MANAGEMENT ACCOUNTING
TERM REPORT
HASCOL PETROLEUM LTD
Group Members:
Manum Murtaza 14015
Hamad Tariq Ashraf 15082
Ali Arshad 14483
Muzammil Hasan 12702
Omer Ahmed 14357 TABLE OF CONTENTS EXECUTIVE SUMMARY ...... 4
INTRODUCTION OF HASCOL ...... 5
VISION STATEMENT ...... 6
MISSION STATEMENT ...... 6
PAKISTAN’S OIL AND GAS INDUSTRY ...... 6
COMPETITORS AND HASCOL’S POSITION IN THE MARKET ...... 7
REASON FOR HASCOL’S CHANGING MARKET POSITION ...... 7
COSTING PROCEDURES FOLLOWED BY HASCOL ...... 8
ACTUALIZED STANDARD COSTING PROCEDURES ...... 8
HASCOL’S PRODUCTS ...... 8
NATURE OF THE GOODS ...... 9
INVENTORY ...... 9
BILL OF LEADING ...... 10
STORAGE OF INVENTORY ...... 10
INLAND FREIGHT EQUALIZATION MARGIN (IFEM) ...... 10
PRICING...... 11
RISKS OF IMPORTING FOR HASCOL ...... 12
SELLING PRICE...... 12
HOW DOES THE GOVERNMENT COMPUTE THE PRICE OF PETROL? ...... 12 TENDERING PROCESS ...... 13
WHAT ACTIONS DOES HASCOL TAKE AFTER FIGURING OUT THE
GOVERNMENT’S CAPPED PRICE? ...... 13
S&P GLOBAL PLATTS INSIGHT MAGAZINE ...... 14
PPRA – PAKISTAN PROCUREMENT REGULATORY AUTHORITY...... 14
CLOSE EYE ON PSO’S MOVES ...... 14
HOW IS THIS DONE? ...... 15
OVERHEADS & LABOR ...... 15
APPENDIX ...... 17
QUESTIONNAIRE FOR INTERVIEW ...... 17
TRANSCRIPTION OF INTERVIEW ...... 19
BUSINESS CARD OF INTERVIEWEE ...... 29 XECUTIVE UMMARY E S
The purpose of this report is to interpret and gain an insight on the costing procedures
followed by Hascol Petroleum Ltd. in Pakistan. We aim to analyze the different methods used by
Hascol Petroleum Ltd. for pricing their products, to understand their business procedures, to have
an overview of the overall industry and how Hascol manages with its end-to-end competitors.
The main purpose we aim to derive from the report is to have an up close understanding of our
subject of study – Management accounting – under real world experiences. NTRODUCTION ASCOL I OF H
Hascol Petroleum Limited is involved in the buying, stockpiling and offering of oil-based
commodities, for example, Fuel Oil, Fast Diesel, Gas, Stream A-1, LPG and Oils. Hascol was
created in the year 2001 under the Companies law of 1984, fundamentally to exploit the oil
division deregulation and to create a program for owning, renting and leasing oil storerooms and
in addition bringing in oil-based goods for its very own use.
In the year 2005, Hascol was granted permission with an advertising permit by the
Legislature of Pakistan and from that point forward, Hascol has been occupied with building up a
retail arrange under the Hascol mark and by the 31st of December 2014, the company has created
more than two hundred and eighty retail outlets, in the four regions of Pakistan and Azad
Kashmir. This number has reached to 300 before the end of the year 2015.
Pakistan, at the moment, only has 20% of its oil requirement that is getting fulfilled. So
whatsoever oil is being extracted from Pakistan, only 20% we can consume and the rest of the
80% demand is met through the imports. So Pakistan is an import driven market. At the moment,
there are five refineries in Pakistan. Three of the refineries are in the South; one is in mid country
and the other one is in the Northern areas. So the Southern refineries are BYCO, PARCO and
PR. The mid countries refineries are again, PARCO which is the largest refinery in Pakistan.
Then the fifth one is the Attock refinery. So these five refineries at the moment are catering that
20%. They import crude oil along with refining indigenous crude oil as well – all the oil that has
been taken out and extracted from Pakistan. The rest 80% is managed through the imports and
from two ports that are in Pakistan and in Karachi. These are Kemari port and Karachi port.
There is another port for oil handling that is BYCO. VISION STATEMENT
The vision statement of Hascol Petroleum limited is to become the leading energy
marketing company in Pakistan through operational excellence, talent management, business
diversification and sustainable expansion. (HASCOL Petroleum Ltd.)
MISSION STATEMENT
The Mission statement of Hascol Petroleum limited is to gain recognition and leadership
in the hydrocarbon and energy sectors, by maximizing customer satisfaction and shareholder
value through continuous improvement, high quality human capital, and appropriate technology
and by adhering to the Company’s Core Values. (HASCOL Petroleum Ltd.)
PAKISTAN’S OIL AND GAS INDUSTRY
Pakistan is known for being the regional gateway of energy with its perfect location, it is
blessed with reserves of different sorts of energy such as oil and gas. Pakistan’s rapidly
increasing requirements for oil and gas is one of the reasons for the needs of large-scale
exploration and expansion projects and investments to help increase oil and gas production.
Pakistan is largely dependent on Oil and Gas for its energy creation. Both oil and gas collectively
contribute 77.40% to the energy requirement of Pakistan. Pakistan has an estimated oil reserve of
303.63 million barrels whereas its current production of oil is 65,531 barrels per day. The gas
reserves of Pakistan are estimated to be 28.32 TCF while its current production is 4 billion cubic
feet per day. Currently, there are seven oil refineries in use in Pakistan, with the capacity to refine 248,506 bpd. Gas is the chief source of energy in Pakistan. Pakistan has a well-developed
gas dispersion network.
COMPETITORS AND HASCOL’S POSITION IN THE MARKET
Hascol can be considered as the second leading Petroleum Company in the petroleum
industry. Its greatest competitor is PSO, which is a government owned organization. As
compared to Hascol Petroleum Ltd. all other competitors, except Pakistan State Oil (PSO) have
differentiated and lower ratios, in comparison to Hascol. This indicates the fact that Hascol
Petroleum is an emerging market leader. It cannot compete directly with PSO due to the
government backing PSO currently has. However, it aims to work line in line to be as great as
PSO is.
REASON FOR HASCOL’S CHANGING MARKET POSITION
As Mr. Hassan Nadeem Jan emphasized to us in the interview, that when he joined
Hascol in 2010, the sales were around Rs10bn to Rs11bn, however the current sales of Hascol
are around Rs 280 bn. In 2010 the market share of Hascol was less than 1% at the time whereas
PSO had a 70% market share. Nonetheless, currently, Hascol is the second largest company after
PSO and the largest oil company in the private sector. Mr. Hassan Nadeem Jan claims that the
critical success factors during the last 8-9 years were the following. Firstly, the vision of
Hascol’s CEO enabled the company to begin to prosper and transformed the company overall.
The CEO brought the company from a 12th ranking company to a 2nd ranking company, where
Hascol stands today, by transforming it completely. Another contributing factor to the changing
market position was the storage spaces built by Hascol. In 2010, the storage infrastructure held by Hascol was zero but after multiple developments, their current storage structure has the
capacity of 500000 tonnes.
COSTING PROCEDURES FOLLOWED BY HASCOL
ACTUALIZED STANDARD COSTING PROCEDURES
The costing procedures currently followed by Hascol Petroleum Ltd. are actualized
standard costing procedures. Standard costs are the base costs of manufacturing. Actual costs are
costs that were actually incurred during manufacturing. In daily manufacturing, it is
recommended to follow standard costs for costing, and if they are realized, the costs are called
“actualized standard costs”.
HASCOL’S PRODUCTS
Hascol Petroleum Limited is occupied in the purchase, storage and sale of petroleum
products such as the following:
High Speed Diesel
Gasoline
Fuel Oil
FUCHS lubricants
Hascol also sells LPG and at present there are 15 AutoMax LPG stations across Pakistan in
different stages of approval with the Government of Pakistan.
NATURE OF THE GOODS
Hascol commonly deals in Petroleum and related products such as High Speed Diesel,
Gasoline, Fuel Oil, FUCHS lubricants and LPG. The nature of these goods generally is highly
liquid. They could easily be sold off for immediate cash with little or no loss in value. They can
be treated as ‘quick assets’ for the company.
INVENTORY As per government regulatory requirements, all petroleum firms are to hold 20 days
worth of stock. Hascol sees the importance in considering the strategic stock levels as well.
Recently, a war like situation erupted between India and Pakistan and if there had been a war,
Pakistan would have needed abundance of fuel in order to keep its vehicles and machines
running, along with tanks and jeeps. The backbone of an economy is its energy sources and their
efficient management is extremely important. All petroleum firms are supposed to have strategic
stocks stored with them in tanks at a required specific level.
Hascol carries inventory and simultaneously it has a very high cost to it because of the
changing oil and petrol prices on a day to day to basis. Due to this, the profit margin achieved is
very low. The KYBOR is currently at 12%, the discount rate which isn’t good for the business,
as investors would prefer investing in banks as opposed to the oil market stocks. BILL OF LEADING
A bill of leading is the most important document in the shipping world. It’s similar to a
purchase order used in different firms. It’s a title document or a transfer document which
authorizes that the whole cargo is owned by the consignee of that bill of leading – the one who
signs it. Who is the consigner, whose product it was, is the owner of the letter of credit, the most
important document in the bill of leading
STORAGE OF INVENTORY In 2010, Hascol had a storage infrastructure of zero but after developments, their storage
structure has the capacity of 500000 tonnes right now. Hascol is the second largest storage
company, which is why they’re the second largest oil market company. Hascol developed its
storage at all the critical locations of Pakistan. Hascol currently has storage facilities in Kemari,
Daulatpur (near Dadu), Shikarpur, Lahore, Sahiwal, Peshawar and many more. Hascol’s storage
locations are widespread in Pakistan. Storage is the major advantage that Hascol has along with
the hedging facility that it follows for purchasing oil.
INLAND FREIGHT EQUALIZATION MARGIN (IFEM)
There is a phenomenon in the oil industry called Inland Freight Equalization Margin
(IFEM), which is regulated by the government. It takes the average freight cost of the whole
country and charges according to the city and cost incurred there. This law has a lot of loopholes
and is taken advantage of. A person already having storage in different cities can get a benefit
out this IFEM phenomenon. The government will only allow a company with a storage unit in a
certain to city to move its product to that city and it will also reimburse all the cost related to the
movement of the product till the city with the storage. This would also result in cheaper prices for customers, as there’s some reimbursement given by the government. However, if a firm does
not have storage, it won’t get any benefit related to costs.
PRICING It would not be wrong to say that Hascol is one of the few companies in Pakistan right
now who understand the PSO pricing mechanism to such a great extent. The reason for their
current position in the market is based on the ability of Hascol to hedge their purchases - which
means that they can hedge their costing. For instance, if Hascol has a view that the oil prices are
going to increase to $100, so Hascol will buy at a lower, fixed price today for its future inventory
needs as opposed to buying oil for $100 in the future. Similarly, if Hascol predicts that oil prices
are likely to go down from $70 to $40, then it will sell off its stock today in order to avoid any
losses in the future.
Hascol can buy a put option, which will allow it the right to sell at a certain date at a
strike price. The immediate competition of Hascol is PSO and being a government entity, it
cannot use this facility that Hascol uses to hedge its purchases and sales. When Hascol does this,
there is a risk that an individual is taking based on predictions but no one in the government
department can do that. They have a transparent system that they follow for their oil prices and
purchasing as.
Similar is the case for Hascol’s non-government owned competitors such as Shell and
Attock. Shell cannot avail the facility Hascol does as it has to comply with the rules of Shell
International, giving Hascol the edge. Attock on the other hand, has been doing very well and the
only advantage it has compared to Hascol is that it has two refineries in Pakistan. Due to these
two refineries, Attock has basically hedged themselves because they can do transfer pricing to get and advantage. They can ask their refineries to give them discounts and show profits in their own books. Similarly, the refinery can do the same, to show higher profits they can buy at a higher price from them. It’s their own business decision; Hascol cannot compare itself to Attock as they have their own business advantage over most of it. However, their volumes are less than
Hascol’s because they are not into importing.
RISKS OF IMPORTING FOR HASCOL
The biggest risk that importers like Hascol have revolves around the foreign exchange.
Last year in 2018, there was a loss of around Rs 3.8 billion just because of a fluctuating foreign exchange from 105 to 140.
SELLING PRICE
In Pakistan, locally for the oil industry, pricing and costing is regulated. The government caps the price by telling the maximum price and Petroleum firms have to maneuver and manage their purchases accordingly. The government caps the price on things which are a human need.
Petrol is just like wheat which you need, it’s just like cotton which is a basic necessity of a human being. So, that is why the government regulates it for the sake of the masses.
HOW DOES THE GOVERNMENT COMPUTE THE PRICE OF PETROL?
Pakistan purchases oil from an international market. There are proper exchanges, there are publications, a magazine called “Platts” which publishes and analyzes and quotes the oil prices and everyone in the world has to follow them. The pricing analysis is basically based on
Demand and Supply. PSO or Pakistan State Oil is the largest oil company in Pakistan. It’s the only government owned entity. So if Hascol, Shell, Attock, Total or any other non-government owned petroleum firm buys anything, the government cannot approve its authenticity, it’s not transparent. But since PSO is government owned, it can regulate prices for it, following PPRA rules. Like, for example if PSO wants to buy petrol or diesel they have to tender that. After the tender is approved, the petrol price is the average import price of PSO that is what the government sets the price of the country’s petroleum.
TENDERING PROCESS
The tender should be an open tender, and any individual can witness that tender openly as it’s an open bidding process. It’s a very transparent process held by the auditor general of
Pakistan and anybody can witness this process. How this happens is that they give an advertisement in a newspaper or on their website that they need oil for a specific month like for example, April. They do that in February in their house, during mid of March; they will open a tender for the April procurement. All the suppliers/national oil companies can come in on the
15th of March and state the price whatever they can offer for April. So whoever quotes the best price – the most competitive price – gets the cargos and for this very reason the price of PSO is only taken into account while calculating the price of oil.
WHAT ACTIONS DOES HASCOL TAKE AFTER FIGURING OUT THE
GOVERNMENT’S CAPPED PRICE?
Hascol has to compete with PSO pricing. If Hascol brings any cargo below the PSO price it would be beneficial for it and it will make money out of it. If Hascol brings any cargo above the PSO price, Hascol is going to lose money there. Hascol should keep the prices as close to PSO pricing as possible.
As mentioned about the Tender, what Hascol does is that it starts procuring when PSO cargo starts pricing. Once the current formula of PSO cargo pricing is known, which is the average of these 5 days Platts quotations.
S&P GLOBAL PLATTS INSIGHT MAGAZINE
S&P Global Platts is a provider of energy and commodities information and a source of benchmark price assessments in the physical energy markets. Platts publishes oil prices in the world. It’s the largest oil magazine and buyers, sellers, news reporters, brokers, backers, everybody follow plats. It’s just not the published prices of crude oil, diesel or furnace it publishes prices of LPG, LNG, everything. The nearest office they have is in Singapore and they publish prices from Singapore every single day except for weekends and public holidays.
PPRA – PAKISTAN PROCUREMENT REGULATORY AUTHORITY
PPRA has certain guidelines set which all the government entities have to follow. PSO follows the guidelines stated by PPRA.
CLOSE EYE ON PSO’S MOVES
Hascol always has a very close eye on PSO’s moves. If PSO is quoting 200,000 tonnes of a cargo, Hascol on the other hand has to import 100,000 tons. So if PSO buys 2 tonnes, upon every 2 tons of PSO, Hascol has to buy 1 ton.
Hascol starts the tracking of PSO vessels arrivals at boarding ports and discharge ports. It starts tracking PSO vessels on marine traffic. Hascol starts tracking their tenders, when is tender being booked, when is tender growing, who is booking it and at what rate. Accordingly, Hascol
starts purchasing, based on those figures.
HOW IS THIS DONE?
Hascol uses an application called “marine traffic”. Through this application, it is easy to
track where the vessels are right now. This application is specifically for ships around the world.
Through this application, Hascol is able to track any PSO vessels which have departed or are on
the way to Pakistan. Hascol then purchases its own vessels, 2 days before the bill of leading of
PSO ends. In this way, it is able to have very close competition with PSO.
.
OVERHEADS & LABOR
At the moment, Hascol is using an actualized costing basis. Hascol has an ERP called JD
Edwards. It has almost 6-7 business units - main companies that are business units. Hascol
allocates specific costs to the specific companies. A few of the costs of Hascol cannot be
allocated to any specific business unit or company. For example, Hascol has a company for
retail, lubricants and a corporate overhead company which has its CEO as its admin cost.
Hascol’s CEO cost cannot be allocated to any specific revenue unit, so it has to be
allocated based on his timing; how much time he gives to different units such as the retail or
supply chain business so it can be allocated to each company or business unit accordingly,
whatever the percentage comes out to be. Similar is the case for the supply chain department. Since it is not a revenue generating department thus its costs need to be allocated to the revenue generating departments such as retail, commercial sales, chemical sales, lubricant sales or LPG sales. Similarly, the job of workers under this department requires them to cater to all the departments and then their labor costs are allocated to different business units accordingly. This could be on a weekly, fortnight, monthly or yearly basis.
This is how the actualized standard costing works. Costs are allocated based on a timesheet. Senior-level employee’s costs are based on how much time they spend in a department. Petrol companies get the finished goods from the oil refineries and deliver it to the consumers. They don’t add value in the diesel or petrol, they simply supply to the end consumer.
The pricing in an oil marketing company is completely different as opposed to a manufacturing concern. They don’t have any labor costs for skilled or unskilled labor. PPENDIX A
QUESTIONNAIRE FOR INTERVIEW
MATERIALS COSTING
1. Do you follow process or job/order costing procedures?
2. What are the different types of raw materials used by Hascol?
3. How do you decide the quantity of the raw material? e.g do you follow J.I.T (just in time)
practices for ordering raw material
VALUATION OF INVENTORY
4. How do you value your COGS and closing inventory?
5. How do you place a purchase order?
6. How do you record the purchase in your books?
7. Different storage for the raw materials?
8. How do you record obsolete or damaged inventory items?
9. What are your ordering and holding costs for raw material?
LABOR
10. What are the different types of labor employed by Hascol? E.g. skilled/unskilled, or
direct/indirect?
11. Are the wages fixed or variable or mixed costs? 12. Any other benefits in terms of pay which Hascol offers to its employees?
13. How do you record labor hours? (Biometric, time sheets?)
14. No. of workers employed by Hascol as of today?
OVERHEADS
15. What are the different expenses which are classified by Hascol as overheads?
16. Which of the above expenses are fixed or variable
17. How do you allocate the Overhead costs to the product costs?
18. How do you treat over/under absorption?
SELLING PRICE
19. How do you derive the selling price of your product? What is the pricing model?
FINISHED GOODS
20. How do you record the movement of Finished Goods from the production floor to the finished goods inventory?
21. How do you record COGS? TRANSCRIPTION OF INTERVIEW
Interviewer: So basically we have a term project for our course and we need to ask you some questions based on your processes and the costs regarding them. So, what costing procedure do you follow?
Interviewee: Actually at the moment we are following the actualized costing procedures so let me just give you a brief introduction of what does this mean and how does it work. Let me also give you a brief overview of our industry and how many refineries we have and how do we import. So let’s just discuss Pakistan first. Pakistan, at the moment, only has 20% of its oil requirement that is getting fulfilled. So whatever oil that is being taken from Pakistan, 20% we can consume and the rest of the 80% demand is met through the imports. So Pakistan is an import driven market. At the moment, we have 5 refineries in Pakistan. 3 in South, 1 in mid country and the other one in the Northern areas. So the Southern refineries are BYCO, PARCO and PR. The mid countries refineries are PARCO which is the largest refinery in Pakistan. Then the fifth one is Attock refinery. So these 5 refineries at the moment are catering that 20%. They import crude oil as well, then they refine indigenous crude oil as well – all the oil that we have taken and get out from Pakistan. The rest 80% is managed through the imports and from two ports that are in Pakistan and in Karachi. These are Kemari port and Karachi port. There is another port for oil handling that is BYCO. So locally for this oil industry, our pricing and costing is regulated. So the government caps the price by telling us the maximum price and we have to maneuver and manage our purchases accordingly. Our purchase is the balancing figure, so if government tells us that you have to sell anything at a price, like the maximum cap price is
100 Rs. You must have seen, if you go to the retail outlets – the petrol pumps – there is a fixed price. There is not much differences if you notice. So the pricing in Pakistan, the government caps the price on things which are a human need. Petrol is just like wheat which you need, it’s just like cotton which is a basic necessity of a human being. So, that is why the government regulates it for the sake of the masses. So now the question is, how does the government compute the price? You must have seen, yesterday our finance minister resigned and one of the few reasons that was given for this was the increasing oil prices. But, it’s beyond anyone’s control. It’s an international market from which Pakistan buys oil. There are exchanges, there are publications, a magazine, which publishes and analyzes and quotes the oil prices and everyone in the world has to follow them. So how do they manage their things – their pricing their analysis?
It’s basically based on purely Demand and Supply. You must have heard that OPEC has put cuts on its oil production, Saudi Arab is cutting its oil production, USA is increasing its oil production. So, it’s a pure economics thing about Demand and Supply. So, in Pakistan, how does the local pricing work? There’s something called PSO, it’s the largest oil company in Pakistan.
It’s the only government owned entity. So if Hascol buys anything or if Shell buys or if TOTAL buys anything, government cannot approve its authenticity. It’s not authentic, it’s not transparent.
So the government cannot go and ask Hascol from whom do you buy? At which price you bought? But it can always go to PSO. And PSO being a regulated and a government owned entity; they need to follow the PPRA rules. That is Pakistan Procurement Regulatory authority.
What does PPRA do? PPRA has a few guidelines for which all the government entities have to follow. Like, for example if PSO wants to buy petrol or diesel they have to tender that and that tender should be an open tender, and any individual can witness that tender openly and it’s an open bidding process. It’s very transparent process by the auditor general of Pakistan and anybody can witness this process. So, what happens is that they give an advertisement in a newspaper or on their website that they need oil for April. They do that in February in their house, during mid of March we’ll open a tender for the April procurement. All the suppliers, national oil companies can come in on say 15th March and tell us the price whatever they can offer for April. So whoever quotes the best price – the most competitive price – gets the cargos and for this very reason the price of PSO is only taken into account while calculating the price of oil.
Interviewer: Alright, so they basically fix the price?
Interviewee: Exactly, it’s the average import price of PSO that is what the government sets the price of the country’s petroleum. So what do we do, being Hascol? What we have to do, we have to compete with PSO pricing. If we bring any cargo below the PSO price it would be beneficial for us and we’ll make money out of it. If we bring any cargo above the PSO price, we are going to lose money there. So what should we being Hascol or finance guy do? We should guide the company to keep the prices as close to PSO pricing as possible. As I told you about the tender, what we do is, when the vessels start coming in. For example if PSO tendered for 4 cargos in
April so the first cargo price would be 25% of the price for the month of May, the second cargo price would be another 25% of the price gets finalized and 50% of the pricing for May is finalized. So when all the oil cargo comes in and they are finalized and the pricing is finalized so that becomes the price of the subsequent rates. What Hascol, what a supplier, what we do is that we start procuring when PSO cargo starts pricing. Once the current formula of PSO cargo pricing is known, there is a term called bill of leading. Do you know what is bill of leading? Have you heard of the document called bill of leading?
Interviewer: No, could you please explain. Interviewee: It’s the most important document in the shipping world – bill of leading. It’s a title document/transfer document which authorizes that the whole cargo is owned by the consignee of that bill of leading – the one who signs it. Who is the consigner whose product it was is he owns the letter of credit, the most important document in the bill of leading. How does the pricing of
Petroleum work, usually it is the 80% of the practice industry. The norm which I have seen for the last 6-7 years. There is a magazine called Plats. Plats publishes oil prices in the world, it’s the largest oil magazine and buyers, sellers, news reporters, brokers, backers, everybody follow plats. So plats publishes prices of oil everyday. It’s just not the published prices of crude, diesel or furnace it publishes prices of LPG, LNG, everything they have. The nearest office they have is in Singapore and they publish prices from Singapore and they publish prices everyday except for weekends and like today they didn’t publish price because of Good Friday. Coming back to bill of leading, how does PSO cargo’s price? There is international prices which Plats analyze everyday and they publish it. And the bill of leading date, for example if BL is of 2nd so what would be the price of that specific cargo. If the BL is of 2nd March, the pricing would be around
5 days of Bill of leading. How does that work? 5 days means, if I’m talking about March, it means 28th, 1st, 2nd, 3rd and 4th of March. So the average of these 5 days Plats quotations would be the average price of that cargo. So what does Hascol do accordingly? If PSO is quoting
200,000 tonnes of a cargo, Hascol on the other hand has to import 100,000 tons. So if PSO buys
2 tonnes, upon every 2 tons of PSO we have to buy 1 ton. We start tracking PSO vessels arrivals at boarding ports, discharge ports. We start tracking PSO vessels on marine traffic. We start tracking their tenders, when is tender being booked, when is tender growing, who is booking it and at what rate. And we start purchasing, we start buying our own based on those figures. So let me just demonstrate to you how do we do that. We have a couple of applications with us, like this is an application called “marine traffic” (shows application). So it shows where the vessels are right now. All the vessels, it’s specifically for ships around the world. If you see fojera there’s so many ships standing in fajera. We can see which PSO vessel is standing where. This is a PSO vessel (points towards application). If I open that, I can see that it already came to Karachi and it went back to where it came from. So similarly there are many vessels, if I show you a current vessel that must be on the berth right now in Karachi. This is a vessel right now on berth.
It states that it came from fajera, it’s in port qasim right now. When did it arrive? 9th April. And what is the current position of this vessel, it says it’s just outside but it’s not very updated because it says that the last update was made 5 days and 22 hours ago.
Interviewer: But it gives you an idea
Interviewee: It gives an idea and if I’ve subscribed to this application, it gives a satellite view as well. But it’s quite expensive so I can manage with this right now. So that’s the first thing we should have. It’s not very straight forward or simple as it seems because, it includes too many assumptions as well. Because, if pricing is around 5 days around of Bill of Leading, I should have an idea when it will deal. If it’s sitting today, I need to start buying 2 days before the bill of leading date.
Interviewer: Right.
Interviewer: We wanted to ask a bit about the cost: What are your over head costs and how do you manage them?
Interviewee: At the moment we are using actual costing basis, we have an erp card called JD
Edwards. It has almost 6-7 business units, main companies that are business units. We allocate specific cost to specific company for example we have a company for retail, lubricants, a corporate overhead company which has our CEO that is our admin cost. For our CEO cost we cannot allocate that to any specific revenue unit so it has to be allocated for example based on his timing; how much time he gives to different units such as the retail or supply chain business so we need to allocate that accordingly, 30%, or whatever the percentage comes out to be.
Similarly, my department is supple chain department, we are not a revenue generating department thus our costs need to be allocated to the revenue generating departments such as retail, commercial sales, chemical sales, lubricant sales or LPG sales. For instance, my job requires me to look after all the departments just mentioned, procuring diesel or oil, so if they need to allocate my cost they’ll have to break up my cost and divide it according to the time I give to each revenue generating department. This could be weekly, on a fortnight basis, monthly basis or yearly basis.
Basically this is the actual costing basis, our costs are allocated based on a timesheet. Senior- level employee’s costs are based on how much time they spend in a department.
Its not straight forward like the accounting that we study used to study in school. We are like a post office, more like a service company. We get the finished goods from the oil refineries and deliver it to the consumers. We don’t add value in the diesel or petrol. We supply to the end consumer. The pricing in an oild marketing company is completely different as opposed to a manufacturing concern. We don’t have any labor costs for skilled or unskilled labor.
Interviewer: Are you supposed to hold any sort of inventory?
Interviewee: We are supposed to hold 20-day stock, it’s a government regulatory requirement.
We need to consider the strategic stock levels as you saw that recently we had a war like situation between India and Pakistan, we would have needed abundance of fuel in order to keep our vehicles and machines running. How would our tanks or jeeps work? So the backbone of an economy is its energy sources and their efficient management is extremely important. We are supposed to have strategic stocks. We are supposed to have tanks which are supposed to be filled at a certain level. We carry inventory and simultaneously it has a very high cost to it because if I talk to you about the oil industry, it’s a very highly liquid industry. The diesel price right now is
Rs.115, our margin out of that is only Rs.2.60 so when we take of the profit percentage it comes out to be very low. The KYBOR is at 12%, the discount rate which isn’t good for the business, as investors would prefer investing in banks as opposed to the oil market stocks.
Interviewer: What benefits does Hascol offer to its employees and whats the procedure of deciding salaries/wages for workers?
Interviewee: We have a very professional performance appraisal system. Our head of HR, Mr.
Saad Shah Hussain, is a very veteran seasoned player of HR. He’s the one who has developed all these systems, our appraisal system works on a half yearly basis. And employee is supposed to submit his work performance to his immediate supervisor every 6 months and we get increments every year. It’s a performance based increment system that has 4 categories, for example number one being excellent, next very good, then good and then the least favorable one is under performing. Everybody is compensated according to their performance which is submitted by their immediate departmental head. Everybody, including the ones underperforming get the basic wage, inflation rate included. Bonuses are also given to employees based on their performance and semiannual evaluations, for example an employee under the excellent category would be given a bonus worth of 2-3 salaries combined. Similarly, we have provident fund, half of which is contributed by the company and half of it by the employee’s salaries. We have a gratuity scheme, where a worker is entitled the gratuity after 5 years of service so you’re being compensated based on the number of years you work. There is a formula through which we can calculate the amount for example, if someone has worked for 10 years and is leaving the company, the gratuity amount would be 10year multiplied by the last salary drawn.
We also provide health benefits; a health card is provided that gives employees access to numerous hospitals. Me and my immediate family’s medical expenses are also covered.
We have a car policy which states that if the employee is in a specific level of the workforce or hierarchy, they get a car. If a person is in the sales department and a lot of intercity or within city travelling is under their job description, then they are provided with the mean to do so. Similarly, when it comes to fuel the percentage of fuel for a sales guy is greater in comparison to someone who sits in the office all day.
We also provide life insurances, its based on job groups. For example, our CEO, CFO are in job group 1, General Managers are in job group 2, DGMs are in job group 3 and so on. So basically your life insurance policy depends on which job group you belong to. In hypothetical figures, if you’re in job group 1 and God forbid some accident takes place you’ll get a sum of 80 salaries as insurance whereas if you’re in job group 2, you’ll get 65 salaries combined. There’s an extremely comprehensive compensation system in Hascol in regards to benefits given to its employees.
Interviewer: Could you please tell me about your immediate competitors and how your pricing is different from theirs? How’s Hascol’s profitability?
Interviewee: Coming back again to it, it would not be wrong to say that we are one of the few companies in Pakistan right now who understand the PSO pricing mechanism to this extent. The reason for our achievement is based on the facility to hedge our purchases, that means we can hedge our costing. For instance, if I have a view that the oil prices are going to increase to $100 so I will buy at a lower, fixed price today for my future inventory as opposed to buying oil for
$100 in the future. Similarly, if I predict that oil prices are likely to go down from $70 to $40, then I will sell today in order to avoid any losses in the future. I can buy a put option, that’ll give me a right to sell at a certain date at a strike price. Our immediate competition is PSO and being a government entity, it can not use the facility that we have to hedge our purchases and sales.
When we do this, there is a risk that an individual is taking based on predictions but no one in the government department can do that. They have a transparent system that they follow for their oil prices and purchasing as I’ve mentioned at the start.
Our second competitor is Shell, they also can not avail the facility we have as they need to comply with the rules of Shell International, giving us the edge. Our third competition is Attock, it has been doing very well and the only advantage it has compared to Hascol is that it has two refineries in Pakistan. Attock has two refineries in Pakistan and they have basically hedged themselves because they can do transfer pricing to get and advantage. They can ask their refineries to give them discounts and show profits in their own books. Similarly, the refinery can do the same, to show higher profits they can buy at a higher price from them. Its their own business decision, we cannot compare ourselves to Attock as they have their own business advantage over most. However, their volumes are less than ours because they are not into importing.
The biggest risk that importers like us have revolves around the foreign exchange. Last year in
2018, there was a loss of around Rs 3.8 billion just because of a fluctuating foreign exchange from 105 to 140. Interviewer: What about right now? How are the rates and how is Hascol coping with the new changes?
Interviewee: They are a bit stable, but upon recent news related to IMF there’s a possibility that the exchange rate may go up as high as 150. This will result in people opting for lesser imports and focus more on local manufacturers. All imported luxurious items have high taxes and duties levied which is likely to decrease their demand and stop importing it.
Interviewer: So as you’ve said, you store about a 20-day stock for your inventory. Could you please tell me as to where you store your inventory?
Interviewee: A little background to it, in 2010 when I joined Hascol our sales were around
Rs10bn to Rs11bn, now our sales are Rs 280 bn. Our market share was less than 1% at the time whereas PSO had a 70% market share. However, now we are the second largest company after
PSO and the largest oil company in the private sector. What was our critical success factor during the last 8-9 years? Firstly, the vision of our CEO enabled us to even begin to prosper and transformed our company. He transformed our company from a 12th ranking company to the 2nd ranking company. What helped us further was the storage spaces that we built. In 2010, our storage infrastructure was zero but after developments our storage structure has the capacity of
500000 tonnes right now. We are the second largest storage company that’s why we’re the second largest oil market company. We developed our storage at all the critical locations of
Pakistan for example, in kemari, Daulatpur that’s near Dadu, Shikarpur, Lahore, Sehiwal,
Peshawar and many more. Our storage locations are widespread in Pakistan.
There is a phenomenon in the oil industry called Inland Freight Equalization Margin (IFEM), which is regulated by the government. It takes the average freight cost of the whole country and charges according to the city and cost incurred there. This law has a lot of loopholes and is taken
advantage of. A person already having storage in different cities can get a benefit out this IFEM
phenomenon. The government will only allow a company with a storage unit in a certain to city
to move its product to that city and it will also reimburse all the cost related to the movement of
the product till the city with the storage. This would also result in cheaper prices for customers,
as there’s some reimbursement given by the government. If we don’t have storage, we won’t get
any benefit related to costs. Storage is the major advantage that we have along with the hedging
facility that we use for purchasing oil.
BUSINESS CARD OF INTERVIEWEE
Name of Interviewee: Hassan Nadeem Jan
Position: Unit Head – Supply Chain of Hascol Petroleum Ltd.