PSO: A growing giant

If the number one rule for businesses is to integrate, then Pakistan State Oil (PSO) is doing precisely that. And, if the number one reason behind integration is increasing margins, then the oil marketing giant is hastily moving forward with its plans.
The firm has recently signed a MoU with the government of Khyber-Pakhtunkhwa (KPK) for setting up a refinery in the province. This is strategically in line with MD PSO, Naeem Yahya Mir’s vision of a fully integrated company in six years – a plan he revealed to BR Research last year.
There are many reasons why the ambitious plans are not exaggerated as some quarters claim. For a split second, locating a refinery in Kohat district seems a dangerously awkward move given the law-and-order situation. But one must look at things from the supply perspective.
The rationale behind setting up a refinery in Kirk area of Kohat district is understandable given the region’s productivity. KPK is catching up in its crude oil production; its total production has grown by a five-year CAGR of 44 percent from FY07-FY11 period, whereas the growth in other regions has been in negative.
Naeem Yahya asserted that the idea behind the design is import substitution, meeting the needs of the province through local crude and not relying on imported blend. Moreover, the argument for setting up refineries along the coastal belt has to be ruled out because of the transportation cost.
Furthermore, the so-called inherent risks like circular debt and financing of this public-private project also seem to be in check so far. The company is cheerful about its dividend history and strong liquidity with daily cash flow of Rs1.8 to 2 billion. Absence of any international investor eliminates the chances of a last minute back out.
Though not exactly an apple to apple comparison, one cannot help but wonder how similar projects have faced a standstill—the case in point being PARCO’s $6 billion Khalifa Refinery. However, one can infer from PSO’s stance that the size, cost, capacity, and government guarantee of the project somewhat eases such fears. Mind you, PSO’s refinery is a state-of-the-art refinery with a capacity of 40,000 barrels per day (bpd) and a cost of $700-800 million.
To minimise cost, the third step (second being the refinery operations) in the oil business is to expand upstream. And, if PSO continues with the same fervour, news that the company is participating in the bidding process of some hydrocarbon-rich field should not come as a surprise.