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SIR AZFER

NASEEM

OMC INDUSTRYSECURITY
ANALYSIS
Prepared by: KIRAN MEHFOOZ,
MANEEZEH SHAIKH, BERIHA
ALI, AQSA MARVI, SYED ALI
ASHER, MUHAMMAD UZAIR,
FAHAD MUSTAFA, M TALHA,
OSMAN BOKHARI, ASAD
MEMON, SHAYAN HASHIM

OMC INDUSTRY-SECURITY ANALYSIS

Topics covered...
A BRIEF SYNOPSIS.................................................................................................. 2
Explorations- History.............................................................................................. 3
Major Players........................................................................................................... 4
What actually is OMCs market?............................................................................ 6
Major Customers..................................................................................................... 7
Competitors Analysis and its Outlook.................................................................7
OMCs Association in Pakistan............................................................................10
Process Flow in OMCs.......................................................................................... 12
Structure of OMCs................................................................................................. 13
Demand and Supply in OMCs.............................................................................. 15
Financial statements analysis of three market players.................................17
Historic Margin Regime........................................................................................ 19
Omc Margins.......................................................................................................... 20
Oil Pricing............................................................................................................... 22
Volume drivers for various products.................................................................24
Cost Drivers........................................................................................................... 26
Uses of product that OMCs make.......................................................................27
Imports................................................................................................................... 27
Exports.................................................................................................................... 28
Product Sales......................................................................................................... 28
Stock Market and OMC linkage...........................................................................29
Taxes on OMC Product.......................................................................................... 33
Custom Duty.......................................................................................................... 34
Investments in OMC sector.................................................................................35
Regulatory environment...................................................................................... 35
Few Market Trends observed.............................................................................. 38
Circular Debt Issues in OMCs..............................................................................39
Variation in Oil prices in Pakistan along with comparison from
international market............................................................................................ 40
Latest news on OMCs........................................................................................... 42
Improvement /Measures...................................................................................... 44
Contribution Sheet............................................................................................... 46

SECURITY ANALYSIS-PROJECT REPORT- I

OMC INDUSTRY-SECURITY ANALYSIS

A BRIEF SYNOPSIS
Oil is the essential wellspring of energy and met 45% of Pakistan's
energy utilization. The Oil marketing Industry in Pakistan has been to a
great extent commanded by the government in the course of the most
recent 2 decades.

Numerous exclusive oil companies once worked in the oil marketing


area however the nationalization of the organizations (which framed
PSO) in 1974 confined further private movement in this segment. Of
late, the GoP has stressed on deregulating the oil marketing segment
and we have seen more privately owned businesses entering the
business sector Shell Pakistan, Caltex, Hascol, Total Parco, being a
couple of them.

Since the public sector was for the most part in charge of the supply of
oil in the Pakistan there was very little accentuation on margins rather
on operations.

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OMC INDUSTRY-SECURITY ANALYSIS

Explorations- History

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OMC INDUSTRY-SECURITY ANALYSIS

Major Players

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OMC INDUSTRY-SECURITY ANALYSIS

In total, there are 23 Oil marketing companies operating in Pakistan.


Amongst which few according to Public/Private and Listed/Non-Listed
wise categorized are:
(according to Ogras website).

The details of all other 23 OMCs can be accessed via this link:
http://www.ogra.org.pk/images/data/downloads/1435211550.pdf

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OMC INDUSTRY-SECURITY ANALYSIS

What actually is OMCs market?


Energy sector in Pakistan comprises petroleum, gas, power and coal.
Due to the limited reserves of oil and gas with in the country, Pakistan
imports around 60% of its total oil requirement of in the form of crude
as well as refined and finished POL products.
The GoP has linked the prices of local petroleum to the mean
international prices. Thus higher international prices mean higher local
prices whereas government is committed to reviewing oil prices on a
quarterly basis.

Pakistans ranking in World Petroleum Production


World
Production
85.160 Million
Barrel Per day

Pakistans
Production
0.062 Million
Barrel
Per day

Pakistans
Ranking
58th

Pakistans Share in
terms of %
0.073

*Source: CIA World Fact Book

Main business climate and activities is to market & distribute


petroleum products in Pakistan (gasoline & HSD) and also OMCs are
engaged in marketing of industrial (furnace oil and other products) and
aviation fuels.

Current Economic Conditions:


A major portion of the POL demand is from the industries if they were
to suffer then so would the OMCs. PSO would be more exposed to this
risk than would other OMCs since most of the Fuel Supply
Agreements are with PSO.

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OMC INDUSTRY-SECURITY ANALYSIS

Major Customers
Industries, Powerhouses and Railways
Aviation- SPL serves mainly the upper end
of the market aviation and retail
customers as well as focusing strongly on lubricants and some
sales on major industries.
Retail Customers
Pakistan Government and Armed Forces- All
GoP dealings as well as fuel to the armed forces is supplied by
PSO.
Others

Competitors Analysis and its Outlook


In the fuel marketing sector the major 3 companies operating are
Shell Pakistan Ltd. (SPL), Pakistan State Oil (PSO) and Caltex Pakistan.
1. Pakistan State Oil Company (PSO) is the largest OMC and the
main national organization in the matter of POL items marketing
business.
At present PSO has more than 3800 outlets situated all through the
nation. Out of these, 150 outlets have been redone so far and another
40 will be completely utilitarian by the year end.

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OMC INDUSTRY-SECURITY ANALYSIS

After the deregulation of furnace oil business in July 2000, PSO was the
primary OMC to welcome global offers for import of the item. A sum of
1.9 million tons of furnace oil was transported in via imports.
PSO has marked a long term item off-bring agreement with PARCO.

2. Shell Pakistan is not just the second biggest organization, getting


a charge out of 32% of the piece of the overall industry, yet it
likewise offers better quality administrations than its clients. To
advance enhance its administrations, it has been adding to a
system of Organization worked locales.

Another client benefit, the 'Shell Genie' quick and free oil change office
has been reached out to more outlets which has helped the
organization in expanding its greases deal.
Shell has additionally started Business Process Re-building venture
known as CHIPS. This name mirrors the key topics: Change, Integrate
and PRofits.

The entity conceives to accomplish progressive change in the way


individuals work; by saddling new innovation to streamline business
procedures and spotlight on clients. The Organization arrangements to
connect more than 30 areas by means of another satellite-based
telecom system giving a la mode data on subtle elements, for
example, client orders, conveyance status and stock levels.
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OMC INDUSTRY-SECURITY ANALYSIS

Caltex Pakistan has a little piece of the pie when contrasted with other
two monsters. To battle the assault of the procedure of deregulation,
the Organization has framed a collusion with Shell for import and
treatment of gas and HSD.
In any case, the Organization is not anticipated that would witness any
generous increase in its piece of the overall industry because of
compel of predetermined number of outlets.

So whats the OUTLOOK?


The OMCs will encounter a decrease in their margins. Sales volume will
assume a key part in the productivity of the organizations. The
organizations as of now face a serious rivalry. In future, two elements
will decide the gainfulness of the OMCs.
These are: volume being taken care of and stock administration
framework.
The diminishment in POL costs will positively affect the economy all in
all and manure and concrete division specifically. A large portion of the
residential commercial enterprises will encounter a moderately more
good cost base. This alongwith desires of enhancing financial
development might enhance the general corporate profit.

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OMC INDUSTRY-SECURITY ANALYSIS

OMCs Association in Pakistan


The Downstream Oil Industry (Refining, Marketing, Circulation)
assumes an extremely critical part in Pakistan's economic
advancement, guaranteeing continuous supply of petroleum item to
the nation with a specific end goal to keep the wheels of the economy
moving. OMCs are connected with OCAC- Oil Companies Advisory
Council.

The members of OCAC currently comprise of the country's five


Refineries:

Pak-Arab Refinery Limited


PARCO
National Refinery Limited
NRL
Pakistan Refinery Limited
PRL
Attock Refinery Limited
ARL
Byco Petroleum Pakistan

Thirteen Oil Marketing Companies are also part of OCAC:


Pakistan State Oil Co. Limited PSO Askar Oil Services (Pvt) Limited
AOSPL
Shell Pakistan Limited SPL
Overseas Oil Trading CO. (Pvt)
Limited OOTCL
Chevron Pakistan Limited CPL
Bakri Trading Company Pakistan
(Pvt) Limited BTCPL
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OMC INDUSTRY-SECURITY ANALYSIS

Attock Petroleum Limited APL


Total Parco Pakistan Limited TPPL
Admore Gas (Pvt) Limited AGPL

Zoom Petroleum Limited ZOOM


Gas & Oil Pakistan Pvt. Limited
GO
Oilco Trading Company (Pvt)
Limited OILCO)

Hascol Petroleum Limited HPL


ne transportation organization is likewise a piece of OCAC which is PakArab Pipeline Co. Limited PAPCO. New participants in the Downstream
Oil area are coming in the nation and the quantity of part organizations
is prone to increment.
ROLE of OCAC- Keeping in mind the end goal to arrange all exercises,
OCAC assumes a significant part in legitimizing these imports in such a
way, to the point that supply/demand is adjusted. It is likewise a
central body for the government and different agencies to associate
with the oil business. Effective petroleum product supply logistics
management.

Plan to overcome any port constraints


Identifying the right energy wise for Pakistan
Petroleum product improvement plans: better, more environment
friendly product for the Pakistani consumer
Follow-up with the Ministries of Petroleum and Finance to ensure
the continued viability of the Downstream Oil Sector

OCAC COMMITTEES

Logistics, Supply, Forecasting Committee


Refining & Technical Committee
Strategy, Finance and Policy Committee
IT and Media Relations Committee

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OMC INDUSTRY-SECURITY ANALYSIS

*Sources: ogra website and ocac site.

Process Flow in OMCs

Basic:
Oil is transported to the oil marketing companies through roads,
railways or pipelines which run from refinery to the storage terminals
of the Oil marketing companies. They are then stored in those
terminals. The oil is then distributed through various channels such as
rail, tankers and pipelines.

Detailed processing:
1. Port facilities are connected to the storage facilities of the OMCs
and refineries through pipelines
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OMC INDUSTRY-SECURITY ANALYSIS

2. The refineries and OMCs store these products in the terminals.


3. They are transported through:
a. Tank Lorries: Used for short haul secondary distribution within the
cities and medium to long haul shipments around the country
b. Pipelines: Transports oil from south of the country to the north. There
are a total of three pipelines.
i. Korangi Mahmood Kot pipeline- transports crude oil from Karachi to
mahmoodKot
ii. White oil pipeline transports diesel from port qasim to mahmoodkot
iii. MFM transports diesel from mahmoodKot to Faisalabad and
Sheikhupura
4 Railway tanks: Unfortunately due to railway infrastructure
constraints and locomotive availability its movement capacity is
limited.
5 When they are stored in the terminals of the OMCs they are
recorded as purchase since now the ownership gets passed on to
them.
6 They are then retailed and distributed for sale to the customers.

Structure of OMCs

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There are a few major companies dominating the market and fulfilling
the needs of the country. Those are Pakistan state Oil, Shell Pakistan
Ltd , Caltex Pakistan Ltd. The others like Mobil Askari are involved
maily in the lubricants sector.

OMCs are Pure Retailing Firms


Companies are mainly involved in retailing and not much in upstream
activities. Some companies are however carrying out projects that
involve some upstream activities eg SPL which has signed a contract
with the government to explore oil. Pso is planning on constructing an
oil refinery at Badin.

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OMC INDUSTRY-SECURITY ANALYSIS

Demand and Supply in OMCs

The demand for oil has increased due to the higher power sector
demand
The growth of the petroleum oil and lubricants is forecasted to
remain around 7%
There has been an increase in the share prices and the
profitability of the OMCs
There is more demand than the refining capability thus finished
POL products are imported
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OMC INDUSTRY-SECURITY ANALYSIS

The Government plans to set up more refineries to reduce


imports and satisfy the demand which currently is three times the
refining capacity of Pakistan

The production of crude oil is expected to increase by 43% by


2022
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OMC INDUSTRY-SECURITY ANALYSIS

However the forecasted demand exceeds the expected supply


The demand is expected to further increase by 23 % by 2022
This means that Pakistan would have to keep importing

Financial statements analysis of three market


players
Gross profit
Name
PSO
SHELL
ATTOCK

2011
4.18
5.70
4.31

2012
3.35
4.36
3.00

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2013
2.82
4.56
3.14

2014
3.10
3.02
2.90

2015
2.58
5.32
2.87

2016
4.07
3.91

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OMC INDUSTRY-SECURITY ANALYSIS

GP MARGIN
6
5
4
3
2
1
0
2011

2012

2013
PSO

2014
SHELL

2015

2016

ATTOCK

After 2011 we can see that the OMC were not that profitable
The gross profit for shell however increased after 2014 by almost
2.5%
Year 2015-2016 has been favorable for PSO and Attock since the
Gross profit is now almost what it was back in 2011
Shell has maintained a higher Gross profit margin than Pso and
Attock throughout these 5 years

Net profit
Name
PSO
SHELL
ATTOCK

2011
1.80
0.41
3.89

2012
0.88
-0.98
2.70

SECURITY ANALYSIS-PROJECT REPORT- I

2013
0.97
0.43
2.37

2014
1.84
-0.43
2.11

2015
0.76
0.12
1.91

2016
1.76
2.70

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OMC INDUSTRY-SECURITY ANALYSIS

NP MARGIN
5
4
3
2
1
0
2011
-1

2012

2013

2014

2015

2016

-2
PSO

SHELL

ATTOCK

Here we see that despite maintaining such a high Gross profit


margin , Shells net profit margin is very low.
This means that shell has a higher operating cost than PSO and
Attock
Attock has been maintaining a higher net profit margin than PSO
and Attock
Attocks net profit margin was higher in 2011 and has been
decreasing over the years.
However 2015-2016 we can see that it has increased

Historic Margin Regime

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OMC INDUSTRY-SECURITY ANALYSIS

The previous government


changed the pricing
mechanism from
percentage terms to fixed
rates, citing extreme
fluctuations in international
oil price that could take
returns to unreasonably
high levels
Fixed rupee margin can be
unfeasible as it involves
hundreds of billions of
rupees of sales
Therefore the OMCs want a
revision in the pricing
formula
The OMCs complain that there is now unfair tax mechanism and
they are being affected by low regulated fuel margins
These margins they claim arent enough to cover the high
operating costs and the cost of financing for investments
Shell Pakistan emphasized on the ill effects of turnover tax, which
is reducing the industrys profit.
Instead of bottom-line profit, the turnover tax is applied on
revenue.
The previous government had imposed a turnover tax of 1% on
multiple industries to increase national revenues which was
reduced to 0.5%
OMCs sales are usually in billions but the high cost of sales lead
to low profits, exposing them to an unfair levy they claim

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OMC INDUSTRY-SECURITY ANALYSIS

Omc Margins
Low crude oil prices to slowdown circular debt build-up: Steep decline
in Arab light crude oil prices will substantially decrease Pakistans
import bill and reduce the rate of circular debt build-up. We expect
relative improvement in PSOs liquidity position, allowing the company
to maintain uninterrupted supply of imported petroleum products in
the country.
Fixed HSD & MOGAS margins to support company earnings: Furnace Oil
(FO) accounts for ~50% of PSO sales volumes while High Speed Diesel
(HSD) & Motor Gasoline (MOGAS) accounts for 45%. Margins on FO,
based on a percentage of ex-refinery prices, declined sharply since Sep
2014 in the wake of declining oil prices. On the other hand, HSD and
MOGAS margins are fixed in absolute (Rs/litre) terms, which provide a
stable source of earnings for PSO. Indexation of HSD and MOGAS
margins to Consumer Price Index (CPI), which is under deliberation
since last 2 years, if happens, will unlock further upside in earnings, we
believe.
Risk: We flag concerns on our investment thesis due to 1) volatility in
international crude oil prices and 2) liquidity constraints .

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OMC INDUSTRY-SECURITY ANALYSIS

OMC Margins HSD;MORGAS


2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
jan12

Mogas
HSD

jul12

jan13

jul13

jan14

jul14

Operating profit margin


4
3.5
Shell

Attock

2.5

PSO

HPL

1.5
1
0.5
0
2012

2013

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2014

2015

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OMC INDUSTRY-SECURITY ANALYSIS

Earnings before Interest, Taxes, Depreciation and Ammotization


4.5
4
3.5
3
Shell
Attock

2.5

PSO
HPL

2
1.5
1
0.5
0
2012

2013

2014

2015

Oil Pricing
In Pakistani oil marketing industry prices of all types of fuel oil are set
by the GoP except the lubricants. The regulated prices also mean that
these prices are hedged against PKR devaluation. If there is any major
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OMC INDUSTRY-SECURITY ANALYSIS

PKR devaluation, then the oil prices are also adjusted accordingly. The
OMCs margins are also set by the government and is a percentage of
cost of goods sold or the margin per litre.
Government is seeking an increase in the profit margins on petroleum
products of oil marketing companies (OMCs) and dealers. The
government, in future, complete deregulation of the oil sector to limit
governments role to policymaking and allowing OMCs and dealers to
set pricing and ensure quality control.
Pakistani Government has always emphasized on revising the
petroleum price upward in relation to international oil prices but there
is no downward revision usually. The current government for the first
time has lowered the petroleum prices by more than 50% giving a
huge relief to public. Moreover, the prices are revised fortnightly.
After the 2015 10 days crisis, apart from the fuel supply arrangements,
OMCs has developed a well-managed supply chain structure through
which their products are transferred to all parts of the country. The
Companies also connected to the import markets and import cargos of
Fuel Oil and Motor Gasoline. Several of these companies have their
integrated import supply chain set ups at Kemari and Port Qasim.
Strategically Placed Storage Facilities.
The Oil prices are locally set keeping in mind the following factors:
EX-REFINERY PRICE:
The ex-refinery price of a product, which is paid to local refineries,
equates to the landed cost of the product. In other words it relates to
the import parity price of the product if the same were to be imported.
The base price relates to the relevant product's FOB price averaged for
the fortnight as quoted in the Arab Gulf region to which are added
other elements like freight, duties, L/c and bank charges, custom duty,
wharfage etc to arrive at the refinery price.

GOVERNMENT LEVIES:

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OMC INDUSTRY-SECURITY ANALYSIS

Government levies are the prerogative of the Government and are


fixed in accordance with the needs of the Government. Petroleum
products are an important source of any Government's revenue and
Pakistan is no exception.
INLAND FREIGHT:
Inland freight is used to equate the prices of the products all across
Pakistan. In order to do this, 29 core depot locations have been
identified and prices are kept constant over these locations. The
product wise cost of product transportation from refineries or imports
to these 29 locations is allocated to the respective product and is
called primary transport cost. Primary cost represents actual cost and
does not include any profit element for the marketing companies.
DISTRIBUTOR AND DEALER MARGINS:
The Government fixes the distributor and dealer margins, which
represent the profit element for the oil marketing company and
their dealers. These margins are represented as a percentage of
the Maximum Ex-Depot Sale Price. From July 2002, these have
been fixed at 3.5% for Oil Marketing Companies
SALES TAX:
Sales tax is the last element in the consumer pricing and is calculated
at 15% of the price before sales tax. To further illustrate, the following
price build up is applied by OGRA while pricing:

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OMC INDUSTRY-SECURITY ANALYSIS

Volume drivers for various products


Aviation Fuel

Volume Drivers: flight operations, Inter country


situations & Tourism
Motor gasoline

Volume drivers: automobiles, private vehicles,


generators
High Speed Diesel

Volume drivers: Economy of a country influencing


trade, automobiles, transportation cost, Agricultural
activities, Trade with neighbouring countries
Furnace Oil

Volume drivers: Thermal power generation, Industrial


development, Energy generation plants (Electricity)
Lubricants

Volume drivers: Auto sales, Automotive industry,


Industrial operations
Aviation fuel is used in flight operations and is directly linked to
the business activities in a country and the tourism. The Pakistan
is fighting a war against terror which directly affects the aviation
fuel consumption.
Motor Gasoline is mostly used in Automobile sector and is widely
consumed by private vehicles. For 2015 MOGAS sales saw an
increase of over 33 percent year-on-year, and the imports
observed a jump of around 60 percent.
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OMC INDUSTRY-SECURITY ANALYSIS

The ease of availability of car loans has widely increased the auto
sales since 2013 which in turn increases MOGAS sales as shown:

High Speed Diesel is used in Cargo vehicles, Trains, Heavy engine


vehicles, Tractors, Tube wells. The volume of HSD is highly
dependent on national trade and as well as the trade with
neighbouring countries. High speed diesel, registered a moderate
increase in the year, explained by consumption in the transport
segment amidst rising auto sector sales but a slowdown in the
agriculture sector. The PAK CHINA corridor is expected to boost
the HSD sales.
Furnace oil is mainly used in thermal power generation. Almost
65% of electricity is generated by thermal in Pakistan and still we
are facing load shedding issues. Due to higher demand of FO and
liquidity constraints of power companies, LNG may replace FO in
power sector. The furnace oil demand is declining as shown in the
graph:

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OMC INDUSTRY-SECURITY ANALYSIS

Lubricants are necessarily used in automobiles and industrial


machinery. The economic policies of current government in
Pakistan are favorable for industrial growth which will lead to
higher sales of lubricant oil.

Cost Drivers
Cost of goods sold
The pure cost that is paid to seller by the OMC for the fuel. It is a
specific percentage of sales. Ex-refinery price is based on concept
of "Import Parity/OMC weighted average cost of purchases.
Including, Inland freight Primary transportation cost from
refineries to imports to 29 identified storage depots. COGS is the
major cost driver which can be up to 80% of sales.
Duties & taxes
Government levies (excise duty and Petroleum Development
Levy)
It is fixed by Government of Pakistan in Rupees/litre.
Finance cost
Mark-up on ST borrowings
Late payment charges
Defaults on LCs
Other operating expenses/income are impacted by the
exchange rate
The dollar is officially linked with oil and the most international oil
trades is invoiced, delivered and settled in US dollar, thus, the
fluctuation of dollar ex- change rate has a direct impact on the
stability of international oil price in petroleum industry. US dollar
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devaluation inevitably leads to rising international oil prices &


greatly improves the purchasing power of other currencies. US
appreciation brings about a drop in international oil price. This in
turn decreases the prices of oil products in local OMCs.

Uses of product that OMCs make


1) Gasoline and low sulphur diesel to drivers via service
stations and 3rd parties who have their own service
stations.
2) Jet fuel to airports and airlines
3) Furnace fuel to homeowners and businesses.
4) Lubricants & waxes to industrial customers or retailers
5) Marine fuel to industrial customers such as government
navies, as well as to individual boat owners.
6) Bunker fuel oil to fleets of large vessels like cruise ships
or navies.
7) Heavy fuel oil to industrial customers for use as fuel in
large boilers.
8) Propane to retailers or direct to customers for use in
BBQs, etc
9) Supply of fuel to the transport sector (Honda,Suzuki etc)

Imports
2010: In 2010 Pakistan imported about 151,200 barrels per day.
2013: Pakistans total crude oil import is about 400,000 barrels
per day and 30,000 tons of furnace oil. Its total oil import bill
stands at about $15bn per annum -2013 (Taken from dawn news)
2014-2015: The country imported oil worth $10.682 billion in JulyMay 2014-15 compared to about 15bn a year ago, according to
Pakistan Bureau of Statistics (PBS).
Major importers include Saudi Arabia, Kuwait and UAE.

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Exports
Pakistan has resumed export of crude oil after a gap of 10 years
as output touched an all-time high of 98,000 barrels per day
(bpd) in June 2014, an increase of 22% over the previous year.
(Tribune)

Crude oil production is expected to increase by 130,000 bdp in a


couple of years . This would mean Pakistan would be able to
export more and domestic needs would be satisfied to such an
extent. (Tribune)
70518 tons of crude oil was exported in 2014. (PSB)
Pakistan exports to Singapore, India etc.

Product Sales
Petrol consumption is increasing with the increase in the production in
the transport sector. People are buying more cars.
Sharp rise in the consumption of fuel oil.
Lower oil prices have boosted domestic OMCs sales.
PSO records impressive growth: This is primarily due to better sales of
FO and MS which pushed up the companys sales.

Stock Market and OMC linkage


The Pakistani market has been facing a falling trend in line with other
Asian markets after a rout in Chinese equities and a sharp drop in US
dollar unnerved investors. The main reason for the fall in the equity
market was global markets and international currency pressure.

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KSE 100
This shows the market trend for the last year and it shows that the
market has been fluctuating quite a lot with a sharp decrease in Apr 15
and then goes on the rise till August when it hits the peak. Then it
starts to decline till October and rises a bit till late November and then
declines again till March.

This stock market can be linked to the OMC sector.

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OMC INDUSTRY-SECURITY ANALYSIS

BPL
This graph for BPL shows that the stock trend has been on the decline
after the rise in May when it the stock prices hit their peak. This can be
related to the decline in the market trend shown in KSE 100.

APL
Its almost the same for APL as with the other OMCs, the stock prices
hits the peak in September and then the stock prices show a falling
trend.

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PSO
PSO, which is the only national company in the business of POL
products marketing business, has followed the same market trend with
a fluctuating stock market trend a decline in the stock market after it
hit its peak in the months of July-September.

The link between stock market and OMCs can be seen here. The trend
in first graph of KSE100 is followed by the trend of OMCs in their
respective graphs. The reason for this is that the prices are pegged to
the international oil prices and as the price of oil has fallen
internationally, these companies have also had to decrease their
prices.
This can be seen in the following graph.

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International Trend for Oil Prices: United States local production has
about multiplied in the course of the most recent quite a while, pushing
out oil imports that need to discover another home. Saudi, Nigerian
and Algerian oil that once was sold in the United States is abruptly
competing for Asian markets, and the makers are compelled to drop
costs. Canadian and Iraqi oil production and exports are on a
continuous rise. Indeed, even the Russians, with all their financial
issues, figure out how to continue pumping.
If we talk about the demand, the economies of Europe and other
developing nations, similar to Pakistan, are frail and vehicles are
turning out to be more vitality effective. So interest for fuel is slacking
a bit.
Due to the decrease in the oil prices set by the international standards,
the OMC have found it difficult to cope up with this decrease and to cut
their costs thus it has led to weak fundamentals of these companies.
This can be seen in the form of ratio analysis with decreased profit
margins and EPS. Therefore their stock markets have faced a decline.

Taxes on OMC Product


The increase in the General Sales Tax (GST) on petroleum items by the
legislature has been tested in the Supreme Court.
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Shahid Orakzai on Monday documented an appeal in the peak court


under Article 184(3) of the Constitution. Making the alliance, through
secretary Ministry of Law and Justice and Chairman Oil and Gas
Regulatory Authority (OGRA) as respondents, the solicitor asked for the
court to promptly control the league from gathering the additional GST
until a choice is come to on the request.
The solicitor likewise supplicated the court to pronounce the expansion
in deals charge on petroleum items as illicit under the law and direct
OGRA to re-assess the cost of petroleum items under the standard GST.
He doubted whether an assessment forced by a government law could
be expanded without changing the law and whether the rate and rate
of GST can be expanded particularly for a specific gathering of items,
without moving a Money Bill in the National Assembly as required
under Article 73 of the Constitution, where in the provision
accommodates 'burden, cancellation, reduction, adjustment or
regulation or any duty'.
On January 31, the government raised GST by five per cent, increasing
if from 22% to 27%. Earlier on January 1, government had increased
GST by five per cent, from 22% from earlier rate of 17%.

Custom Duty
In April 2015, the regulatory duty on import of furnace oil was
increased to 7% in the wake of falling oil costs in the global business
sector, which brought about critical fall in duty and taxes on import of
petroleum products.
The Finance Minister, on June 25, 2015, announced that the regulatory
duty increase had been balanced in custom duty.

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In a post spending plan course FBR executive Tariq Bajwa on June 07


additionally said government had not expanded the rate of customs
duty on the import of High Speed Diesel (HSD) and POL items, for
example, raw petroleum and motor oil, yet administrative obligation
has been supplanted with custom duty, having no effect on their costs.
High Speed Diesel (HSD) is importable at concessionary rate of 7.5
percent customs duty. Regulatory duty at the rate of 2.5 percent was
levied in May, 2015. It is proposed that concessionary rate of duty of
7.5 percent and regulatory duty at the rate of 2.5 percent be replaced
with customs duty rate of 10 percent. This will have no impact on price
of HSD. The measure would generate Rs 5 billion.
POL products namely Crude Oil and Motor Spirit are exempt from
customs duty. However, regulatory duty at the rate of 2 percent was
imposed on these products. It is proposed to withdraw regulatory duty
on these products and levy minimum customs duty rate of 2 percent.
This will have no impact on prices of POL products. The measure would
generate Rs 19 billion. Furnace oil is exempt from customs duty.
However, 7 percent regulatory duty was imposed. It is proposed to
reduce regulatory duty on furnace oil from 7 percent to 2 percent and
levy 5% customs duty. This will have no impact on price of furnace oil.
The measure would generate Rs 15 billion.

Investments in OMC sector


1) Shell made a significant investment to implement Global SAP in
Pakistan to upgrade its systems and processes for increased customer
services.
2) Involved in social investment programmes for many years,
supporting a wide range of community welfare initiatives and projects
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aimed at: education, community development and health, environment


issues.
3) PSO Investments:

Education
Healthcare
Environment
Community development
Disaster relief

Also, some investments in thar coal project , white oil pipeline project,
asia petroleum limited, PAK grease manufacturing company, Pakistan
refinery limited, Joint installation of marketing companies.

Regulatory environment

Ogra is the main regulator of OMCs. Oil and Gas Regulatory Authority
(OGRA) has been set up under the Oil and Gas Regulatory Authority
Ordinance dated 28th March 2002 to foster competition, increase
private investment and ownership in the midstream and downstream
petroleum industry, protect the public interest while respecting
individual rights and provide effective and efficient regulations.
As laid down in the Ordinance, the Authority comprises one Chairman
and three members. To create a working environment where the
interests of all stakeholders namely the Consumer, Investor & the
Government is protected through Independent & Fair Regulatory
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practices. Consequent upon the establishment of OGRA on 28th March,


2002 the Natural Gas Regulatory Authority (NGRA) was subsumed by
the OGRA. All properties and works done by the NGRA were transferred
to and protected under the OGRA Ordinance. OGRA was, therefore, in a
position to start its functions in respect to natural gas immediately
upon its establishment. So recently, the oil marketing companies were
functioning under a strict regulated environment so much so that to
built up new retail outlets they had to seek GoP approval.
These restrictions are slowly being eliminated so as to deregulate the
market slowly. The oil industry is very much deregulated and the
margins are set by the OMCs themselves. However, the strict licensing
requirements required for setting up an oil marketing company remain
and at present the GoP is discouraging any new entrant into the oil
marketing sector.

The oil prices in the country are regulated and there is a fixed margin
that both the dealer and the distributor (the OMC) get currently the
average distribution margin is 2% while the average dealer margin is
around 1%. The regulated environment favors PSO their complacent
management is still able to reap in profits but the professional
management of SPL prefers a de-regulated environment where they
can cut down on costs to increase profitability.

Regulated Products vs Non-Regulated Products

Market Share % Regulated Products


SECURITY ANALYSIS-PROJECT REPORT- I

PSO

Caltex

Shell

77

18
38

OMC INDUSTRY-SECURITY ANALYSIS

Market Share % Unregulated Products

57

38

Regulated Products % of Total Sales

97

95

91

Non-Regulated Products % of Total Sales

PSO controls 77% of the regulated market, 57% of the


unregulated high margin products (lubricants etc)
SPL almost doubles its regulated market share in the unregulated
sector from 18% to 38%.
PSO sells only 3% of its sales volume in the unregulated sector
SPL sells 3 times as more 9% of its total sales volume in the
unregulated sector.
Significant earnings potential for SPL since they can make up for
their small market share by selling more high-end lubricants.
Mobil also sells high margin lubricants.

THE PETROLEUM POLICY OF 1997 AND ITS IMPACT ON OMCs:


Although the Petroleum Policy 97 was comprehensive, the following
section highlights some of the measures that affect the Oil Marketing
Companies.

The commission of the OMCs and dealers will be reviewed and


adjusted annually by the GoP, if necessary, to enable them to
invest in the construction of commercial POL storage areas,
logistics and other facilities
A storage surcharge of Rs. 0.10 per litre will be imposed on POL
products for construction of strategic storage facilities by either
NLC or by the OMCs so that GoP can maintain a 45 days cover of
oil inventory.
Lubricants will remain free from price control. No permission will
be required for establishing lube blending, reclamation, grease
and wax plants except registration for quality checks.

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Refineries can sell their product to any oil marketing company or


they can set up an oil marketing company of their own.
Oil pipeline projects are exempt from custom duty, sales tax, and
other surcharges on equipment, machinery and materials.
Accelerated depreciation allowance @50% of the capital
investment in the first year to improve the projects cash flow.
No GoP permission for setting up petrol pumps by OMCs.
Anti-adulteration law to be enforced for strict quality control and
enforcement.

Few Market Trends observed


1) Reduction in oil prices: Benchmark Arab Light Crude has
dropped by 52.77 per cent to $26 per barrel now from $55
in January 2015, but the government reduced petrol and
diesel prices by a meagre 3pc and 6pc, respectively, in the
last one year. In January 2015, petrol and diesel prices stood
at Rs78.3 and Rs86.23 per litre while currently the two fuels
were selling at Rs76.2 and Rs80.79. The government
instead of passing on the benefit of record low world oil
prices to consumers has raised petroleum development levy
(PDL) and general sales tax.

2) Increase in sales, especially of fuel oil: Increase in sales of


fuel oil because of growth in automobile industry. Smaller
OMCs have captured PSOs market share as Dec-2014 sales
of Attock Petroleum (APL), Shell Pakistan (SHEL) and
HASCOL Petroleum (HASCOL) edged up by 2% YoY, 6% YoY
and 74% YoY respectively.

3) Global trend is towards cleaner fuel and advances in


technology. It represents the technology that allow the
OMCs to discover oil and produce it.

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OMC INDUSTRY-SECURITY ANALYSIS

Circular Debt Issues in OMCs


Circular debt in OMCs leads to a lot of problems. Following are
few of them:
It can choke the cash flow of countrys fuel distributers. One of
the major example of this is Pakistan state oil who has 49 percent
of the countrys gasoline marketing business.
Besides cash flow problems, circular debt limits the ability of
OMCs to pay out dividends.
The vicious cycle of circular debt can bog down energy supply
chain in the country. Power distributors delay payments to
generators who, in turn, face difficulty in clearing dues of fuel
suppliers. Importers in return cut month imports.
Circular debt results in the petroleum shortage as well.
But the important point to be noticed that partial resolution of
circular debt improves oil and gas sector outlook.

For now, analysts are excited about what lies ahead. They see good
days of international oil price stability and strong margins. If past
trends can be used as a benchmark, then the sector is poised to
perform well notwithstanding the problems, which are in store for the
energy sector of the country.
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Variation in Oil prices in Pakistan along with


comparison from international market
Economy of Pakistan has witnessed many ups and down and many
debates have been done with this respect. This research is
particularly aimed to determine the existence and intensity of relation
between crude oil price and inflation in Pakistan and internationally.
Moreover the study also investigates other determinants of inflation in
Pakistan which affects oil rates.
Inflation is a big concern for Pakistan economy for years. Single digit
inflation is considered to be good for economy but when we talk about
Pakistan we have been facing double digit inflation for the last 5 years.
A brief summary of price changes

Key factors
1. Pakistan is ranked 158th from the highest to the lowest income
countries on per capita income, but in terms of petrol prices it is
ranked at 59th.
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OMC INDUSTRY-SECURITY ANALYSIS

2. on other side countries with the least expensive oil, Venezuela is the
country with the cheapest oil in the world in terms of $/liter and per
capita income Pakistan's oil is 47 times more expensive than
Turkmenistan, 30 times, Iran, 4 times Vietnam and 4 times Indonesia.
3. Petrol is Rs. 1.20 /ltr in Turkmenistan, Rs. 1.80 in Iraq, Rs. 3.0 in Iran
and Rs. 15.00 for UAE as compared with Rs. 31.80/liters in 2000 /@ Rs.
60 /dollar rate in Pakistan.
4. Amongst the most expensive countries, the petrol is Rs. 87.60 /liter
in Hong Kong, Rs. 71.40 in Norway, 70.20 in UK, Rs. 63.0 in Japan and
Rs. 61.80 in Netherlands.
5. Amongst the most expensive fuel countries, the petrol is 4.33 times,
6.72, 2.09, 5.38 and 19.27 times more expensive in Hong Kong,
Norway, Uruguay, UK and England as compared to Pakistan. This
means that although the price in these countries is amongst the
highest in the world, yet Pakistan is still more expensive because of
wide difference in their per capita income. The high per capita income
makes hardly any difference in purchasing capacity of the consumer in
their countries.
6. Pakistan's comparison has been made keeping in view both the
items, petrol prices and per capita income, with the world low-income,
middle income and high income countries. The composite average is
higher by 3.62 times in Pakistan as compared with the world's medium
average. With high income countries the petrol prices is 7.63 times
higher in Pakistan.
7. Pakistan is ranked 33rd with the most expensive oil amongst 124
countries with 91 countries behind Pakistan with less petrol prices with
both the factors petrol price and per capita income taking into account.

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Latest news on OMCs


1. Ministry moves summery for increase in profit margins of OMCs,
dealers (4th march 2016):

The ministry of petroleum and natural resources on Friday sent a


summery to the Economic Coordination Committee (ECC) for seeking
an increase in the profit margins on petroleum products of oil
marketing companies (OMCs) and dealers.
According to media reports, a summery seeking an increase in the
profit margins on petroleum products of oil marketing companies and
dealers had been moved early this week for the ECC after decrease in
petroleum products.
According to the ministry officials, profit margins of marketing
companies and dealers had been increased in December last year and
the government was of the opinion that due to reduction in prices of
petroleum products, profit margins of oil marketing companies and
dealers would also be decline proportionately.

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The ECC has approved the profit margins summery of oil marketing
companies and dealers in 2014. According to media reports, oilmarketing companies are earning profit amount Rs3 2 per one litter.

2. CCP approves PSOs acquisition of 26.67pc share in PRL(3rd


march 2016):

The Competition Commission of Pakistan (CCP) has granted approval to


the acquisition of up to 26.67 per cent shares in Pakistan Refinery
Limited (PRL) by Pakistan State Oil Company Limited (PSO). The PRL is
a local refinery which produces various refined petroleum products
such as motor gasoline, kerosene, and diesel oil for supply to oil
marketing companies.
The approval in form of an order under Section 11 read with Section 31
of the Competition Act, 2010 (the Act) was passed by a bench
comprising Ms Vadiyya Khalil, Chairperson, Mr Ikram ul Haque Qureshi,
Member (Cartels & Trade Abuses, and Legal) and Dr Shahzad Ansar,
Member (OFT & Advocacy).
The CCP observed that the acquisition of PRLs shares by the PSO
would not substantially lessen competition in the market. It was noted
that PRLs share in the local refined petroleum product market was
around 10 per cent and that local refineries including the PRL
collectively supply less than 50 per cent of the total demand of refined
petroleum products in Pakistan while the rest was met by imports
undertaken by the oil marketing companies (OMCs) themselves.

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Furthermore, with downstream OMC industry, heavily regulated by the


Oil and Gas Regulatory Authority, there is no chance of PSO raising
prices
for
competitors
or
end
consumers.
Source: Pakistan today

Improvement /Measures
A few measures that can be taken for improvement are as follows
One authority:
One one authority should be present to
regulate the sector in order to avoid
confusions and delay
They should be allowed to bring in third
party inspectors to inspect the operations.
This authority should look over the OMCs
and resolve matters and stop unfair
competition
They should work according to the best
industry practices like HSE standards and should not be
under ministry of petroleum
Rights of investors should be protected in order to attract
more investment
OGRAs role will be more meaningful if instead of becoming a
victim of ad-hoc changes they make policies on a long term
basis.
Supply side:
crude production of 70,000 barrels per day can be increased
by approximately 20% by using latest technology for
enhanced recovery

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areas of balochistan and other off shore areas still have


not been explored , so there are
chances of more reserves being
discovered

Improvement of import :
import facilities need to
be improved at KPT
procedures and
scheduling should be
done properly
Gwadar port needs to be
developed for imports

Help for new players/ reducing barriers for entry


The OMCs since they have been there for
ages
, have proper storage and pipeline set
up.
However this along with other things
act as barriers to entry for other new
players that was to enter the market
An infrastructure should be set up
which can help the new companies with
the infrastructure. This way they can

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OMC INDUSTRY-SECURITY ANALYSIS

have the pipelines etc but allow other companies to use


them and get paid for it

Contribution Sheet
1. Kiran Mehfooz 05805- Group Leader
Brief synopsis and Exploration History
Major players in OMCs
What actually is OMC market
Competitors analysis and its outlook
Major Customers
Associations of OMCs in Pakistan
Assigning and compilation of all work
Helped all group members in finding details regarding
their topics
2.

Maneezeh Shaikh- 06083


Analysis of financial statements of 3 major players
Process flow- explanation of the diagram
Demand and supply
Structure of OMCs
Historical Margin Regime
Helped all group members in finding details regarding their
topics

3. Aqsa Marvi 06083:


Imports/Export
Product Sales
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Investments made by OMC sector


Uses of products of OMCs
4. Beriha Ali- 05809
Regulatory Framework
Market trends observed
Circular Debt Cycle

5. Syed Ali Asher- 05815


Latest news about OMCs
Improvements/Measures that can be taken
6. Muhammad Uzair
Variation in Oil Prices in Pakistan
Difference of spread between international and local
prices
7. Muhammad Talha
Cost drivers
Volume drivers
8. Fahad Mustafa
Oil Pricing
9. Asad Memon
Margins in OMCs
10.

Osman Bokhari
Stock Market and OMCs Linkage
Taxes (gst rate) and Custom Duty

11.

Shayan Hashim:
Historical Margin Regime *(done quietly rough and at the

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last minute so edited and properly done by Maneezeh


Shaikh)
12.
Osama Fahim Khan- No
submission/participation nor any response to term report
group. Excused after class presentation. Absent while
presentation as well.

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