Energy demand: Shell hesitant to jump into LNG fray
Regulatory constraints prevent company from investing further in Pakistan.
KARACHI:
Despite being the largest producer of liquefied natural gas in the world, Shell does not plan on entering the LNG business in Pakistan until the government clarifies several regulatory issues, including pricing and volume guarantees.
Sarim Sheikh, the managing director of Shell Pakistan, a subsidiary of the global energy giant Royal Dutch Shell, said that while the company recognised the business case for LNG imports into Pakistan, the company would need firm commitments from the government on matters such as pricing formulas and guarantees of minimal volume purchases in order to make any investment in LNG imports viable.
Pakistan faces a severe gas shortage, estimated at one billion cubic feet per day (cfd), and is expected to only see a further widening of the gap between domestic demand and supply, said Sheikh, citing figures that concur with the petroleum ministry’s analysis. As the country’s domestic production continues to decline due to exhaustion of existing gas fields that shortage is expected to rise to 2 billion cfd by 2015.
While Shell has been one of the earliest players in Pakistan’s oil marketing business, the company has been reducing its footprint in the country over the past three years.
“They currently have around 800 retail outlets. There were around 1,050 of them three years ago,” said Muhammad Ali Taufeeq, a research analyst at BMA Capital, an investment bank. “Shell International is not interested in investing in Pakistan. Regulatory and political uncertainty has made it so that there are better destinations for investment.”
Sheikh alluded to those regulatory challenges when he spoke about the company’s operations in Pakistan, particularly the fact that the profit margins of oil companies is determined by the government, not market forces.
“With the current margins, the business environment is not conducive to continued investment because that is an issue,” said Sheikh to The Express Tribune.
Not all of Shell’s reticence to invest in Pakistan is due to country-specific reasons. Shell sold off its liquefied petroleum gas business, incorporated as Shell Gas, to OPI Gas in June 2010 owing to a decision made by its global parent company to exit the LPG business and focus on fewer business lines.
The decision was made independently of the profitability of Shell Gas, which reported a net income of Rs72.1 million in 2009. The buyer, OPI Gas, is a subsidiary of the Hashoo Group, owned by the industrial magnate Sadruddin Hashwani.
Nevertheless, the firm’s core business in Pakistan, the retail sales of petroleum products through its network of outlets has been doing quite well. Shell Pakistan’s profits soared 88% to Rs758 million in the first quarter of 2010, compared to the same period in the previous year.
While most oil companies benefited largely due to higher oil prices, Shell also saw a healthy 24% increase in its volumetric sales, a sign that the company is dependent not just on international oil prices but is able to increase its market share, even with the reduced size of its distribution network.
“They are currently reaping the benefit of all that they have currently invested,” said BMA?s Taufeeq.
Part of the company’s ability to keep its sales growing is the policy to not allow its dealer network to go on strike, ensuring that Shell petrol stations remain open, even when other companies see theirs shut down by protests over fuel price disputes.
“We have been consistently working with our dealers to keep our pumps open,” said Sheikh. “We have been taking action against them if they do not, warning them, visiting them and getting them to open up.”
Published in The Express Tribune, May 28th, 2011.
Despite being the largest producer of liquefied natural gas in the world, Shell does not plan on entering the LNG business in Pakistan until the government clarifies several regulatory issues, including pricing and volume guarantees.
Sarim Sheikh, the managing director of Shell Pakistan, a subsidiary of the global energy giant Royal Dutch Shell, said that while the company recognised the business case for LNG imports into Pakistan, the company would need firm commitments from the government on matters such as pricing formulas and guarantees of minimal volume purchases in order to make any investment in LNG imports viable.
Pakistan faces a severe gas shortage, estimated at one billion cubic feet per day (cfd), and is expected to only see a further widening of the gap between domestic demand and supply, said Sheikh, citing figures that concur with the petroleum ministry’s analysis. As the country’s domestic production continues to decline due to exhaustion of existing gas fields that shortage is expected to rise to 2 billion cfd by 2015.
While Shell has been one of the earliest players in Pakistan’s oil marketing business, the company has been reducing its footprint in the country over the past three years.
“They currently have around 800 retail outlets. There were around 1,050 of them three years ago,” said Muhammad Ali Taufeeq, a research analyst at BMA Capital, an investment bank. “Shell International is not interested in investing in Pakistan. Regulatory and political uncertainty has made it so that there are better destinations for investment.”
Sheikh alluded to those regulatory challenges when he spoke about the company’s operations in Pakistan, particularly the fact that the profit margins of oil companies is determined by the government, not market forces.
“With the current margins, the business environment is not conducive to continued investment because that is an issue,” said Sheikh to The Express Tribune.
Not all of Shell’s reticence to invest in Pakistan is due to country-specific reasons. Shell sold off its liquefied petroleum gas business, incorporated as Shell Gas, to OPI Gas in June 2010 owing to a decision made by its global parent company to exit the LPG business and focus on fewer business lines.
The decision was made independently of the profitability of Shell Gas, which reported a net income of Rs72.1 million in 2009. The buyer, OPI Gas, is a subsidiary of the Hashoo Group, owned by the industrial magnate Sadruddin Hashwani.
Nevertheless, the firm’s core business in Pakistan, the retail sales of petroleum products through its network of outlets has been doing quite well. Shell Pakistan’s profits soared 88% to Rs758 million in the first quarter of 2010, compared to the same period in the previous year.
While most oil companies benefited largely due to higher oil prices, Shell also saw a healthy 24% increase in its volumetric sales, a sign that the company is dependent not just on international oil prices but is able to increase its market share, even with the reduced size of its distribution network.
“They are currently reaping the benefit of all that they have currently invested,” said BMA?s Taufeeq.
Part of the company’s ability to keep its sales growing is the policy to not allow its dealer network to go on strike, ensuring that Shell petrol stations remain open, even when other companies see theirs shut down by protests over fuel price disputes.
“We have been consistently working with our dealers to keep our pumps open,” said Sheikh. “We have been taking action against them if they do not, warning them, visiting them and getting them to open up.”
Published in The Express Tribune, May 28th, 2011.