BR Research recently met up with Imran and discussed the dynamics of the downstream oil sector of Pakistan. The discussion flowed around PSO’s performance, plans and challenges it faces. Below are edited excerpts from the conversation.

BR Research: PSO has been in the thick of things lately, especially in the wake of growth in white oil market. How has all of it helped your financials and strategies?

Sheikh Imranul Haque (SIH): Last year’s bottom line reflects results of the first step taken in organization transformation; higher EBITDA and after tax profits over 2015. There are other multiple reasons; not only because of volumetric growth, but also due to focus on reviving some of the dormant businesses such as Lubricants, NFR, and LPG. Additionally filling of vacant leadership positions, aggressive emphasis on growth and margins in most product categories has facilitated the improved results.

BRR: But you do not have the control over margins.

SIH: I am referring to net margins here which had gone down to 0.6 percent of sales and are now at 1.8 percent. This is partly because we have not only improved our efficiencies, but is also due to focus on high margin categories where LPG volumes have grown from 1,013 tons per month to around 2,086 tons per month, Lubricants from 2,309 tons per month to 2,952 tons per month combined with 9 percent volumetric growth in Mogas.

On the Non Fuel Retail side, we have started to renovate our existing outlets and are determined to offer variety of new services to our 3 million customers who begin their journey with PSO. That alone offers us exciting opportunities in combination with PSO Card which will start offering new card products in coming weeks; thus building the robustness of our brand.

We are also actively seeking support of the regulator to check possible misuse of IFEM and illegal product dumping, which continues unabated despite being against law, and was also highlighted passionately by the cartage contractors recently in meetings with Ministry of Finance participated by OGRA, NHA and others.

Furthermore we have also improved our competitiveness by ensuring open and transparent tendering of products which has resulted in reduced premium on imported supplies and PSO is investing to further bring down our operating costs despite being already the least cost operator in the industry.

BRR: Do you think there is a sense of fair market competition today in the OMC sphere?

 SIH: Enforcement of the writ of the government on the borders has facilitated in creating a level playing field for ethical organizations and in a fair competitive market PSO will always grow and lead the industry.

We actively advocate the fact that PSO’s role is unique as it not only assumes the role of social enterprise, in addition to being a national company but also is expected to deliver results by competing in a market that has only private sector OMCs.

For example, in January 2015 and again in last quarter this year when the international market prices started to increase, most OMCs stopped importing and PSO faced the pressure. We actually lost money due to inventory losses, but PSO having responsibility to people of Pakistan, fulfilled its obligations by working round the clock to ensure minimum disruption in the supply chain.

Unfortunately the regulator has not taken punitive action against those who restricted imports for short term gain. Instead we were directed by the government to order additional volumes which have resulted in demurrage expense to PSO which will impact our bottom line. In FO, PSO is obligated to meet the demand despite the circular debt and higher receivables.

BRR: Are other OMCs bound to import volumes for a specific period?

 SIH:  A product review meeting chaired by DG Oil is held every month, where all OMCs inform of their import plans. But when prices are not in favour, others back out and they do not even face penalty. All eyes are then on PSO, and if there is a shortage, PSO is incorrectly blamed and held responsible. The OCAC has also opined that issuance of OMCs licenses by OGRA be reviewed as it has started to impact the industry.

But even in such situations, if we can grow our profits three times in two years, then surely there is enough strength in PSO. We will be doing a lot better, if we are provided with a level playing field.

BRR: Are you satisfied with the prevailing OMC margins, after the recent increase?

SIH: Some of the OMCs are offering discounts beyond their current margins, which implies that margins maybe sufficient. But here is where red flag should have been raised, and investigated by the regulator. As you know, margins of dealers are higher than that of OMCs. Additionally, PSO needs to be compensated for circular debt burden, one percent nonadjustable withholding tax on LNG which is in contravention of Liquefied Natural gas (LNG) policy 2006/2011.

BRR: How do you see the sudden 15 percent growth in white oil market? Do you think it can be sustained?

SIH: To me, this growth is abnormal. It clearly tells that we always underestimated the Iranian factor. There is no other way the market could have grown by 15-20 percent. The increased control on borders by the FC has resulted in a sharp decline in Iranian fuel.

BRR: Don’t you think that there is also an element of genuine demand growth, looking at the massive growth in the automobile sector, by the day?

SIH: You can give some of it to the automobile growth. But what else is there to show? It is not that we are adding a million cars every month, for the demand to go up by such magnitude. Yes, a better environment in terms of security has also contributed, which allows people to travel more frequently.  We will be able to gauge it better if sustainability is there, and it continues to grow at the same rate.

BRR: What do you have to say about Ogra’s role, both in terms of regulation and enforcement?

SIH: OGRA generally follows policy directive by the Government, and our current concern is the number of OMC licenses being issued and companies reporting sales higher than their storage capacity and/or number of retail outlets. This is unacceptable to us and OGRA needs to be vigilant and exercise punitive measures as allowed by law.

OGRA has now ordered that PSO cannot construct more retail outlets outside Sindh, as the storage capacity is not sufficient.  Although PSO has 15-20 days stock in the country. Treating us with new OMCs is unfair as they are regional and allowed to build and operate in provinces.

Enforcement of writ is the other most critical element and OGRA has significantly increased their fees and inducted third party consultant to undertake diligence with their fee also paid by the OMCs. We need the regulator be proactive and fortunately the current leadership at OGRA is actively engaged with the industry to bring positive change.

BRR: Has the growth of your retail outlets been hurt by this provision?

SIH: Definitely.  We have about 200 new development retail outlet cases approved during last two years. Based on OGRA’s current policy these may not reach the realization stage. This will be adversely affecting PSO’s ability to cater the growing fueling needs of the country.

BRR: Does the industry have strategic reserves for 20 days?

SIH:  Pakistan has enough storage, but in most cases, supply chain issues are at the back of most shortages. When a country is dependent on 60 percent imports, and in a fast growing market how much buffer can you have?  We need to increase turnover at depots to bring in efficiency and include stock in transit, at retail outlets and in the pipelines when determining the reserves.

BRR: Given the robust growth, what is your take on our port handling capacity? Will our ports be easily able to handle such a rapid rise in volumes?

SIH: We are constrained in the way we operate today, but there is enough import facility available in Pakistan. KPT is underutilized, whereas Port Qasim is over utilized. We are not allowed to build new storage at Kemari post 1971. We are trying to obtain approval.

Next step is better connectivity between ports through pipelines, and utilization of alternate import structure.

BRB: What is the strategy for laying pipelines?

SIH: Bulk of HSD is transported via pipeline and FO is transported by both trains and trucks.  The furnace oil business should reduce significantly, as the Government moves to other fuels for power generation. Trucks will always be required on the secondary routes.

For motor gasoline, by the first quarter of 2019 the white oil pipeline will be a multi-product pipeline. Nearly half of motor gasoline will then be transported via pipeline as well. The Government has also now approved pipeline from Mehmood Kot to Tarujabba. So directionally, most of our product should be transported by pipeline by 2021/22.

BRR: The RLNG phenomenon has taken over quite rapidly. How is PSO preparing for it and how much of revenue share will the RNLG account for in the coming years?

SIH: The current agreements upon novation will be managed by the new subsidiary of GHPL. PSO has had the privilege of seamlessly managing the imports and putting Pakistan successfully on the LNG world map. We are developing alternate plans to be a player in the market.

BRR: Your share of FO is also going to go down in the future. How will it impact PSO revenues? 

SIH: Yes, the impact is significant. We identified the risk and it is a major challenge for us in the short term but we have plans evolving which include increasing volumes of our white oil business, reviving our LPG, NFR & Lubricants businesses and to diversify portfolio. 

BRR: Your finance costs have come down of late, primarily due to lower interest rates. But the receivables on your books refuse to die down. Should the oil price go higher, how do you plan to cope with it?

SIH: There is no denying that the situation is not improving. The circular debt has increased. There are different solutions to it and proposals keep being submitted to the government with a focus to solve the problem. PSO carries a high risk in case of higher oil prices, devaluation and interest rate hike but the silver lining is the expected change in power generation energy mix will assist in reducing our receivables.

BRR: Given that your receivables are mostly linked to FO, the strain on your balance sheet should reduce once furnace oil is completely done away with.

SIH: The most positive aspect of moving out of furnace oil business will definitely be a cleaner balance sheet provided the government continues to pay off the LPS and principal amount.

BRR: Where do PSO’s plans of backward integration stand?

SIH: One of PRL’s shareholders has withdrawn its case against our acquisition of shares in PRL. That unfortunately delayed its upgrade and capacity increase by over two years. We are moving ahead with the formalities and the bid documents for expansion are expected to be issued before end of this year by PRL.