Jilted titans: The short-lived affair between PSO and PNSC

Once known as business partners, developed differences on freight and shipping cost

KARACHI:

Up until December 2012, Naeem Yahya Mir had a relatively uneventful tenure as managing director of Pakistan State Oil (PSO) – a company that faces political interference on even trivial matters such as posting of a junior executive. But that month he took a step that would pit him up against a powerful lobby.

PSO announced it will use tankers of Pakistan National Shipping Corporation (PNSC) to import petrol from UAE, Kuwait and Singapore. The state-run shipper was already transporting PSO’s furnace oil cargos since October that year.

“Suddenly, we came under a lot of pressure from different quarters,” recalls Mir, who was forced to quit six months later. “Phone calls were rained on to me. There are just a handful of traders in oil import business and they could see what was happening.”

Being the largest petroleum supplier, PSO accounts for most of the deficit products that Pakistan imports. Between July 2014 and May 2015, around 8.5 million tons of furnace oil and petrol has been imported.



Depending on the prevailing price in international markets, freight for shipping these two products can be anywhere between $150 million and $350 million, industry people say.

Read: Oil transportation: PNSC fears losing business to PSO

Mir says the deal was beneficial for both PSO and PNSC.

“Freight rate was fixed for the next 12 months, hedging us against fluctuation in market rates. Similarly, we were paying them in rupees instead of dollars, avoiding unnecessary drain on foreign exchange reserves. PNSC, on the other hand, was getting substantial business from us.”

Agreement was not limited to shipments; PSO and PNSC were in talks to start a joint venture that envisaged buying new tankers.

“It was a logical course of action for a company the size of PSO. We would have saved a lot of money and paid only for half of the operational cost to run the vessels,” Mir said. However the joint venture never took off.

The resistance

Mir, who took charge at PSO in January 2012, says he was well versed in the workings of the international oil business and its supply chain, having worked in Kuwait Petroleum Corporation and other foreign firms for two decades of his professional life.

However, when he first floated the idea of using PNSC to import furnace oil, it made his lieutenants jittery. “They were very fearful … fearful about what would happen if there were delays. No one wanted to take responsibility. They were just worried about keeping the supply-line intact.”

Read: Oil transportation: Ministry backs revocation of PSO-PNSC agreement

PNSC was not new to the oil import business. It has been importing crude oil for Pakistani refineries since the 1980s. But handling petroleum products was a different trade altogether.

A senior PSO official, who was involved in the process, said, “We were all scared. PSO had always imported petroleum products on C&F basis.  So, as a test case, we gave PNSC the task to bring 71,500 tons of furnace oil, which they successfully did. Then its vessels started bringing products regularly.”

Under the Cost and Freight mode, the supplier of the product arranges the vessel and takes responsibility of delivering the cargo on schedule. For the deal with PNSC to work, PSO booked consignments on Free On Board basis. PNSC arranged the ships, took care of insurance and delivered where it was wanted.

Mir says the old practice of using C&F basis was an easy way for PSO to avoid planning and responsibility of ensuring sufficient supplies were in hand. “We were basically passing on the buck. If shipment was delayed, the supplier could be blamed. And nobody cared about the additional costs. It is all passed on to consumers – that was the general attitude.”

Whenever suppliers are asked to arrange tankers along with products, they factor in every cost with a profit margin, he said. “There is no free lunch. When he books a ship he keeps a profit, when he arranges insurance he keeps a profit. And that is beside what shipping line and insurance company charge you.”

Victim of convenience

Pakistan faced its worst petrol shortage in January 2015 when vehicles were left stranded on the roadsides and fuel pumps were shut across Punjab. The main reason behind that was the spike in petrol consumption after government cut its prices by 27% over a period of few months.

Read: PSO complains about delay in arrival of vessels

It was a PR disaster for the government, which was quick to suspend senior officials of petroleum ministry and PSO after two enquires. Since then maintaining sufficient supplies at fuel pumps has become a top priority for industry officials.

This was also the time PSO started expressing concern about PNSC’s ability to handle its large volume.

“High level inquiry teams constituted by the Prime Minster didn’t find anything wrong on our part,” said Brig (retired) Rashid Siddiqi, PNSC’s Executive Director. “Shipping is a properly documented business. Anyone can easily find out if ships are getting delayed.”

Initially agreed shipment rates were between $6.75 per ton and $7 per ton, he said. “These were supposed to be revised in February 2014. But we are still waiting for that to happen. For the past year we have booked losses on all petrol shipments due to this.”

He regretted that government officials have recently intervened, asking PSO to revert back to booking C&F cargos.

“What about the fact that there were no issues with quantity and quality of petroleum products? What about that practice, which we ended when private suppliers would bring multiple vessels at once to a port and claim tens of thousands of dollars in demurrages?”

PNSC, a listed firm, had seen a rise in revenue and profit since the agreement with PSO came into effect. Buoyed by this and a rising share price, the corporation was already in talks with financial institutions to buy two more tankers. But that plan now seems to be in jeopardy.

What about inefficiency?

PNSC has four tankers, which are used for shipping both crude and furnace oil. It hires vessels for bringing petrol cargos.

“Even refineries have been facing problems since the corporation got involved with furnace oil. They are facing obvious difficulty in dealing with such huge volumes,” said a member of Oil Companies Advisory Council.

“Pakistan has never witnessed a rise in petrol consumption like what we are seeing right now. Imports are only going to increase in coming months and year. We are running such a tight schedule that a delay in a vessel of just a day or two could create shortages in the country.”

The writer is a staff correspondent

Published in The Express Tribune, June 22^nd,  2015.

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