Shell Pakistan announces exit amidst economic crisis

Widening macroeconomic crisis forces Dutch oil company to sell shareholding

KARACHI:

In a major setback to Pakistan’s already struggling economy, Shell Pakistan, the 75-year-old Dutch oil marketing company, has announced its intention to exit the country. The decision sends a negative message to potential long-term investors, casting doubts on the stability of the country’s economic landscape.

In a notification to the Pakistan Stock Exchange (PSX) on Wednesday, Shell Pakistan stated that its board had been notified of the intent of its immediate parent company, Shell Petroleum Company Limited (SPCo), to sell its shareholding in Shell Pakistan Limited (SPL). The sale is subject to a targeted sales process, regulatory approvals, and the execution of binding documentation.

Although the company citied no reason as to why this decision was taken, the latest financial report speaks volumes about how the widening macroeconomic crisis and mismanagement of policymakers pulled the firm into troubled waters, impacting its business in the country.

While the announcement does not impact SPL’s current business operations, the decision comes after the company reported a net loss of Rs4.76 billion in the quarter ended March 31, 2023. The company’s quarterly financial report cited the unprecedented devaluation of the rupee, rising inflation, and macroeconomic uncertainty as significant factors that contributed to the company’s struggles in the country.

Surprisingly, the news had a positive effect on the company’s share price at the PSX, with a 7.5% increase, or Rs6.22, reaching a three-month high of Rs89.17 per share with 4.38 million share at the bourse. At the current share price, the value (market capitalisation) of the company comes to around Rs19.08 billion ($66.5 million). However, this may not reflect the true value of the company, considering the overall downward trend of the PSX in recent years.

Speaking to The Express Tribune, Samiullah Tariq, Head of Research at Pak-Kuwait Investment Company, pointed out that in addition to currency devaluation and stagflation, the sale of smuggled petroleum products in local markets was negatively impacting the sales volumes of regulated entities like Shell Pakistan. Furthermore, the unannounced ban on repatriating profits to headquarters has affected many multinational companies (MNCs) operating in Pakistan due to the country’s acute shortage of foreign exchange reserves. Shell Pakistan may be one of such MNCs facing difficulty in sending profit to headquarters.

Tariq mentioned that Shell Pakistan had long worked towards deregulating petroleum product prices, such as petrol, to improve competitiveness and profit margins. However, the regulated margins of Rs6 per litre did not prove favourable for the company. This decision to exit is not unique to Pakistan, as the Dutch firm has been pulling out of financially unviable markets worldwide.

As of May 2023, Shell Pakistan holds a 7% market share in volumetric sales nationwide and maintains a strong lubricants business. However, sales data shows a decline of 40% to 1.30 million tonnes in petroleum product sales in May 2023 compared to the same month last year. Cumulatively, sales dropped by 26% to 15.26 million tonnes in the first 11 months of the outgoing fiscal year compared to 20.62 million tonnes in the previous year.

The sharp increase in petroleum product prices, resulting from the withdrawal of subsidies and the imposition of a Rs50 per litre petroleum development levy, has severely impacted purchasing power and contributed to reduced sales for all oil marketing companies in Pakistan, said Tariq.

The Pakistani government recently projected a deceleration in economic growth to 0.3% for the outgoing fiscal year 2023, compared to 6.1% in the previous fiscal year. This downturn is the consequence of operating a controlled economy with critically low foreign exchange reserves and a high risk of default on foreign debt repayments.

The foreign direct investment (FDI) has also declined by 23% to $1.17 billion in the first 10 months of FY23, compared to $1.52 billion last year, further highlighting the challenges faced by the country.

Shell Pakistan’s exit follows similar threats from foreign airlines, logistics firms, and the closure of all three Japanese car assembling plants due to restrictions on profit repatriation and import bans.

With numerous factories remaining closed or operating at reduced capacity, Pakistan’s macroeconomic crisis continues to pose significant challenges for the country’s economic stability and foreign investment prospects.

Published in The Express Tribune, June 15^th, 2023.

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