Analysis of Pakistan Industry

Ans. Pakistan economy is growing steadily. This growth demands higher energy utilization and accordingly putting high pressure on countries economy. Pakistan mainly depends upon oil and gas resources to fulfill energy necessities. Native resources of Oil are not enough to put out energy thirst of the growing economy. As a result Pakistan has to import large quantity of oil and oil based products from Middle East countries. Gas assets in the country are enough for current gas requirements. So natural gas is playing a key role in power sector. Currently in oil upstream and downstream sector there are some local and international companies involved and government of Pakistan is creating such policies that it can attract more international sponsors in this sector but the quicked rate of knots of change, high degree of inability to make up your mind and unstable political situation of the country present momentous challenges and menace to foreign investment. There are so many Industries in Pakistan, some are gigantic and some are undersized. Each and every industry has its own criteria; Main industries of Pakistan are Agriculture, Pharmaceuticals, Information Technology, Shipping Logistics and Petroleum industry, which are working on a huge scale of Pakistan. The industry which we selected is Petroleum Industry of Pakistan. Objective of our research is to highlight the present status of petroleum industry in Pakistan and its future projections keeping in view the internal result situation and geopolitical outward appearance of the county. Oil is passes through two processes both are listed below: 1. Extraction of Petroleum: The taking out of petroleum is the process by which usable petroleum is extracted and removed from the earth. Process: Extracting crude oil usually starts with drilling wells into the subversive reservoir. When an oil well has been spigoted, a geologist (known on the rig as the mud logger) will note its presence. Such a mud logger is known to be sitting on the assemble. Historically, in the USA, some oil fields stay alived where the oil rose naturally to the surface, but most of these fields have long since been used up, except in certain places in Alaska. Often many wells (called multilateral wells) are drilled into the same reservoir, to guarantee that the extraction rate will be economically feasible. Also, some wells (secondary wells) may be used to pump water, steam, acids or various gas mixtures into the reservoir to raise or maintain the reservoir pressure, and so maintain an economic extraction rate. 2. OIL REFINARY: An oil refinery or petroleum refinery is an industrial process plant where crude oil is processed and refined into more useful petroleum products, such as naphtha, gasoline, diesel fuel, and asphalt base, heating oil, kerosene, and liquefied petroleum gas. Process: Oil refineries are characteristically large, rambling industrial multifariouses with extensive piping running throughout, carrying streams of fluids between large chemical processing units. In many ways, oil refineries use much of the technology of, and can be thought of, as types of chemical plants. The crude oil feedstock has typically been processed by an oil production plant. There is usually an oil depository (tank farm) at or near an oil refinery for storage of immensity liquid products. An oil refinery is considered an indispensable part of the downstream side of the petroleum industry. Historical Background of Petroleum in Pakistan First well was drilled in 1866 at Kundal in the upper region of Indus valley. Shallow wells were drilled in the following years, and from 1886, small scale production of oil started in Khattan (Balochistan). In 1915, the first series of commercial oil discovery was made in the Potwar basin (Punjab). After independence in 1947, there was a need for an appropriate legislative framework to organize the petroleum sector, therefore the policies for petroleum were introduced in 1949. These rules or policies contained inducement that generated a new beckon of exploration. The Government of Pakistan decided to enter directly into oil exploration in order to sustain the exploration effort with assistance from U. S. S. R they established the Oil and Gas Development Corporation (OGDC) in the public sector in 1961, which provided successful track in discovery of oil and gas reserves with in the country. Due to Pakistan’s modest oil production, the country is dependent on oil imports to satisfy domestic oil demand. As of November 2006, Pakistan had consumed approximately 350 thousand barrels of oil and various petroleum products, of which, more than 80 percent was imported. 2. 2 Major Players of this Industry: Q. 2 List five largest companies in your industry holding 51% of share in the market? (Descriptive Analysis) Ans. Major Players in upstream sector: 1. Oil Gas Development Company Limited: OGDC was created in 1961 under an agreement signed by GOP with USSR for financing paraphernalias and services of Soviet experts for exploration of oil and gas in the sector. During 1970s, Western technology was introduced and it also under took an belligerent program in Exploration sector of Pakistan. Seventies spreading outs resulted in discovery of number of oil fields and hence OGDCL financial independence. Pakistan holds 74. 82% venture in the company. 2. Pakistan Petroleum Limited: Incorporated on June 5, 1950 as a Public Limited company, PPL presented at birth all the assets and liabilities of the Burmah Oil Company (Pakistan Concessions) Limited, and on targeted business on 01 July 1952. In 1997, Burmah sold PPL to GoP. In July 2004 the government sold 15% of these holdings to general municipal as part of Privatization Program. PPLs present exploration portfolio consists of 17 exploration blocks out of which nine (9) areas, including one (1) offshore block, are PPL operated and eight (8) areas including one (1) offshore block are partner operated. As of June 30, 2006, the remaining confirmed recoverable assets of PPL consisted of 4. 391 TCf of gas (784 million barrels of oil equivalent) and around 21 millions of barrel oil. The company’s current hydrocarbon construction interms of energy is equivalent to around 184,000 barrels of crude oil per day. The stipulate for the energy is rising due to economic growth. Therefore to meet the demand PPL has embarked on various detections to intensify theenergy supply. GoP hold 70. 66% of the shares. 3. Pakistan State Oil: Pakistan State Oil is the largest oil company and the only national one in Pakistan with 61% market share in overall sales volume. When the overall sales volume had been moribund in the past few years, the company decided to enthusiastically chase retail markets with new, modernized pumps. The company has also introduced a variety of products that will help them in maintaining their market share which include corporate credit cards, fleet cards and prepaid cards. They have built New Vision channels to make available better eminence service to its customers. 4. Shell Pakistan: In 1928, to boost their allocation competencies, the marketing interest of Royal Dutch Shell and the Burmah Oil Company Limited in India were amalgamated and Burmah Shell Oil Storage Distribution Company of India was born. After the independence of Pakistan in 1947, the name was changed to the Burmah Shell Oil Distribution Company of Pakistan. In 1970, when 51% of the shareholding was transmitted to Pakistani investors, the name of changed to Pakistan Burmah Shell Limited (PBS). The Shell and the Burmah Groups maintained the remaining 49% in equal propositions. In February 1993, as economic liberalization commenced to take starting place and the Burmah dissociated from from PBS, Shell Petroleum stepped into raise its stake to 51%. The years 2001-2 have seen the Shell Petroleum Company sequentially increasing its share, with the Group now having a 76% stake in Shell Pakistan Limited (SPL). 5. National Refinery Limited: National Refinery Limited (NRL) is a petroleum refinery and petrochemical complex affianced in the manufacture and supplies of asphalts, BTX, fuel products and lubes for domestic expenditure and export. NRL stands to be the second largest refinery of Pakistan in term of crude oil handing out capability and the only lube oil refinery of the country. The company controls within fuel and lube business subdivisions. Fuel segment is primarily a miscellaneous supplier of fuel products offering furnace oil, high speed diesel (HSD), jet fuels, liquefied petroleum gas, motor gasoline and it exports naphtha. Lube segment mainly endows with different types of lube base oils, asphalts, some fuel products, waxes and rubber process oil, while it also sell overseas lube base oils. Company holds 55% market shares. Macro Environmental Analysis POLITICAL ENVIRONMENTAL ANALYSIS: 1. Environmental Issues: Poor natural resource management and extending high population rise in Pakistan has a negative impact on Pakistan’s environment. Pakistan is focusing to achieve self-sufficiency in food yield, coping with energy requirement and bearing its high population growth rather to restrict on population or other environmental issues. Lack of funding efforts is apparent in Pakistan’s environmental protection. 2. Future Legislation Home Markets: There’s not as such future legislation in Pakistan regarding petroleum because the petroleum prices fluctuate every day and it’s set by our Regulatory Agencies of petroleum in Pakistan by seeing the international prices of Oil. 3. Regulatory Bodies Processes: Regulatory bodies mostly work administratively with government but for all practical purposes it work independent. Nevertheless, its independency maybe confined by the rules and regulation which more often than not established by the ministry itself. Sometimes the problems or the issues are multi-sectorial or multi-ministerial and therefore mostly treated by the Prime Minister (PM) himself and his Cabinet Division. It has been observed that OGRA-(Oil Gas Regulatory Authority) can’t perform its work properly; it’s because of the unduly going up prices of CNG LPG therefore, they cannot able to shape out space of itself. Now coming up to the oil pricing it has been observed that OCAC-(Oil Companies Advisory Committee) has executed and could execute better than OGRA. It has been seen mostly that OGRA just give recommendations for oil pricing but it’s depend on government that they give subsidy or not. Now OGRA’s job today is to calculate the price and print it. There are many ifs and buts in it, which OGRA should have made a practice of talking about in broad day light in public audience than determining on these quietly and sliding into the pricing system. 4. Government Policies: The Government of Pakistan is aware of the striking changes that have taken place in the pricing and cost environment of the international oil and gas industry. The forceful increase in the crude oil prices in the international market has changed the nature of the EP- (Exploration and Production) sectors which necessitates forceful changes in the approach towards the sector. In addition, the GoP-(Government of Pakistan) recognizes the operating disputes and circumstances for the Pakistan oil exploration and development industry. Today, more than ever before, the GoP stands committed to providing fiscal and regulatory inducement that would increase and facilitate EP companies in stimulating their exploration and development programs in order to maximize domestic oil and gas production in the coming years. 5. Trading Policies: However, exploration and development industry people fear that the policy, which would provide the much took impulse to the exploration activities, might fall prey to the political exploitation following condemnation of the prime minister. The sources said that the policy was presented before the Council of Common Interest (CCI) and was forwarded to provinces for comments. All the provinces nod was needed for the implementation and the Punjab government’s reservations regarding the PM’s conviction could go adverse for the policy, they said. Industry people said that the Petroleum Policy 2012 would provide the much took impulse to the exploration and production activities in the country and there must not be any delay in its announcement. The new petroleum policy is the oil and gas producing province would acquire 12. 5 % of imperial. The Windfall Levy Oil (WLO) and Windfall Levy Gas (WLG) charges have been reduced from 50 % to 40 %, the sources said, adding that the crude price range for applicability of WLO has also been moved up from $30-100 per barrel range to $40-110 per barrel. The minimal working interest that local companies are demanded to hold has been increased to 20 % from 15 %, they added. 6. Funding, Grants Initiatives: Pakistan State Oil (PSO) has decided to stop the supply of oil to power companies on credit basis as the amount due is fix to cross the Rs. 200 billion mark. The Ministry of Petroleum and Natural Resources has asked the Ministry of Water and Power to arrange funds and buy oil on cash. A petroleum ministry official said, â€Å"If power companies do not release funds for furnace oil, the water and power ministry should directly import furnace oil or buy from local refineries for running the power plants. † PSO, the largest oil marketing company of the country, imports and supplies furnace oil to power companies on deferred payment. â€Å"Now, PSO will not open letters of credit (LC) for furnace oil import unless power companies pay cash,† the official said. To classify the matter, the Ministry of Finance did a meeting. According to the official, the supply of high-speed diesel and other petroleum products is being hurt because of increasing dues to be paid by power companies. Because of the financial crunch, PSO has also not been able to pay the refineries, which in turn are facing difficulties in importing crude oil and making payments to national oil and gas explorer Oil and Gas Development Company-(OGDC). Oil refineries and gas distribution companies are to pay over Rs. 131 billion to OGDC, which has haltered exploration activity. Qatari investors have been invited to invest in the oil and petroleum sector of Pakistan during the recently held second session of the Pak-Qatar Join Ministerial Commission here. During the session of the committee, the Qatari delegation was appraised on the opportunities in Pakistan’s oil and petroleum sector. It was also altered of the potential in Pakistan’s offshore oil exploration opportunities and government incentives being extended in this regard. The delegation promised to assess these proposals individually. It is apt to note that Qatar’s Minister of Energy and Industry had recently been in Pakistan to attend the Pak-Qatar Join Ministerial Commission. ECONOMIC ENVIRONMENTAL ANALYSIS: The economic-environmental analysis of petroleum industry in Pakistan basically gives the wide picture of industry operations analyzing the impacts of economy and environment like the policies specified for this particular industry, regulations, market distribution assessment and costs incurred. In short it focuses on economic trends of petroleum industry in Pakistan and its effects. 1. Home Economy Situation: Pakistan’s economy is at developing stage. Due to this, the world believes that it is good place to invest. But the economy never remains steady and it fluctuates. From Pakistan’s perspective, this usually occurs due to political unrest in the country or due to failure of any economic policy. Petroleum industry in Pakistan, as the research says has no such issues related to economic situation of country except pricing. The demand and supply of petroleum goods is seen always balanced and the companies at their position are functioning properly. Petroleum sector in Pakistan is one of the most profitable sectors in the country. However the exchange rate has been a problem due to which the petroleum products in Pakistan are pretty expensive than the other countries of the region and world. This is because the government is not ready to provide subsidy on petroleum goods due to the laid guidelines by IMF to achieve the economic targets. This makes the conditions bounded and the chances of expansion and development of the industry become less. 2. Home Economy Trends: From past two or three years, Pakistan’s economy is facing crisis in the form of lesser export volume and devaluation of currency. These are two major problems. But experts say that when an economy is in crisis, that is the best time to take advantage of new opportunities and change the trends. Pakistan has gone through significant economic changes in the last few decades but the some problems that are now considered the core problems of economy are still unsolved. On the top of these problems is inflation. Inflation in Pakistani economy is caused by unstructured fiscal and monetary policies. Reports of last ten years show that the high inflation in the economy of the country is due to the expansionary policies and the increase in oil prices internationally. High oil prices resulted in high transportation charges and expensive energy. Apart from this issue, Pakistan also faces the problems of â€Å"Balance of payment†. The interference of IMF in the country’s economy does not allow the government to set the policies according the nation’s demand and condition. It’s always directed to compensate the deficit faced. 3. Overseas Economies and trends: The world economic development is on the move and different economies are working together to carry out a research on present issues and develop a new structure or ways to carry out trade with less restrictions and increased benefits. The centers of these researches are: A: Merchandise Trade B: International Capital movements C: International Balance of trade D: Exchange rates E: Trade in services The Oil producing countries (OPCs), according to IMF, have the fiscal oil revenue 25% more than the total fiscal revenue. The economy and policies of OPCs are of major interest because these countries put direct impact on the oil prices worldwide and thus are a cause of inflation in many small countries because oil is basic commodity and used worldwide. The largest oil producer, Saudi Arabia has the total export balance of $350. 7 billion. About 90% of these exports comprises of crude oil and petroleum goods. The trend in international economy is seen ever increasing with small fall downs that occur worldwide named as â€Å"Economic Meltdown†. 4. General Taxation Issues: A government official claimed recently that the government charges Rs 46. 18 per litre tax on fuels. This is a big amount. Petroleum goods mainly come from imports and that’s the main ground for the government to charge taxes on it. Apart from the imports, the oil production inside the country is also not so cheap. The refineries operating in the country are entitled to pay 10% to 40% tax on their paid-up capital. Due to this the profit margin of petroleum dealers has come down because they had to pay various indirect and direct taxes. In Pakistan there are four different kinds of taxes on petroleum goods. This huge taxation is done in many countries. 5. Taxation specific to product/services: Taxes on petroleum products vary. In Pakistan, government charges different amount of tax on petrol, diesel and kerosene oil. The current figures of this sales tax are Rs 24. 58 on each litre of petrol, Rs 18. 99 on each litre of diesel and Rs 18. 85 on each litre of kerosene oil. These amounts keep varying as the â€Å"oil and gas regulatory authority† makes recommendations to the government after every 15 days. Similarly different other petroleum products like engine oils, greases, lubricants and fuels are taxed. 6. Seasonality/weather issues: Pakistan is a country of four seasons and there is no specific extreme weather. So there is no such issue of weather and season on the production and sales of petroleum goods in general. It is considered as stable industry for its increasing demand and supply. However, during last two years, the industry faced minor losses of plants and supply due to wrathful floods in the country. Although losses were there and there was a cut off of supplies in many parts of the country but that ended when water levels came down. 7. Market and trade cycles: The market cycles related to oil industry results in oil prices fluctuation. During last two decades, the world has seen number of price shifts. This is because of some macroeconomic effects of the industry worldwide. In Pakistan, as the major part of oil is imported, the industry has the effect of global market cycles. Oil price shifts are directly transferred to Pakistan’s industry because we are the importer of oil. Every sector gets affected by it. So there is no specific trade cycle of petroleum industry of Pakistan. It is shared internationally as many countries do. The industry is on the mercy of international price controllers. 8. Specific Industry factors: Every industry has some factors that have influence on production, development and crisis of the industry. The main analysis of these factors is called PEST analysis. This analysis includes the Political, economic, social and technological aspects of the industry. These four are the major heads. Apart from these, there are other factors like â€Å"legal† and production factors like land, labor and capital. The political factors in Pakistan petroleum industry is of greater importance because the leading market shares holder i. e. PSO has around 65% alone, and the company is state owned. So there is the state intervention in the company policies and decisions. 9. Market routes and distributions: Out of five major oil refineries in Pakistan, three are situated in Karachi. One is situated in Punjab and one is situated in Baluchistan. From these refineries, the petroleum is mainly transported to filling stations in the whole country. The distribution process is different for different companies. Some companies like chevron and PSO has its own distribution network and they supply the petroleum in all over the country through their own oil tankers. Whereas Shell, which is another market share holder, supplies petroleum through its own distribution network and also through the contract carriers spread all over the country. The condition and setup of distribution is good all over the country. Also, there is no issue related to absence of market routes and remote customers. 10. Customer/end user drivers: The users of petroleum are mainly the automobile owners. There are approximately 8 million vehicles on the roads of Pakistan currently. These 8 million vehicles use petroleum as the basic means of energy to run. Although the demand of CNG shown an abrupt increase in the past decade, but the demand of petrol and diesel didn’t shift much due to that. After these vehicles, the second big user of petroleum is industries. It is the primary fuel to most of industries located all over the country. The demand of petroleum remains high in every season, every part of the year, as per production requirements. Apart from industries and vehicles, there is use of petroleum in electricity generation in the country. Furnace oil is one of the most important petroleum products which are responsible for the power production. 11. Interest and exchange rates: There is an indirect and â€Å"inverse co-relation† between the interest rate and price of petroleum in a country. Increasing or decreasing the interest rate, may result in the demand and finally the price of oil. In Pakistan, the current interest rate is 12%. The state bank of Pakistan takes the decision of setting the interest rate. Exchange rate has the direct impact over the oil prices in Pakistan. From the past two decades, the value of Rupee against the dollar has fallen abruptly. This difference of value results in higher fuel prices. After the international market rates, exchange rate is the second big reason of high petroleum prices in the country. 12. International trade/monetary issues: Internationally, crude oil and all major refined petroleum products are traded. The global oil markets are facing new challenges daily. Time to time, the structure and working of these markets have changed a lot. Prices were stable before, but nowadays they are volatile. Similarly participants in the market were limited and established, but now there are numerous players in the market. Apart from the markets, there is an increase of intermediaries in oil trade. In past, there was only a bank that has to deal between seller and buyer of oil. But now there are many services offered by financial institutions, global funds and industry factors. There are various monetary issues related to Pakistan’s economy. Pakistan applies its monetary policy along with the fiscal policy to achieve the goals. This is due to some policy failures and mis- management of economic activities in the country. Obviously it has direct impact on trade process of the country and the central bank’s allowance of further imports. However the oil sector keeps its demand and supply in level very well. SOCIAL ENVIRONMENTAL ANALYSIS: 1. Lifestyle Trends: Pakistan is in the grasp of a serious petroleum crisis that is affecting all sectors of the economy and the various segments of the society. As the today’s situation point of view, there are hardly any immediate solutions to resolve the issue. A change of attitude and a change of life style is needed at the national level which should be sparked by the ruling elite and followed by all segments of the society that have access to electricity. At best there could be some short and long-term solutions to the grasp but they need immediate planning and execution with an enormous investment. Our elite class still prefer Petrol or Diesel for their vehicles use the upper middle, Middle-middle uses CNG as against of Petrol – (Economy of Pakistan) 2. Demographics: With a per capita GDP of over $3000 (PPP, 2006) compared with $2600 (PPP, 2005) in 2005 the World Bank considers Pakistan a medium-income country, it is also recorded as a Medium Development Country on the Human Development Index2007. Pakistan has a large informal economy, which the government is trying to document and assess. Approximately 49% of adults are literate, and life expectancy is about 64 years. The population, about 168 million in 2007, is growing at about 1. 80%. Relatively few resources in the past had been devoted to socio-economic development or infrastructure projects. Inadequate provisions of social services, high birth rates and immigration from nearby countries in the past have contributed to a persistence of poverty. An influential recent study concluded that the fertility rate peaked in the 1980s, and has since fallen sharply. Pakistan has a family-income index of 41, close to the world average of 39 – (Economy of Pakistan) 3. Law Changes Effecting Social Factors: New trends and laws are creating a different type of consumer and, consequently, a need for different products, different services, and different strategies. In upcoming years Pakistan would be a state of Provincial rather than federal, Youth getting more independent. Steady change would be in ethnic balance. More educated buyers would be in market. Pakistan would have higher average lifespan and the numbers of youth will be more – (Key External Factors) 4. Brand, Company Technology Image: Numerous companies are working in petroleum sector of Pakistan but the PSO, PPL and SHELL are the major leaders of petroleum sectors. They are working effectively and efficiently in the petroleum sector, they have made strong bond of trust between their customers. They are using or bringing new technologies in petroleum sector, therefore their brand image is secure and far above the ground. Their mission is substantial supply of oil and gas for economic development and strategic necessity of Pakistan or to coordinate development of natural resources and minerals. 5. Ethical Issues: The policy of Pakistan Oil Exploration is one of hard and fast observance of all laws applicable to its business following the course of highest integrity. Any Oil Gas company need a solid system for legal compliance in place for the following reasons: Preservation of legal position. Good publicity. It’s reputation as a joint venture partner. Transparency for the board of directors/supervisory board/shareholders. For the reason of knowledge transfer and control. PSO stated that: â€Å"We do care how we get results. We expect compliance with our standard of integrity throughout the organization. We will not tolerate an employee who achieves results at the cost of violation of laws or unscrupulous dealings or who thinks it best not to tell higher management all that he is doing, not to record all transactions accurately in his books and records, and to deceive the Companys internal and external auditors. We expect candor from all employees of PSO, and compliance with accounting rules and controls. Our system of management must be based on honest book-keeping, honest budget proposals, and honest economic evaluation of projects. It is PSOs policy that all transactions shall be accurately reflected in its books and records. This, of course, means that falsification of its books and records and any off-the-record bank accounts are strictly prohibited† – (Scribd) TECHNOLOGICAL ENVIRONMENTAL ANALYSIS: The technological-environmental analysis basically gives a complete picture of research and technology development. In any industry there are some problems at any particular time that needs to be solved by innovating new alternatives or technological change. These also have impact on our eco system and environment. The study and analysis of all these things is called the technological –environmental analysis. Here we will discuss the technological changes, Pakistan’s petroleum industry has gone through and there future issues and their suggested solutions. 1. Competing Technology Development: The petroleum industry, by nature, is technology driven industry. If researched in detail, petroleum industry uses the latest and large scale technological assistance to carry out the operations. The new methods of exploring, extracting and drilling are good examples of that. Petroleum companies spend a lot on their technological development to increase the efficiency and production. In Pakistan, the modern technology is made available by foreign oil services, and consulting companies. No such steps have been taken on government level to upgrade and adapt the new technology for the petroleum industry in the country. The companies on their own cannot purchase the expensive technology and therefore just hire to do the work. Something has to be done on this because the world keeps itself updated and technologically capable to increase its production and get the benefits in the form of profits. 2. Research funding: Pakistan’s petroleum sector is not much developed and equipped with latest machinery and equipment for exploring, and processing of petroleum. However its position is good enough to keep the demand and supply figures equal. The world is finding new alternatives of petroleum because of depletion of resources all around the world and increasing prices. Scientists and biologists have developed many substitutes of petrol and diesel and many of them are being used practically in many countries of the world. This needs research, which is not at it level best in Pakistan. The reason behind this lack of activity is absence of funding. Government seems to have no interest in this and therefore does not support to carry out such a research for future of Pakistan’s petroleum industry. The only company that has done some work in the field of research for new technology and an alternative is PSO, and that is on a smaller scale. There are ideas and resources but no one supports to have new development. 3. Associated/dependent technologies: From the beginning days of petroleum industry in Pakistan till now, there no prominent work done for the technological advancement and up gradation. The oil and gas development corporation (OGDC) is considered the entity which is responsible for the development of this sector in Pakistan. The oil exploring and processing firms are also responsib

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