Pakistan’s state-run oil and gas companies are facing a serious challenge of circular debt that is putting the oil and gas supply chain and their future investment plans at stake. Despite witnessing growth, the companies are struggling to cope with the mounting debt that could collapse the entire industry. Circular debt has been piling up for years, and all governments have failed to find a solution to the problem. It has now crossed a staggering Rs1.6 trillion.
According to industry experts and officials, circular debt has the potential to bring down the entire oil and gas supply chain if the government fails to clear it. Pakistan’s economy is already grappling with high inflation, regressed growth, and increasing financial vulnerabilities in FY23. Large-scale manufacturing declined by 4.4% (Jul-Jan) compared to the same period last year, and vehicle sales dropped by 35%. The petroleum industry has also witnessed a significant decline in white oil sales due to a slowdown in economic activities and inflating fuel prices.
Pakistan State Oil (PSO), the country’s largest state oil company, is facing the brunt of circular debt. Despite posting a net profit in the recent financial results, the company is struggling to manage its receivables from various sectors. PSO receivables against different sectors continue to balloon up at Rs731 billion as on May 8, 2023. SNGPL has to pay Rs457 billion on account of LNG supply, while the power sector has to pay Rs179 billion to PSO. State-run Gencos, Hubco, and Kapco are also defaulting on their payments, with PSO to pay Rs67 billion to local oil refineries.
Despite these challenges, the three public sector petroleum companies, namely PSO, Pakistan Petroleum Limited (PPL), and Oil and Gas Development Company Limited (OGDCL), have posted strong financial results for the nine months ended March 31, 2023. PSO reported a net profit of Rs10.3 billion for the period, while PPL’s net profit surged by 58% YoY to Rs81.35 billion. OGDCL reported a profit after tax of Rs159.638 billion, with net sales of Rs309.148 billion.
Despite the overall decline in white oil sales by 19.6%, PSO outperformed the sector and continued to dominate the country’s white oil market, selling around 51% of the industry volume. The company’s market share in diesel increased by 4.1%, closing the period at 54.4%. However, circular debt remains a major concern for the industry, with PSO’s receivables from SNGPL increasing by 65% from March 31, 2022. As a result, the company’s average borrowings increased by 157%, and finance cost surged by 995 basis points compared to the same period last year.
The strong financial results of the energy companies reflect their resilience and proactive business strategies. Despite the economic challenges and reduced demand for oil products, PSO continued to invest in infrastructure development and rehabilitated 42 thousand tonnes of existing storage capacity, with another 90 thousand tonnes of new storage capacity currently under construction. The company also added 22 retail outlets at key locations.
Industry officials have praised the resilience of PSO, PPL, and OGDCL, stating that these companies have demonstrated their ability to navigate through difficult times and deliver strong financial performance. The petroleum sector in Pakistan continues to face challenges, but companies like PSO, PPL, and OGDCL remain committed to keeping the wheels of the country’s economy in motion. The companies expect to deliver even better business performance in the remaining part of the year.
Published in The Express Tribune, May 10th, 2023.
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