Economic growth spurs fuel-oil consumption

http://www.thenews.com.pk/print1.asp?id=77633
By By Dr Hina Lodhi 10/29/2007

Pakistan has come a long way since 1998/99 crisis when the country was on the brink of default as its foreign exchange reserves had depleted dangerously and economic activities were on a decline. Considering the critical regional and domestic environment, high oil prices and massive earthquake, Pakistan has made a revolutionary turnaround, specifically post 9/11. Steady economic performance is expected to continue, indicating that most of the financial indicators set by the planners would be achieved in the FY08 as well. Economic growth has accelerated averaging 7 per cent per annum; inflation and fiscal deficit have been contained within reasonable limits. Pakistan’s credit worthiness has been upgraded to B+ by Standard & Poor’s.The SBP report for the FY07 shows the key indicators of economy very much in manageable range despite global externalities and geopolitical situation. Forex reserves increased to over US$ 16bn, whereas foreign investment also witnessed an all-time high of US$ 4.1bn on YTD basis. Real GDP growth of 7 per cent was achieved in FY07 (FY06: 6.6), while trade and fiscal deficits remained within the reasonable range of 6 per cent and 4.2 per cent respectively.As the economic turnaround was on its way, major large-scale manufacturing industries such as cement and automobile flourished. Even today, Pakistan is going through a construction boom. Growth in these sectors resulted in huge demand of energy, specifically petroleum products. The oil industry has shown similar trend in line with steady GDP growth rate and ever-increasing power demand on account of industrial and construction activities being undertaken in the country as well as increased participation of agriculture sector and large-scale manufacturing depicting a growth of 5 per cent and 8.8 per cent respectively. The oil experts predict that POL industry would reach an all time high consumption of 19 million tons in FY08. High-Speed Diesel (HSD) would display a growth in the range of 8-10 per cent, white oil consumption would cross eleven million metric tons, an all time high since the inception of the country. White Oil comprises Motor Gasoline (Mogas), HSD, Jet Fuel (JP-1) and Kerosene (SKO). Comparing earlier Mogas projections, at the outset of FY08, there was a sharp rise in demand of Mogas and diesel which mainly resulted due to reduction of smuggled products from across the border. This demand has led major OMCs (PSO, Shell and Caltex) to import Mogas as existing refineries were unable to meet the enhanced demand. It is estimated that Mogas consumption in FY08 would be around 1.6 million metric tons compared to 1.1 million metric tons in the previous year.The oil industry would continue to consume higher Fuel Oil volumes owing to increased reliance on thermal power generation on account of ever-widening power supply-demand gap; and low gas availability to power plants and drop in hydel generation. The industry sources say that estimated demand of fuel oil in FY08 would be over 8 million metric tons, almost the same level recorded in FY01.In the absence of any abrupt increase in hydel power and big gas discoveries, fuel oil-based IPPs are the only sources that have idle capacity to meet incremental demand. Analysing the growth trend in IPP sector it would be safe to assume that power fuel supply is an area in which PSO’s superiority is difficult to challenge. It has gained experience of international markets for local import needs. PSO owns 82 per cent of storage facility and has pipelines to all major IPPs. The ability to handle high volumes and market shares provides PSO the ability to offer competitive prices to consumers. Oil industry sources disclose that some six major companies plan to setup IPPs which will require around one million metric tons a year. The state-owned company would be a major beneficiary in gaining fuel oil business of new IPPs thus capitalizing on its vast infrastructure.According to analysts, PSO successfully managed to post reasonable profits in all quarters of the fiscal year 2007 despite wild fluctuations in international prices resulting in significant inventory losses. Contrary to PSO’s performance, Shell’s earning before tax was only Rs 378 million. Caltex, not being listed on stock exchanges, does not make its data available, however, analysts assume that Caltex must have had results similar to Shell.Interestingly, PSO despite being the largest holder of inventory in the country reported after tax earning of Rs 4.7 billion with an EPS of Rs 27.3. Analysts attribute the positive bottom line of the state company primarily on account of higher fuel oil intakes and ever-increasing market participation in key white oil products through innovative and customer-focused approach. Industry experts observe that PSO has been displaying strong fundamentals in all key financial indicators for the last couple of years. This clearly shows PSO’s outstanding performance as a result of well-perceived and far-reaching strategies, which are contributing a lot in terms of higher volumes and market participation.During the last seven years, the state-owned oil giant’s motor gasoline participation increased over 49 per cent from 39 per cent despite the industry having been fragmented with eleven players, which used to be enjoyed by only three players till 1997-8. Shell’s Mogas share dropped to 28 per cent from 43 per cent, while Chevron also reported a decline in its participation from 18 per cent to 14 per cent. PSO successfully maintained its participation in Diesel at 60 per cent level and Shell came down from 30 per cent to 22 per cent and Caltex came down to 8 per cent from 10 per cent.Local and international analysts believe that the state-owned company has all it takes to sustain dominance in Pakistan’s oil industry supported by a strong retail network, continued investments in oil movement and storage infrastructure, experience in handling high volumes and a professional management. It is believed that these advantages are difficult to match by existing or new companies. PSO’s investments in storage and oil movement infrastructure not only support its logistics, but also a source of additional income as PSO offers hospitality to other players in the industry. Some experts believe that if PSO embarks upon its vertical integration plan by getting interest in refining, it would be one of the leading players in the region.