Pakistan State Oil Company Ltd. Business Information, Profile, and History

Company Perspectives

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History of Pakistan State Oil Company Ltd.

The Pakistani government's move toward a nationalized oil sector began in 1974, with the passage of Petroleum Products (Federal Control) Act. Under the new legislation, the government took control of the two Pakistani oil companies, Pakistan National and Dawood Petroleum. Following the takeover, Dawood was renamed Premier Oil Company. Also in 1974, the government founded a new agency, the Petroleum Storage Development Corporation (PSDC). That entity was subsequently renamed Pakistan State Oil (PSO) in 1976.

Following the adoption of the new name, PSO then took over both Pakistan National and Premier, in what was then the largest ever merger to take place in Pakistan. One month later, the government also took over the operations of Esso in Pakistan, which were placed under PSO. As such, PSO became the undisputed leader in the Pakistani market.

Pakistan State Oil Company Limited is that country's leading oil marketing and distribution company. Formerly a state-run agency, PSO controls approximately 70 percent of Pakistan's total finished fuel products market, and as much as 80 percent of the total furnace oil market, the main fuel oil market in the country. PSO also controls 60 percent of the country's diesel fuel market. Despite a nationally operating network of more than 3,750 PSO-branded filling stations, many of which include convenience stores, PSO's share of the consumer gasoline and lubricants markets has dropped to just 40 percent, in large part due to Shell Pakistan's aggressive expansion of its own retail network. Shell remains PSO's largest competitor in the country, with a market share of more than 25 percent. Other major competitors include Total and refinery operators Attock and Caltex. PSO itself has engaged in a strategy of developing vertically integrated operations, including backing the construction of a new refinery.

The company also produces and markets a variety of products under its own brand, including motor oils and lubricants. PSO's sales extend to jet fuels and marine fuels, LPG, CNG, kerosene, and other petrochemicals. The company is also the leading supplier to Pakistan's utility and industrial sectors. Nonetheless, retail sales remain the company's largest revenue-generator, representing some 90 percent of the group's sales. These topped PKR 254 billion ($4.27 billion) in 2005, making PSO Pakistan's largest company and the flagship of the Pakistani government's privatization effort in the early 2000s. The Pakistani government continues to hold more than 25.5 percent of PSO's shares, while a group of institutional investors, primarily banks, control more than 37.5 percent of group stock. PSO has been hailed for its dramatic turnaround, from inefficient government-run organization to a streamlined, modern corporation, a transformation largely credited to the leadership of Managing Director Tariq Kirmani. PSO is listed on the Karachi Stock Exchange.

National Oil Company in 1976

The first oil well in Pakistan appeared as early as 1886, at an oil seepage point in Kundal, in Punjab Province. Other exploration efforts followed through the end of the century; these efforts focused on seepage points, which typically yielded little oil, and only for short periods of time. A notable exception was a series of wells drilled in Khattan in 1885, which yielded some 25,000 barrels of oil over a seven-year period.

A better understanding of petroleum deposits and drilling technologies in the early 20th century led to the striking of the region's first major oil producing wells at Khaur-I, in the Potwar Basin, in 1915. This site also provided the first commercially available supplies of oil to the region. By then, exploration efforts, originally led by British-controlled government agencies, had been taken over by private companies, including Attock Oil, Burmah Oil Company, and others. For the most part, however, the various exploration efforts failed to produce significant quantities of oil, with the exception of those of Attock Oil.

Pakistan's independence in 1947 prompted the need for the new country to develop its own oil industry and legislation governing the sector. By 1949, the Pakistani government had put into place a first set of regulations for the country's oil industry. These included a number of incentives that helped re-stimulate private sector investment in exploration, as well as oil imports, refining, and marketing. Further impetus to the country's oil market came after Pakistan Petroleum Ltd, a joint-venture between Burmah Oil and the Pakistani government, discovered a vast natural gas deposit in Sui, located in Balochistan, the country's largest province, in 1952. Following that discovery, the country also saw the installation of its first pipeline, connecting the Sui field to Karachi. A number of new players then entered the country. Most of the world's top oil companies set up exploration operations in Pakistan, while others, including Shell and Esso (Standard Oil) also began oil and gas marketing operations.

These sales were based on lucrative imports of refined oil products. Despite the discovery of additional natural gas deposits, developing the country's domestic oil reserves proved more difficult. In the meantime, demand for petroleum products had begun to rise rapidly in the country. If the country's oil needs remained below 0.5 million tons at the time of its independence, by the early 1960s, the country required some 3.5 million tons per year, with demand growing at more than 12 percent per year. The lack of other fuel resources in the country further forced the country to rely on imported oil. In the meantime, the lack of success in locating significant oil deposits--despite success in India, Afghanistan, and elsewhere in the region--had led to a new drop-off in exploration efforts.

The Pakistani government itself entered oil exploration in 1961, forming the Oil and Gas Development Corporation in cooperation with the Soviet Union. The Soviet government also offered to help the country build its own refinery, with the restriction that the country only use imported oil from the Soviet Union. The Pakistani government then approached Shell, Esso, and the other private sector companies operating in the country with a request that they join together in construction of a refinery in Karachi. Rather than allow the Pakistani government to take up the Soviets' offer, which would eliminate their profits from oil imports, the private sector companies agreed to build the refinery. Pakistani Oil Refinery, as the complex was called, was in operation by 1964.

With the launch of production at the refinery, the Pakistani government provided the backing for the formation of a Pakistani oil company, Pakistan National Oil Company, founded as a private sector company in 1964. This company then entered the petroleum products marketing sector based on the production at the Karachi refinery. Another Pakistani player soon joined the market, when Dawood Petroleum Company Ltd. was established in 1967.

By then, however, the Pakistani government recognized the vulnerability of the country's oil market in regard to its dependence on foreign, privately held companies. During the war with India in 1965, the foreign oil companies were instructed by their parent companies to shut off oil imports to the country. Pakistani Oil Refinery found itself unable to procure crude oil--only Pakistan National Oil managed to continue to bring in crude oil to the country. In order to end the war, Pakistan signed the Tashkent Treaty with India; it has been suggested that the country had been forced to sign the treaty by the oil companies, which refused to resume imports otherwise.

A new war with India in 1971 gave rise to a new, repressive government led by Zulfikar Ali Bhutto. The new government now firmly established a policy of nationalization of the country's industries. The oil sector became a primary target for nationalization, all the more so because of the Arab Oil Crisis and the sudden skyrocketing of global oil prices.

The Pakistani government's move toward a nationalized oil sector began in 1974, with the passage of the Petroleum Products (Federal Control) Act. Under the new legislation, the government took control of the two Pakistani oil companies, Pakistan National and Dawood Petroleum. Following the takeover, Dawood was renamed as Premier Oil Company. Also in 1974, the government founded a new agency, the Petroleum Storage Development Corporation (PSDC). That entity was subsequently renamed Pakistan State Oil (PSO) in 1976.

Following the adoption of the new name, PSO then took over both Pakistan National and Premier, in what was then the largest ever merger to take place in Pakistan. One month later, the government also took over the operations of Esso in Pakistan, which were placed under PSO. As such, PSO became the undisputed leader in the Pakistani market.

Turnaround for a New Century

Over the next decades, PSO's growth and development was hampered by the long period of political stability that gripped the country through the 1980s. The company's growth was further restricted by Pakistan's weak economy, which remained among the lowest in the world. In the meantime, PSO's status as a government-owned and run agency left it exposed to the same endemic corruption that hampered the government itself. The decision-making process was particularly affected by the company's state-owned status, and as often as not, major corporate decisions were taken for political reasons, rather than as part of a well-defined corporate strategy. As a result, the company's operations continued to be defined as "shabby" by many into the late 1990s, provoking a great deal of consumer discontent.

Nonetheless, PSO's position as the government-owned oil marketing operation enabled it to outpace the other players in the market, notably Shell Pakistan, Caltex, and Attock. Through the 1980s and into the 1990s, the company's control of the Pakistani retail fuel market reached as high as 85 percent. The company also developed a growing, if not altogether modern, retail network, with more than 2,000 pumps in operation at the beginning of the 1990s. The company had also launched sales of liquid natural gas in 1981, becoming the industry leader in that sector, and had also built up a fleet of more than 1,000 railway tankers, more than 2,500 tanker trucks, and total storage capacity of some 350,000 tons. By then, too, PSO's sales had topped PKR 40 million (approximately $700 million). Into the early 1990s, PSO adopted a strategy of vertical integration, and in 1994 launched a joint-venture with Hyundai Corporation to build a new refinery. The company also invested in its own blending plants and production facilities for a line of PSO-branded motor oils and related products.

During the 1990s, however, the Pakistani government launched a series of liberalization and deregulation efforts. PSO's competitors began gearing up for the liberalization of the oil market. In particular, the Pakistani government announced its intention to deregulate oil imports, which had been a PSO monopoly, a move carried out in 2000. As part of the preparation for the new era in the Pakistani oil market, Shell, Caltex, and the other private sector players, including new entrant Total, of France, began upgrading their retail networks. The more modern facilities of its competitors helped win over consumers, and PSO soon saw its market share go into decline.

PSO, in the meantime, became one of the flagships of the Pakistani government's new privatization program. The company was placed on the Karachi Stock Exchange, with a 17 percent free float, and a further 35 percent controlled by banks and other institutional investors. The Pakistani government initially maintained a 54 percent stake in the company. Through the mid-2000s, the government reduced its stake, down to 25.5 percent in 2005, with plans to complete the privatization in the second half of the decade.

During this time, PSO was placed under the management of Tariq Kirmani, brought in from outside the government. With some 30 years of experience in the oil sector, Kirmani led the company on a restructuring effort that transformed the company into a more competitive, modern group. As part of that effort, the company revamped its retail operations, upgrading its facilities and further expanding its network to more than 3,750 stations by 2006. A growing number of the group's retail shops also featured modern convenience stores. PSO also launched a system of pre-paid fuel cards, a public service in a country where cash was often in short supply. The company also inaugurated a fleet of mobile oil change vans, bringing that service to its customers' doorstep.

By the mid-2000s, PSO was being upheld as a case study in the redevelopment of a flagging, state-run company into a high-performance market-oriented competitor. The company had succeeded in containing the erosion of its market share, despite the strong efforts of its multinational competitors. In the meantime, PSO's sales had boomed, topping PKR 250 million ($4.6 billion) by the end of 2005. This placed PSO as Pakistan's leading corporation, and provided a strong platform for growth into the future.

Principal Divisions

Audit Department; Aviation Marine; Corporate Planning; Imports; Industrial Consumer; IT Achievement; Lube Sales & Agency; Lubricants; Non Fuel Retail; Operations Department; Power Projects; Product Movement; Product Storage; PSO Cards; Quality Assurance; Retail Departments; Retail News; Security Services.

Principal Competitors

Shell Pakistan Limited; Total Parco Pakistan Limited; Attock Oil Company Limited; Caltex Oil Pakistan Limited.

Chronology

• Key Dates
• 1964 Pakistan National Oil (PNO) is founded as Pakistani-owned oil marketing counterpart to Esso and Shell Pakistan.
• 1967 Dawood Petroleum begins oil products marketing in Pakistan.
• 1974 New legislation nationalizes Pakistani retail oil sector, and government takes over Dawood (renamed as Premier) and PNO; government forms Petroleum Storage Development Corporation (PSDC).
• 1976 PSDC is renamed Pakistan State Oil (PSO) and takes over Premier and PNO, then takes over Esso's operations in Pakistan.
• 1981 PSO begins marketing liquefied natural gas.
• 1994 Company forms joint venture with Hyundai Corporation to build oil refinery.
• 2001 PSO begins privatization process, listing shares on the Karachi stock exchange, and begins modernization effort.
• 2005 Pakistani government reduces stake in PSO to 25.5 percent.