IHS Global Insight Perspective | |
Significance | Pakistan State Oil (PSO), being owed 149 billion Pakistani rupees (US$1.72 billion) in receivables, mainly from power generators, has found itself unable to pay outstanding letters of credit to various fuel suppliers, forcing the company to seriously consider cancelling tenders issued for imports of fuel products. |
Implications | The chances of PSO being able to recover receivables in time for meeting its obligations to foreign suppliers are slim, as power generators are also heavily indebted given the failure of provincial governments and other consumers to pay for electricity. |
Outlook | PSO will be hoping the federal government of Pakistan can provide a bail-out package, although with the country already reeling from the cost of flood damage the Ministry of Finance might be reluctant to comply. Defaulting on foreign payments for fuel would, however, undermine relationships with key fuel suppliers, and PSO might cancel cargoes going forward if its financial situation does not improve, further affecting domestic supply security. |
PSO Faces Default
Pakistan State Oil (PSO) is facing a default on international payments due to a severe liquidity crunch, according to The Dawn newspaper, citing unidentified officials from Pakistan's Ministry of Petroleum & Natural Resources. Letters of credit (LCs) worth approximately 4 billion Pakistani rupees (US$46.65 million) are due today (17 September), with an additional 4-billion-rupee package also due on the 20, 21, and 22 September 2010. However, PSO is not able to pay the LCs due to the severe liquidity crisis facing the company, which has been compounded by outstanding payments to foreign suppliers of fuel amounting to 30 billion rupees. The situation has led the company to seriously consider cancelling tenders issued for imports of four products, namely high-speed diesel (HSD), furnace oil, jet fuel, and motor spirit, which could be worth 19 billion rupees. A decision on whether to go ahead with the cancellation will be taken after a consultation with the government today.
The situation is serious as PSO is the largest oil marketing company in Pakistan, accounting for approximately a 68% market share in July 2010. PSO's payables crisis stems from the company's own difficulties in recovering receivables from its customers. These receivables have now reached an all-time high of 149 billion rupees, having steadily increased over recent months. These non-paying customers are mainly power-generation companies. The Hub Power Company (HUBCO)—an independent power producer (IPP) which runs the oil-fired Hub Power Plant near Karachi—owes PSO 62.6 billion rupees. The Kot Addu Power Company (KAPCO)—which runs the Kot Addu Power Plant in Muzaffargarh district in Punjab—owes PSO a further 31.5 billion rupees, while the state-run Pakistan Electric Power Company (PEPCO) owes PSO 47 billion rupees. The chances of PSO being able to recover these dues in time to meet its obligations to foreign suppliers are slim. KAPCO recently reported a second straight annual decline in profit and continues to suffer from delayed payments. A lack of natural gas availability after Sui Northern Gas Co. shut down a compressor plant was inundated with flood waters has also forced KAPCO to switch its power plant to run on furnace oil and diesel, increasing feedstock costs. PEPCO's financial situation is also undermined by lack of payments for electricity by provincial government authorities in a number of provinces throughout Pakistan. PEPCO owes money to a host of companies, including independent power producers (IPPs) and distributors of natural gas and fuel, and is therefore unlikely to meet its sizeable obligations to PSO in such a short period.
PSO's big hope therefore rests with the federal government of Pakistan, although following the recent catastrophic floods the government has other large priorities, namely, getting on with the costly task of rebuilding the country. Back in January 2010, the government tried to resolve the problem of circular debt in the energy sector by injecting capital into the system. The government effectively persuaded the Central Bank to print money and inject it into the banking system for payment to energy companies. It was hoped that boosting liquidity would enable energy companies to pay off their debts to each other. According to a report by The Dawn newspaper back in January 2010, the government released about 190 billion rupees to petroleum and power companies to deal with the circular debt issue while previously picking up 290 billion rupees in liabilities through the creation of a power sector debt-holding company. Without implementing new measures to ensure that electricity consumers pay their bills, however, there was little hope that the capital injection could provide a long-term solution to the circular debt problem, particularly when there appeared to be little oversight of the money after the initial injection. Looking ahead, the Ministry of Finance might be reluctant to inject more funds into the system, given the potential impact on the consumer price index (CPI), which is already expected to hit 14% this year, way above the government target of 9.5%, due to soaring food prices following the floods. The Ministry of Finance has previously borrowed money from the State Bank of Pakistan through the issue of term-finance certificates to bail out the power sector. The high interest rates on these borrowings will provide additional disincentives for funding through this channel going forward. However, PSO will be hoping that government concerns about the impact of a default on foreign payments on relationships with key fuel suppliers and the important role PSO plays in ensuring fuel supply security will outweigh reservations about the economic impact of another bail out.
Outlook and Implications
Reports suggest that PSO has deferred a term cargo of gasoil scheduled for October 2010 delivery under a term contract with Kuwait Petroleum Corp, which followed the deferral of fuel oil and gas oil cargoes during August 2010. The fuel oil deferrals were reportedly because power plants needed less fuel, running at low capacity because of the floods while the disruption to infrastructure reduced consumption of gasoil, which PSO believed it could cover from its own inventories. However, while fuel supply networks were disrupted, demand for fuel remained in Pakistan, particularly as the lack of domestic availability was exacerbated by the closure of the country's 100,000 b/d Pak-Arab Refinery (PARCO) following flood damage (see Pakistan: 12 August 2010: Flooding Closes Down Pakistan Refinery and Cuts Natural Gas Production). Reports are now suggesting that in Lahore long queues of people trying to buy fuel have formed at PSO pumps, which are running dry. Demand for petroleum has also increased due to the decision of Sui Northern Gas Pipelines Ltd. (SNGPL) to scale back alternative fuel supplies of compressed natural gas (CNG)—an alternative transportation fuel—due to maintenance work at the Qadirpur gas field, which was also hit by flooding.
Even if the government provides enough support to prevent PSO from defaulting on its payments, Pakistan's circular debt situation is likely to continue. PSO's difficulty in meeting its foreign payment obligations due to a lack of receivables from the power sector means it cannot provide secure supplies of fuel to the domestic market. This situation encourages black market activity, which surfaced following the floods when opportunistic dealers capitalised on the lack of supplies to sell remaining stocks at highly inflated prices. Resolving the circular debt issue in Pakistan's energy sector is a mammoth task, but separating PSO from the crisis in the power sector can start to be achieved by reducing the country's reliance on oil-fired generation, which in any case is expensive, polluting, and inefficient. Pakistan has bountiful coal supplies as well as significant hydropower and solar power potential, which remains a virtually untapped market. PSO also faces internal corruption problems, and officials have been accused of embezzlement of company funds and illegal sales of petroleum products to fuel dealers. External auditing of PSO accounts and tighter regulation of the company is needed to ensure corruption does not worsen its financial situation. PSO might also look for government support, not in the form of bail outs, but for purchases of minority stakes in producing upstream fields, which can provide a more stable source of revenue to improve the company's finances over the long term.