Pakistan Reader# 623, 8 July 2023
Ryan Marcus Manuel
On 14 June, Shell Pakistan Limited (SPL) notified the Pakistan Stock Exchange of its parent company, Shell Petroleum Company (SPCo)'s intention to sell its shareholding in the business.
SPL stated that SPCo would be exiting Pakistan with the sale of 77.42 per cent of its shareholding to local business. However, SPL stated that the disinvestment act would not impact SPL's current operations. SPCo remarked that it would now pursue a safe and smooth divestment, and will continue its delivery of safe and reliable operations. The sale of stakes included all of SPL's downstream businesses and SPL's 26 per cent ownership of Pak-Arab Pipeline Company Ltd (PAPCO). The statement added that Shell is witnessing a strong interest from international buyers. The statement did not reveal the buyers. However, potential buyers could include Saudi Arabia and UAE.
SPCo has disinvested in the interest of its investors, who have expressed speculations owing to poor returns from renewables in contrast to the booming oil and gas profits. On 14 June, Shell CEO Wael Sawan revealed updates on capital allocation, shareholder payouts and strategic choices. As with other MNCs, SPCo has cited that poor returns are due to the economic difficulties of its offshore businesses. The withdrawal from Pakistan was considered to be a holistic view of Shell's global operations.
In January 2023 SPCo indicated its intention to change its presence and streamline its activities. The CEO introduced a sharp focus on the company's performance and returns. SPCo's review and exit is not specific to Pakistan. It has reviewed and contemplated exiting the home energy retail businesses of the UK, the Netherlands and Germany citing their tough market conditions. SPCo scrapped renewable offshore projects due to the projection of weak returns. Sawan had additionally highlighted that the 2021 target to cut oil output by 20 per cent was under review. He announced that the scrapping of the target of reducing oil output by 1 per cent to 2 per cent has already been reached. It is projected that SPCo will boost its dividend by 20 per cent and overall payouts to 35 per cent globally.
Dwindling profits and the decision to leave
Pakistan's deteriorating economy has prompted SPCo to review SPL's performance and withdraw its stakes from Pakistan. SPL reported a net loss of USD 17.2 million in January-March 2023 in comparison to a net profit of USD 7 million in 2022. It suffered losses in 2022 due to devaluation of Pakistani rupee, overdue receivables, inflation, macroeconomic uncertainty and economic slowdown. Notably, FY 2023 SPL witnessed a 50 per cent drop in the consumption of petroleum in comparison to FY2022, owing to the high inflation rate. Diesel and furnace oil sales dropped to 36 per cent and 80 per cent year-on-year, amid low industrial activity.
The news had a short-term positive effect on SPL's shares at the PSX with an increase of 7.5 per cent. With a book value of PKR 46, asset valuation could be USD 29 million. Shell owns a network of more than 600 sites, 10 fuel terminals and a single lube oil blending plant in Pakistan. In the long run, the Pakistani government has projected a deceleration in economic growth of 0.3 per cent for the fiscal year 2023. Several multinational companies have undergone major losses following the deprivation of the Pakistani rupee. As Shell exits Pakistan, MNCs are facing challenges in repatriation of dividends and making royalty payments. Pakistan faces similar threats of exits from foreign airlines, logistic firms,and Japanese automobile assembly closure. The pull-out Shell Company could initiate a domino effect, with foreign investors halting operations in Pakistan. The impact on the oil sector would eventually affect the pharmaceutical and automobile sectors. Experts state that the smoothness of the transaction depends on whether the buyer of SPL is an international or a domestic company.
PTI leader Farukh Habib stated that MNCs are exiting Pakistan due to PM Shehbaz Sharif's 'Fascist regime', and lashed out at the policy inconsistency and higher taxes. Civilians have called upon the Pakistan Army, PM Shehbaz Sharif and Finance Minister Ishaq Dar to address the economic condition that led to Shell's exit. PML-N leaders have not commented on the disinvestment.
Pakistan has developments in terms of energy resources to compensate for Shell's exit. Pakistan began importing LNG from Turkmenistan from the TAPI gas pipeline. Additionally, invited China and European countries to establish LNG plants and export fuel. Pak-Arab Refinery Ltd (PARCO) offered fuel to Singapore and UAE in July 2023, underlining its shift in market dynamics to focus on exporting instead of importing this summer. The exports have reached Singapore and UAE. Additionally, Pakistan has received two Russian crude oil shipments under a signed agreement between both the countries in April 2023.