the bargaining power they have and

the cheaper it will be for the company to switch among alternatives. And the lower the

number of suppliers exists in the market the more help you will require from them and the

stronger will be their position and ability to drive up the price. And this will negatively

impact your revenues and profitability.

In oil industry, we have a high level of competition among the suppliers as all the middle east

countries such as Dubai, Saudi Arabia, Iran Iraq etc. have huge reserves of oil and are

supplying it to the countries all over the world. This high level of competition reduces the

prices for the oil producers in Pakistan. And it has a positive and significant impact on

Pakistan’s oil industry as a whole. In oil industry instead of using backward integration

strategy to get more control over suppliers the firms generally negotiate more beneficial
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terms with the suppliers. Because the suppliers in this sector have to be reliable, cost

efficient, and long-term. Moreover, we have a low concentration of suppliers in the oil

industry sector which means that there are huge number of suppliers with only limited

bargaining power. This low concentration of suppliers positively affects our oil industry.

Pakistan’s main suppliers of oil is Middle East, apart from that we buy from Qatar, Saudi

Arab, and Fujairah also. All these countries have similar critical production inputs which

makes it easier for Pakistan to mix and match the inputs. This again reduces the bargaining

power of suppliers.

Finally, our oil suppliers play on large volumes. As 90% of out import bills consists of oil

imports only, which means that Pakistan buys a very significantly huge volume of oil as it’s

demand is very high domestically. So, it flagrantly reduces the bargaining power of suppliers

because then the oil producers can threaten them to cut the volumes or to buy it from other

suppliers which will hurt the supplier’s profitability.

BARGAINING POWER OF CUSTOMERS

This factor specifically deals with the ability of customers to pull the prices down. This

incorporates number of buyers in the market, the extent to which each buyer is important for

the industry, and what cost will the buyer have to incur while switching from one buyer to

another. The smaller and powerful the client base the more power of bargaining it holds.

Other factors that leads to more power of buyers are:

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o there are few of them, and

o a seller is locked into a

relationship with the buyer

because of relationship-

specific investments.

When you have only a few savvy customers they have more power, but this is not the case

with oil industry. as oil is majorly used commodity product. So, there are huge number of

customers and the switching cost of customers from one company to another is very low,

almost insignificant. Which make them indifferent of the company. However, the witching

cost of buyers to other substitutes if very high as told earlier which make them restrict to buy

only oil from which ever the company they want. So, they don’t really have a bargaining

power over it. Apart from this there is a huge demand of oil in Pakistan so there are large

number of customers, and no one customer tends to have bargaining leverage. Which means

that the prices are identical for all type of the customers. Which is very useful for the oil

industry. Moreover, the buyers or the customers in the oil industry have very limited

information about the internal economic factors that affect the prices of oil so they are at

disadvantage in negotiations with sellers it again positively affects the oil industry. in

addition to this, in Pakistan people usually cherish oil products and they do end up paying

extra for that just to maintain their vehicles. And the limited choices in the purchase of oil

again adds to the competitive intensity of the oil industry.

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Chapter 5 Restrictions and Regulations

RESTRICTIONS AND
REGULATIONS

When we talk about restrictions and regulations in the petroleum industry, it’s a largely

regulated market. Some products are regulated and other deregulated. Negotiations keep

taking place where oil marketing companies keep trying to propose the government to

deregulate the products. It therefore is important to regulate the market to not let the

monopoly exploit the domestic consumers for such necessity. That’s why products like petrol

and High Octane Blending Component (HOBC).

The Oil and Gas (O&G) sector operates under the umbrella of the Federal Ministry of

Petroleum and Natural Resources (MPNR). Government is the regulatory authority along

with OGRA (Oil and Gas regulatory Authority). There have been some policies in the recent

past for which the the authority is praised.

The MPNR’s Petroleum Exploration & Production Policy 2012, generally known as Pakistan

Petroleum Policy 2012, offers one of the best incentives for E&P companies, according to the

industry experts. Government of Pakistan (GOP) guarantees purchase of whatever is

produced by the O&G companies, at the well head. All proceeds to foreign companies are

paid in USD.

Change in government strategy i.e. switching to LNG is another policy which can be proved

fruitful in the near future. Over dependence on import of one product will be reduced hence

will give the cost advantages as well. The import bill in 2016-2017 increased not only due to

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increased prices but also due to the imports of LNG worth $1.15 billion from Qatar. This

however has introduced us to a new import substitute.

Restriction in this sector includes Imports bans like imports of (Furnace Oil) FO were

stopped which affected PSO as it totally relied on imports and it had a share of 90% in FO.

Other regulations include barriers to entry which government imposes through its policies.

Government sometimes discourages new outlets by not issuing license for CNG stations so

easily. Furthermore, government has always put a restriction on number of outlets for

marketing companies giving them a limited quota of outlets. Companies like PSO however

argue upon this that there shouldn’t be any restriction as that as they have a very large market

share compared to others, so they shouldn’t be restricted equally. Or at least a quota should

be different for them in accordance with market share and size.

Therefore, this continuous intervention of OGRA and Government is must in this industry to

not let c consumer be exploited for such basic needs and requirements.

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Chapter 6 Issues and Solutions

ISSUES AND SOLUTIONS

A plethora of factors, like the changing geopolitical relationships, the arrival of new

competitors, changes in supply and demand dynamics, social and environmental pressures,

are transforming and reshaping our industry. Among which there is one undeniable fact

i.e. Global Demand for energy will continue to increase theatrically, driven in most part by

population raise and the strong wish of developing countries to attain economic wellbeing.

Here are some of the issues that are faced by the oil industry of Pakistan and they even apply

to the world at large.

Health, Safety, Social Responsibility, and Environmental Security.

Human, environment safety and health protection stays the number one priority for the oil and

gas industry. The technique for extracting gas from unorthodox reservoirs — hydraulic

fracturing— has given a rise to environmental concerns regarding the water table. So these

companies should pay more attention to HSE issues within wider operations’ concerns i.e.

across the entire span of their activity, from exploration and production, to pipeline

management, down to refinery and marketing.

Management and Information

We need collaborative partnerships, alliances, or joint ventures that involve oil companies,

service companies, governments, and academia, all pooling their knowledge to achieve

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breakthroughs in the targeted areas in far less time and at lower cost, than if everyone goes

about it alone. Such collaboration should include:

 Integration across upstream, midstream, and downstream

 Joint investments outside the host country

 Different commercial terms and risk sharing

 Greater shared control

 More technology transfers and development of the local workforce

The People Shortage

One of the main challenges is having sufficient well-trained and capable technical people.

However, we can solve this issue by attracting and encouraging more bright young people

and “New Majority”—young women and ethnic and minority youth—into the science and

engineering disciplines and then into our industry.

The Cost of Services

The other challenge is high costs for services across the board, from exploration to

production and refining of crude to its transportation, including seismic, drilling, deep water

horizons and constructions. These are functions of higher commodity prices, which have

driven industry activity to a point that exceeds the service industry’s capacity to respond.

Capacity is being raised in some areas but bigger, more complex, longer-lead-time projects

are needed around the world.

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Fluctuating Crude Prices

Fluctuation in crude prices has become common due to politics involvement. For example,

the price went from a high of nearly $150/Barrel in mid-2008 to below $40/Barrel at the

starting of 2009. Slow approval of new capital projects, resultant talent squeeze due to early

retirement and acquisition activity were the main reasons for this un-stabilized pricing. So we

have to remain operationally effective while maintaining margins within environment.

Economic Uncertainty

Uncertainty in economics is an unknown prospect of gain or loss, whether quantifiable as risk

or not and it has a direct impact on employment, income prospects and communication

among industries. However, we can overcome it with setting a goal and creating a roadmap

detailing how to get there.

Results

Capitalizing on the new interdependencies between senior management information,

operational effectiveness, decision-making and the understanding of their impact on

profitability can somehow resolve our problems.

The industry is under the impact of global forces such as geopolitical pressures. What supply

chain management companies offer their clients facing pressures from geopolitical insecurity

is the knowledge, contacts, and skills to adapt. So, the best in-class supply chain performance

will require to foresee and react effectively to changes in the global environment.

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APPENDIX

PSO Interview Recording

 https://drive.google.com/file/d/1UPZkrbQwky7aaCrNXvZSCwla9azwIBrj/view?usp=
drivesdk

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REFERENCES
http://www.pakistaneconomist.com/2018/02/26/issues-opportunities-oil-gas-sector/

https://www.ravimagazine.com/afs-oil-industry-analysis-of-pakistan/

http://www.wikiwealth.com/five-forces:pakistan-state-oil-ltd

https://www.ravimagazine.com/oil-marketing-companies-omc-of-pakistan-an-academic-
report/

http://jcrvis.com.pk/docs/OMCs%20201710.pdf

https://www.slideshare.net/QunberBilal/petroleum-companies-of-pakistan

https://www.slideshare.net/ibadsid/my-presentation-the-oil-industry-of-pakistan

http://documents.worldbank.org/curated/en/574911468757785277/pdf/multi0page.pdf

http://www.pakistaneconomist.com/2018/02/26/issues-opportunities-oil-gas-sector/

http://www.ppl.com.pk/content/sui-gas-field-overview

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continue/

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Chapter 8 References

http://centralasiaonline.com/en_GB/articles/caii/features/2009/06/23/feature-02

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https://nation.com.pk/19-Apr-2016/oil-gas-companies-slow-down-exploration

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