Most of the equity market analysts are bullish about energy companies listed at Pakistan Stock Exchange. Two of the prime reasons are: 1) high dividend pay outs due to persistently increasing crude oil and gas prices and 2) persistently eroding PKR. However, some other analysts term energy sector one of the most inefficient sectors. The disparity is the opinions needs a little deeper probe to determine its strengths and weaknesses.
Exploration and Production (E&P) is one of the largest sub sectors in terms of listed capital as well as high dividend pay-out history. However, it may be said point blank that since most of the companies fall in the category of State Owned Enterprises (SOEs), the ultimate beneficiary of high dividend pay-out is the Government of Pakistan (GoP). The biggest disadvantage of high dividend pay-out is that the E&P companies drill much lesser than the desired number of wells. This point can be verified by the declining quantum of crude oil and gas production in the country. Despite having an enviable success rate and more than two dozen E&P companies operating in the country, the annual number new wells drilled in the country is around two dozen. Another disappointing fact is number of drilling rigs available in the country and the maximum depth to which these rigs can drill.
After this comes, poor capacity utilization of refineries. Reportedly the aggregate installed refining capacity in the country is around 20 million tons per annum, which is enough to meet country’s total demand. However, due to poor capacity utilizing huge quantities of various products have to be imported. Reportedly, one of the refineries operates at 30% capacity. This is because of lack of modern facilities to bring in crude and send out finished products.
Added to this is obsolescence of the refineries operating if the country. For decades some of the large refineries operated as SOEs and failed in undertaking balancing, modernization and replacement (BMR). Though, for a considerably long time some of these refineries have been operated by the private sector, they have failed in undertaking BMR. At present these refineries mainly produce three products i.e. motor gasoline, diesel and furnace oil. Ironically, furnace oil produced in Pakistan has high percentage of Sulphur.
While the GoP failed in convincing/ facilitating refineries to install gadgetry to reduce Sulphur in furnace, power plants were stopped from using high Sulphur furnace oil for electricity generation, on the pretext of being the signatory to some conventions prohibiting use of high Sulphur furnace oil.
As a consequence when furnace oil offtake reduced and storage tanks started overflowing, refineries had no option but to operate at lower capacity utilization. This prompted higher import of motor gasoline and diesel. Since the GoP has limited foreign exchange at its disposal, border forces were told not to stop diesel coming from Iran.
This myopic decision hurt Pakistan in two ways: 1) there was colossal fall in the collection of petroleum development levy (PDL) and 2) even higher quantity of motor gasoline has to be imported that further eroded limited available foreign exchange.
Reportedly over two dozen oil marketing companies (OMCs) are operating in the country. However, bulk of the volume pertains to less than half a dozen companies. The dismal state of affairs can be attributed to poor oversight by OGRA, which kept on issuing licenses but failed in ensuring increase in the storage capacity in the country. Experts go to the extent of saying that some of the OMCs don’t have their own storage facilities and keep their products at facilities owned by other companies.
This gives large OMCs an undue advantage. Historically, POL prices are revised fortnightly and the beneficiary of “Inventory Gains” are companies with large storage facilities, the most notorious being Pakistan State Oil Company (PSO).
Sui twins, namely Sui Southern Gas Company (SSGC) and Sui Northern Gas Pipeline (SNGPL) are at the verge of delinquency/ virtually insolvent. The prime reasons are: rampant theft and colossal leakages. It is true that their transmission and distribution have outlived their lives, but many of the experts are of the opinion that rampant theft has been going on for decades with the connivance of the staff of the gas marketing companies.
One of the latest discoveries is that the GoP has been paying billions of rupees per month to many IPPS without buying even a unit. It is still not too late the GoP has to solicit arrangements with IPPS to overcome this issue.
Experts say that the country faces prolonged outages/ load shedding because of highly depleted distribution networks.
Please allow us to say that the birth of IPPs has put the cart before the horse. It may be true that state owned generation companies were not very efficient, but the real culprits were distribution companies, which are still operating in the public sector.
This has given birth to a real mega issue, circular debt in the energy sector. This is the combined outcome of theft, poor recovery and above all “Who Cares” attitude of the policy planners and regulators.
Over the years two of the apex regulatory authorities have proved nothing but “Rubber Stamps”. They just endorse tariff hikes without determining plausible reasons and calculating the required percentage increase. It must be kept in mind that each tariff hike offers incentive for pilferage.