Case Study 9 Revitalization of Pakistan State Qil On May 12, 2004, Tariq Kirmani, Managing Director and Chief Executive Officer, Pakistan State Oil (PSO) was in his office thinking about the turnaround strategy he had initiated at PSO, a public sector enterprise. He was assessing whether enough had been done to institutionalize the changes implemented at PSO to maintain and further improve its present market leadership position. He wondered if the same strategy would be enough to take the company toa higher level of operations, or if he would have to further modify it. Kirmani was also concerned that in this highly dynamic and intensely competitive environment, PSO’s market leadership position should be maintained. Furthermore, since he was unsure of the length of the tenure of an MD/CEO in a state enterprise due to political factors, Kirmani realized the urgency with which he had to move forward to ensure that the changes already implemented ’| were embedded in the culture of the company. He knew that without this, the changes already implemented would not be sustainable, especiaily since there were still'a number of employees who had not moved with the change programme, whose mindset was still reactionary. There was danger of the employees upsetting the change initiative. COMPANY PROFILE Pakistan State Oil was one of the two major oil marketing companies in the country. It came into being on January 1, 1974 when the federal government took over the management of Pakistan National Oil (PNO) and Dawood Petroleum Limited (DPL), and renamed them Premier Oil Company Limited (POCL) under the Marketing of Petroleum Products (Federal Control) Act, 1974. On June 3, 1974 the Petroleum Storage Development Corporation (PSDC) was taken over by the government and was renamed the State Oil Company Limited. The government merged PNO and POCL into the State Oil Company Limited (SOCL) and on December 30, 1976 renamed it the Pakistan State Oil Company Limited.196 Case Study 9 By 2003, the Government of Pakistan owned, either directly or indirectly nearly 54 per cent shares of the Pakistan State Oil Company Limited. PSO also owned the following subsidiaries which have since been disposed of: Auto Oils (Pvt) Limited, Gizri Lubricants (Pvt) Limited, Mideast Oil and Grease Corp. (Pvt) Limited, Aremai Petroleum (Pvt) Limited, Salsons Lubricants (Pvt) Limited, Petro Lube (Pvt) Limited, Petro Chemicals (Pvt) Limited, Mohsin Lubricants (Pvt) Limited and Salim Petroleum (Pvt) Limited. PSO was the oil market leader in the country, enjoying a 79 per cent share of the black oil market and a 59 per cent share of the white oil market. It was engaged in import, storage, distribution and marketing of various POL products, including mogas, HSD, fuel oil, jet fuel, kerosene, LPG, CNG and petro- chemicals. PSO, now a blue chip company, member of the World Econiomic Forum and winner of the Karachi Stock Exchange’s Top Companies Award, became a topic for case studies in Pakistan and abroad, largely due to its turnaround sttategy over the past four years. OIL INDUSTRY IN PAKISTAN Pakistan, a modest producer of oil and gas, imported 70 per cent of its crude oil requirements. The country was self-sufficient in natural gas, although this status was likely to change with future demand increase. The state-owned Oil and Gas Development Corporation (OGDC) was the most important player in Pakistan's oil industry. Pakistan Petroleum Ltd (PPL), established in 1950, produced the bulk of the natural gas. Foreign companies currently operating in Pakistan included British Petroleum (which produced approximately 50 per cent oil and 9 per cent natural gas); British Gas; Lasmo; OMV; Gaz de France; Shell and Unocal. During the fiscal year 2003-4, the overall consumption of petroleum, oil and lubricants in Pakistan showed a negative growth of 5.8 per cent due to the reduced consumption of fuel oil. White oil (mogas, HSD, JP-1 and SKO) recorded. a growth of 1.4 per cent while black oil (FO and LDQ) registered a decline of 16.2 per cent. The petroleum, oil and lubricants (POL) industry in Pakistan was made up of two major players, PSO and Shell Pakistan. Caltex came in third, Totale Parco was fourth and Attock Petroleum had the smallest share of the market. PSO was the largest oil marketing company, facing competition from these players.Pakistan State Oil 197 The deregulation of the industry in July 2001 had intensified the competition for oil marketing companies since inventory gains due to price fluctuations had disappeared after linking domestic prices with international ones. Due to this shift in the business environment, the performance of companies in the industry was contingent on technological advantage, efficient operations management, product innovation, proactive marketing and custonier satisfaction. Shell Pakistan The Shell brand name enjoyed more than a 100-year history in this part of the world, dating back to 1899. This was the time when Asiatic Petroleum, the marketing arm of Shell Transport Company and Royal Dutch Petroleum Company, began importing kerosene oil from Azerbaijan to the subcontinent. The documented history in the Indo-Pakistan subcontinent dated back to 1903 when a partnership was struck between the Shell Transport & Trading Company and the Royal Dutch Petroleum Company to supply petroleum to Asia. In 1928, to enhance their distribution capabilities, the business interest of Royal Dutch/Shell Group and the Burmah Oil Company Limited in India were merged, resulting in the birth of the Burmah Shell Oil Storage & Distribution Company of India. After Independence in 1947, the name was changed to the Burmah Shell Oil Distribution Company of Pakistan. In 1970, when 51 per cent of the shareholding was transferred to Pakistani investors, the company’s name was changed to Pakistan Burmah Shell (PBS) Limited. Shell and the Burmah Group retained the remaining 49 per cent in equal proportions. In February 1993, as economic liberalization began to take root and Burmah divested from PBS, Shell Petroleum stepped in to raise its stake to 51 per cent. The years 2001-2 saw the Shell Petroleum Company successively increasing its share, and now had a 76 per cent stake in Shell Pakistan Ltd (SPL). : : Caltex Caltex was a part of Chevron Texaco Corporation, the third largest global energy company in terms of global oil reserves and the fourth largest in terms of global oil and natural gas production. Chevron Texaco operated in 180 counties with 51,000 employees, 12 billion barrels of oil reserves, 24,000 service stations, over 2.2 million barrels of refinery capacity and fuel product sales of 3.5 million barrels per day. The company had been operating in the subcontinent since 1938 and had, apart from its main oil storage facility in Karachi, twelve depots throughout the country which included three inland terminals in Rawalpindi, Machike and Shikarpur. The company’s xetail outlet consisted of 501 outlets located across the country as well as a widespread distribution network catering to the demands of the198 Case Study 9 industrial and agricultural sectors. Caltex had greatly increased the level of its investment in Pakistan over the past decade. The most recent major investment had been in acquisition and further development of the LPG business of the Sui Northern Gas Company Limited (SSGCL). Caltex had also acquired 11 per cent equity in the White Oil Pipeline that was being constructed. Attock Petroleum Limited (APL) APL was granted a marketing license in February 1997 and a certificate of commencement of business in May 1997, APL was part of the Attock Oil Company which was incorporated with limited liability in the United Kingdom on December 1, 1913. APL’s sponsors included Pharaoh Commercial Investment Group Ltd and Attock Oil Group of Companies (AOC). The main objective of APL was to establish a group company in the downstream petroleum sector related to marketing of petroleum products in Pakistan, which had historically been restricted to the other three major players in this field. After government approval, APL had been able to effectively penetrate the market by competing with established marketing companies in a short period and had now achieved recognition in the market as an important player. APL had successfully completed and commissioned a storage terminal in Morgah, Rawalpindi, in less than a year through its own resources. The terminal was connected to Attock Refinery Ltd through a pipeline. The APL terminal had storage for high speed diesel, premier motor gasoline, kerosene oil, solvent oil and mineral turpentine oil. Furnace oil was being added and was expected to be commissioned by the end of the current fiscal year. At present APL owned 50 petrol pumps, 13 construction and 29 were awaiting government approval. APL had also introduced its own brand of lubricants in the market. The company planned to eventually extend its business to new ‘geographical areas with a view to expanding its market share. ORGANIZATIONAL STRUCTURE OF PSO The apex body at PSO was._a fully autonomous Board constituted with full statutory powers under the Companies Ordinance, 1984, The non-executive Chairman of the Board was Pervaiz Kausar. Other members were Tariq Kirmani, Muhammad Iqbal Awan (Financial Advisor, Ministry of Petroleum & Natural Resources), Naeem Baig (Joint Secretary, Ministry of Petroleum & Natural Resources), Tariq Iqbal Khan (Chairman & MD, National Investment Trust Ltd), Istaqbal Mehdi (President, Zarai Taraqiati Bank), Kamran Mirza (Chairman and MD, Abbott Laboratories), Arshad Said (Former Senior Executive, Shell