Pakistan Energy Conference 2011

1. Pakistan Energy Conference 2011 Reasonable OMC & Refining Sector Margins Imperative for Investment in Energy Sector Monday April 11th, 2011

2. Pakistan Oil Market Overview • Pakistan is an energy deficit country • Petroleum Product demand in 2009-10 was 20.16 million M. Tons 2.88 million M. Tons 10.4 million M. Tons 6.88 million M. Tons

3. Oil Marketing Sector statement Due to progressive policies adopted a decade ago, the oil sector in Pakistan attained international quality service standards and is driving the country’s economy by: • Making oil products available across the country • Ensuring safety in handling dangerous oil products • Assuring quality and quantity of oil products • Enhancing the image of the country (quality retail stations) • Introducing world class standards and technological innovations

4. Out look of POL Demand in Pakistan • Demand of POL products in Pakistan is Expected to grow by 3% per annum (PMG~6%, HSD~2%, FO~4%) • Such increase would require additional investment in infrastructure • A forced reduction in oil consumption due to inadequate infrastructure will potentially slowdown economic growth • We have already experienced growing Gas outages during the winter months, these are expected to increase in coming years, thereby impacting industrial output • Shortage of Gas will only be compensated through oil • Therefore investment in timely development of the oil sector infrastructure is extremely important to support GDP growth

5. Areas that require Major Investments • Refineries • Increasing storage capacities • Increase ship handling capacity at port • Increase in capacity for conversion of Naphtha into PMG • Pipeline to link Keamari Port with Port Qasim • Refineries upgradation to produce products of Euro II standard • Development of LPG Autogas station

6. Margin of refineries • Ex-Refinery price of POL products are determined on the basis of import parity price (IPPS) • Therefore refinery margin in Pakistan are dependant on difference of cost and IPP • Government has given the protection to local refineries in the form of Deemed duty- But

7. Frequent changes in refinery price formula • Removal /Reduction of deemed duty protection • Hypothetical formula of Ex-refinery Price of PMG (price allowed to ex-refinery is lower than international market) • Removal of incidental charges from Import Parity Price (IPP) formula in Dec 2010 • Ex-refinery price of SKO & LDO as announced by OGRA is even lower than IPP (Shifting the burden from GoP to Refineries)

8. Margins of OMCs OMCs were allowed in 2002 a margin of 3.5% of consumer price Since 2006, Govt has tweaked OMC margin 7 times Such adhoc changes in margins have shattered the confidence of existing and future investors

9. Amendment in OMC Margins Year 2002 - OMC were allowed a margin of 3.5% of consumer price Year 2006 - the margin was fixed @ 3.5% of price before GST Year 2006, the margin was fixed @ 3.5% of price before Petroleum levy & Sales Tax July 2008 -The margin was frozen in Rupee term at the then prevailing level Aug 2008 - The margin was reduced to and capped @ AG light US$100/BBL Feb 2009 - Fixed margin of Rs. 1.35/ltr in HSD and on rest of the product 4% of price excluding GST & PDL (It was fixed for the oil price range of US$45-$80) - Current price is in the range of US$110-US$120/BBL Dec 2010 - Margin on all products were fixed in rupee terms

10. Margins* history – Motor gasoline 3.5% margins on end selling price till March 15, 2006 GST & PDL exclusion from margin calculation % was increased from 3.5% to 4% Shift from fixed margin regime to % basis Current decline in oil prices effecting profitability Margin is fixed in Rs. per liter * Margins plotted as % of retail price

11. Margins* history – Diesel 3.5% margins on selling price till March 15, 2006 GST exclusion from margin calculation Margins were fixed in rupee per liter Shift from fixed margin regime to % basis Decline in oil prices effected profitability * Margins plotted as % of retail price

12. Margins cover OMCs investments and expenses • Capital expenditure on storages, pipelines and retail outlets • Investment in inventory • Rising cost of doing business: • Interest rates, KIBOR: 14% • Rs/US$ parity: Rs 86+ • Electricity, gas, fuel • Insurance cost • Traveling • Human Resource • Land leases • Advertisement • Repairs & Maintenance

13. Consumer Price Index Source: www.tradingeconomics.com

14. Linking of OMC margins with price has brought in investment in the country 5 40 WOPP Total Capex Cumulative Capex 35 4 Shift of fixed margin regime to % basis – an impetus for growth in investment 30 Asia Petroleum 25 and ZOT 3 Cumulative Capex Rs billion Annual Capex Rs billion 20 2 15 10 1 5 0 0 1993 1994 1997 1998 1999 2000 2001 2002 2006 2007 1985 1986 1987 1988 1989 1990 1991 1992 2003 2004 2005 1995/6 (18mth) Modernization of Retail Introduction of New Vision Outlets by Chevron & Shell Retail Outlets by PSO

15. Capping / Reducing margin did not have any material impact on the customer price but will be detrimental to investment • This sample calculation is based on the prices effective April 1, 2011 • GoP revenues are linked to Oil prices e.g. Custom Duty, PDL, GST and Income tax • A reduction in OMC margins will not have a significant impact on the consumer, • Reduction in margin is also a cause of increasing the tendency of malpractices in the industry

16. Net Margin comparison – different industrial sectors Source: Elixir securities Year : 2010

17. Recommendation • GoP should announce a long term and sustainable policy on Refinery Price and OMC Margin • Give a legal protection to investors against: • Adhoc changes in Government Policies • Changes in taxation structure • Unfair burden on oil sector in the form of Price Differential Claims and Circular Debt • Providing a level playing field to all players of industry • Fully deregulating the petroleum sector in the longer term