Pakistan Refinery: Corporate Briefing

To recall during FY22, sales of Pakistan refinery (PRL) grew to its highest ever level of PKR 191 billion. Gross profit increased to PKR20 billion due to high cracking margins globally. Despite a provision of PKR1.6 billion related to super tax, profit after tax and EPS increased to PKR 12.6 billion and PKR 19.96, respectively.

During 1QFY23, sales grew to PKR73 billion. Moreover, gross profit increased to PKR1.6 billion as cracking margins are on a decline globally. This led to an increase in net profit to PKR1.00 billion and EPS of PKR 1.63. 

PRL is a subsidiary of PSO with 63.6% holding. Plant’s annual capacity is 50,000bpd which is run on hydro skimming technology with Crude distillation, Hydrotreating, Platformer and Isomerisation units.

PRL product mix and margins: mainly comprises of HSD and MS, constitute 70% of the refined products and have higher margins than the rest. However, negative margins in FO has made it unviable for exports.

Wood plc was awarded to conduct a FEED study for the upgrade of the plant. Further, JS Global and UBL are hired as financial advisors for the arrangement of financing for the project. This deep conversion refinery upgrade project will allow the Company to produce Euro-V compliant fuel at the same time enhancing capacity to 100,000 bpd. 

The Company has altered its sources to lighter crudes which has resulted in higher profitability. It was mainly due to less reliance on ADNOC due to its lower grade and increasing the share of ARAMCO and KPC. In turn FO proportion in the production mix has declined to 22% which was more than 30% in FY19.

Higher of ACT (based in higher of accounting income and taxable income), normal corporate tax or the minimum turnover tax (0.5% on local and 1% on exports) is applicable on the Company.

During 1QFY23, taxation was provided on turnover tax which included PKR100 million deferred tax.

After the Sindh High Court decision on super tax, the Company is hopeful that its reversal would augment profitability going forward.

 Future outlook

Despite delays in the issuance of the new refinery policy, the Company remains committed to upgrade project as the country is reducing its reliance on FO for power generation and better margins are offered by HSD and MS.

The Company also changed its logo to reflect its contribution for the sustainable development of the country.

Key challenges include subdued refinery margin which is currently declining from its peak. Also, high interest rate and PKR depreciation will continue to dampen profitability. Lastly, low FO upliftment may hamper cash flows in the coming months.

UN halts some programs in Afghanistan after ban on women aid workers

Taliban seized power in August in 2021. They largely banned education of girls when last in power two decades ago but had said their policies had changed. Taliban-led administration has not been recognized internationally.

The United Nations said on Wednesday that some time-critical programs in Afghanistan have temporarily stopped and warned many other activities will also likely need to be paused because of a ban by the Taliban-led administration on women aid workers.

UN aid chief Martin Griffiths, the heads of UN agencies and several aid groups said in a joint statement that women's participation in aid delivery is not negotiable and must continue, calling on the authorities to reverse the decision.

“Banning women from humanitarian work has immediate life-threatening consequences for all Afghans. Already, some time-critical programs have had to stop temporarily due to lack of female staff," read the statement.

"We cannot ignore the operational constraints now facing us as a humanitarian community," it said. "We will endeavour to continue lifesaving, time-critical activities ... But we foresee that many activities will need to be paused as we cannot deliver principled humanitarian assistance without female aid workers."

The ban on female aid workers was announced by Taliban-led administration on Saturday. It follows a ban imposed earlier on women attending universities. Girls were stopped from attending high school in March this year.

"No country can afford to exclude half of its population from contributing to society," said the statement, which was also signed by the heads of UNICEF, the World Food Program, the World Health Organization, the U.N. Development Program, and the UN high commissioners for refugees and human rights.

Separately, 12 countries and the EU jointly called on the Taliban to reverse the ban on female aid workers and allow women and girls to return to school.

The statement was issued by the foreign ministers of Australia, Canada, Denmark, France, Germany, Italy, Japan, Norway, Switzerland, the Netherlands, Britain, the United States and the EU.

The ban on female aid workers "puts at risk millions of Afghans who depend on humanitarian assistance for their survival," the statement said.

Four major global groups, whose humanitarian aid has reached millions of Afghans, said on Sunday that they were suspending operations because they were unable to run their programs without female staff.

The UN statement said the ban on female aid workers "comes at a time when more than 28 million people in Afghanistan ... require assistance to survive as the country grapples with the risk of famine conditions, economic decline, entrenched poverty and a brutal winter."

The UN agencies and aid groups - which included World Vision International, CARE International, Save the Children US, Mercy Corps and InterAction - pledged to remain resolute in our commitment to deliver independent, principled, lifesaving assistance to all the women, men and children who need it.

Taliban seized power in August last year. They largely banned education of girls when last in power two decades ago but had said their policies had changed. Taliban-led administration has not been recognized internationally.

 

 

 

 

Moscow considering gas export to Pakistan through Iran

Russian Deputy Prime Minister Alexander Novak has said his country is considering export of natural gas to Pakistan and Afghanistan through Iran.

Novak said that in the long run, Russia can send its natural gas to the markets of Afghanistan and Pakistan, either using the infrastructure of Central Asia or by swapping from the territory of Iran.

Back in November, Iranian Oil Minister Javad Oji had announced a plan for cooperation with Russia and Pakistan on gas export to Islamabad.

Under the mentioned plan, Iran can tap Russian gas for a revival of its long-installed pipeline project to neighboring Pakistan.

As reported by Iranian media, Russia has agreed to supply gas to Iran for the purpose of delivery to Pakistan via the Iranian pipelines.

Russia has also agreed to build pipelines in Pakistan that were supposed to be built by the Pakistani side of a 1995 gas supply contract with Iran.

Russia’s contribution to the scheme comes as the country is trying to find new markets for natural gas supplies that were removed from the European markets because of Western sanctions on Moscow over the war in Ukraine.

Iran is also keen to partner with Russia in supplying gas to Pakistan as the country could benefit financially from the project while increased gas supplies from Russia will help the country address potential gas shortages in its northern regions.

Under a proposed swap scheme, Iran will import gas from Russia either through Turkmenistan or Azerbaijan to consume the supplies in its northern regions while committing to deliver the same amount of gas on the border with Pakistan.

Iran has another option to buy Russian gas for domestic consumption in its north without committing to any swap delivery of the same amount to other countries.

That will enable Iran to meet the growing domestic demand for natural gas and increase its gas supplies for the purpose of exports to other countries.

Experts believe both scenarios could benefit Iran although some prefer the swap model because it will lead to more Russian contribution to the Iran-Pakistan gas pipeline project.

 

Decoding Pakistan’s Circular Debt

Recent government estimates point towards the gas sector circular debt to have increased to PKR900 billion by end November 2022, compared to PKR719 billion as of March 2022. The companies affected by the debt include OGDC, PPL, SNGP, SSGC, and PSO.

The increasing quantum of circular debt in the gas sector has been detrimental to the energy security of the country in the recent past. Not only has it constricted the liquidity positions of the companies in the energy chain, but has also become a point of contention with the IMF.

The circular debt can be traced to: 1) diversion of costlier RLNG to Natural Gas consumers, 2) hike in UFG Losses, primarily theft, and 3) delayed gas tariff revisions.

Rising circular debt has put Pakistan in a vicious cycle. It has been widely documented that the increasing quantum has resulted in liquidity constraints, especially for the Exploration & Production companies, OGDC and PPL.

The stock of receivables on the companies’ books has increased from a collective PKR306 billion at the end of FY18 to PKR892 billion at the end of the September 2022 quarter.

With the mounting receivable burden on the companies, exploration activity has been subdued, leading to an inability to arrest the fall in production due to natural decline in reserves.

Gas production in the country has fallen from 3,997 MMCFD in FY18 to 3,390 MMCFD in FY22. This comes at a time when the demand for gas and energy is increasing.

This gap is being filled by imported RLNG, which is diverted to natural gas consumers and billed at lower rates, adding further to the stock of gas circular debt—putting the country in a vicious cycle.

Trade debt leads to lower exploration activity, ultimately leading to lower production levels, increasing the diversion of RLNG to natural gas consumers, which leads to lower cash collection, adding to the receivables, and the cycle continues.

Government is succumbing to the peculiar situation. Thanks to IMF’s impending ninth review, the government has finally taken notice of the situation in the gas sector and constituted a team to address the circular debt situation.

However, the agenda for the committee is short-term as it only aims to address the circular debt that has built up over the years, while not addressing the greater issue of policy measures required to arrest the buildup of the circular debt going forward.

The government would have to hike gas tariffs if it hopes to reduce the buildup going forward—a measure that has also been stressed by the IMF. Prime Minister Shehbaz Sharif has hinted towards the same in his recent address, paving the way for euphoria in the market.

From the vantage of E&P companies, specifically OGDC and PPL, any resolution of the receivables on the companies’ balance sheets would result in valuations being unlocked for the juggernauts.

If the government is able to overhaul the balance sheets of OGDC and PPL, it may lead to a re-rating in the multiples, unlocking upside potential.

Pakistan Refinery ready to resume production

Pakistan Refinery (PRL) is ready to resume its production on December 31, 2022 after receiving the cargo of crude oil. The refinery has received 70,000 tons crude oil. PRL had announced a shut down on December 10, 2022 to carry out annual maintenance.

According to sources privy to details, apart from annual maintenance, PRL was not able to carry out production as it was facing problems in opening of letters of credit for the import of crude oil, a must for smooth operations.

Sources said that PRL went for shutdown despite the instructions of the Oil and Gas Regulatory Authority (OGRA) that the refinery should continue with its operations in the month of December.

OGRA wrote a letter to the PRL at the start of the month, after review meeting of supplies of oil in the country.

The PRL representative in the meeting told that the refinery would be shut down because of the issue related to the opening of letters of credit for the import of crude.

Despite PRL’s reluctance, OGRA had directed the refinery to adhere to its directives by not shutting down till February 2023 as it expected shutting down would create oil supply issues in the country.

In response to the PRL letter for shut down, OGRA said that the request of PRL for temporary shutdown has been examined by the OGRA’s Oil Supply Chain Department in the light of current demand-supply trend of POL products.

Keeping in view the high demand of diesel in winter and significant contribution of PRL therein, it said that the PRL was requested to reassess its technical and HSE issue and reschedule the proposed shutdown to the first half of February 2023.

PRL, on the other hand justified the shutdown on the ground that it was already planned. Sources said that apart from carrying out technical annual maintenance work, PRL managed to secure the opening of a letter of credit for crude oil.

Oil marketing companies and refineries have been struggling to open letters of credit due to the extreme scarcity of dollars in the country, despite government policy to give preference to the oil sector for imports to ensure energy security.

PRL received 70,000 tons crude oil and the next cargo would come on January 13, 2023, the sources said.

 

Iran to improve transit infrastructure

The head of the Iran Chamber of Commerce, Industries, Mines and Agriculture (ICCIMA) has stressed the need to increase efforts for improving the country’s transit infrastructure in order to benefit from the recent developments in the region, the ICCIMA portal reported.

Speaking at a meeting of the Mashhad Chamber of Commerce and Industry’s Transport Committee, Gholam Hossein Shafeie mentioned the competitiveness of the transit market in the region, saying, “Competitors are creating alternative routes by spending huge amounts of money to replace Iran in the transit market.”

Stating that Turkey has made several efforts to strengthen the Trans-Caspian Corridor for transiting goods between East and West, he added, “With the integration of the Trans-Caspian Corridor in the Silk Road Project, this corridor will be connected with the China-Central Asia-West Asia corridor that passes through Iran.”

Shafeie further referred to the recent changes in the world including the war between Russia and Ukraine, saying, “In this period, due to the change in the global transport routes, new opportunities have been provided for Iran and we should take full advantage of such opportunities.”

The Islamic Republic has been taking serious measures for the development of its railway network as well as its ports and shipping infrastructure in order to encourage more countries to join the project.

Using the capacities of the International North-South Transit Corridor (INSTC), Iran will be able not only to expand the volume of trade with Russia and the countries of the region, it can also gain a huge share of the mentioned countries’ annual transit.

Currently, Russia has proposed to take part in some railway projects in Iran in order to accelerate the development of the Islamic Republic’s railway network along the mentioned route.

The row between Europe and Russia over the Ukraine war, which resulted in harsh sanctions being imposed on the country made Russia look for new ways for distributing its goods across the world, especially in Asia and mainly through the INSTC.

According to official data, one of the major advantages of INSTC is that the cost of transporting goods through this corridor is cheaper by 30%. It also halves the time it takes to transport Indian goods to Russia via the Suez Canal.

Iran can use this transit route to distribute European commodities in the shortest possible time and at a lower cost than other routes to the Indian Ocean and the Persian Gulf.

 

Netanyahu gets closer to forming government

Israeli Prime Minister-designate Benjamin Netanyahu moved one step further on Tuesday toward establishing a government after parliament approved divisive legislation agreed with his far-right coalition partners.

Already facing criticism on policy before taking office, Netanyahu has vowed to govern for all Israelis even as he will head one of the most right-wing governments in the country's history with key ministries in the hands of hardliners.

Despite a clear election win in November for his right-wing and religious bloc of parties, it has taken Netanyahu almost two months to reach deals with his allies, who have demanded a significant share of power in return for their support.

Tuesday's amendments to Israel's government law will ultimately enable the pro-settler Religious Zionism party to take up a post of second minister within the defence ministry, granting it broad authority over expansion of Jewish settlements in the occupied West Bank - land Palestinians seek for a state.

A second amendment will allow Aryeh Deri, leader of the ultra-Orthodox Shas party, to serve as a minister despite a conviction for tax fraud.

Deri is expected to serve as finance minister in two years, in a rotation deal with Religious Zionism leader Bezalel Smotrich.

But soon after the legislation was passed, Israel's Supreme Court said it would hear an appeal against Deri's appointment by a group of scientists, academics and former diplomats called "Democracy's Bastion."

Netanyahu is expected to swear in his new government on December 29, 2022 after advancing legislation to grant new powers over the police to Itamar Ben-Gvir, head of the ultra-nationalist Jewish Power party, as a national security minister.

The legislation, along with pledges to curb Supreme Court powers, anti-gay statements from coalition members and calls to allow a business to refuse services to people based on religious grounds, have alarmed liberal Israelis as well as Western allies, while drawing criticism from rights groups, businesses and  serving officials.

In response, Netanyahu has repeatedly said that he will safeguard civil rights and will not allow any harm to the country's Arab minority or to the LGBTQ community.