Crisis Fallout: Shell Pakistan Bows Out of Troubled Market
In a significant blow to Pakistan’s already struggling economy, Dutch oil marketing company Shell Pakistan has announced its intention to exit the country. This decision sends a negative message to potential long-term investors, casting doubt on the stability of the country’s economic landscape.
Shell Pakistan notified the Pakistan Stock Exchange (PSX) on Wednesday about the intent of its immediate parent company, Shell Petroleum Company Limited (SPCo), to sell its shareholding in Shell Pakistan Limited (SPL). The sale is subject to a targeted sales process, regulatory approvals, and the execution of binding documentation.
While the company did not provide a specific reason for this decision, its latest financial report reveals the widening macroeconomic crisis and mismanagement of policymakers as contributing factors that led the firm into troubled waters and impacted its business in the country.
Although SPL’s current business operations remain unaffected by the announcement, the company reported a net loss of Rs4.76 billion in the quarter ending on March 31, 2023. The quarterly financial report cited the unprecedented devaluation of the rupee, rising inflation, and macroeconomic uncertainty as significant factors that contributed to the company’s struggles in Pakistan.
Interestingly, the news had a positive effect on the company’s share price at the PSX, with a 7.5% increase, reaching a three-month high of Rs89.17 per share with 4.38 million shares at the bourse. However, this increase may not reflect the true value of the company, considering the overall downward trend of the PSX in recent years.
Samiullah Tariq, Head of Research at Pak-Kuwait Investment Company, highlighted several factors affecting the sales volumes of regulated entities like Shell Pakistan. These factors include currency devaluation, stagflation, and the sale of smuggled petroleum products in local markets. Additionally, the unannounced ban on repatriating profits to headquarters has impacted many multinational companies (MNCs) operating in Pakistan due to the country’s acute shortage of foreign exchange reserves. Shell Pakistan may be one such MNC facing difficulties in sending profits to its headquarters.
Tariq mentioned that Shell Pakistan had been working towards deregulating petroleum product prices to improve competitiveness and profit margins. However, the regulated margins of Rs6 per litre proved unfavorable for the company. This decision to exit is not exclusive to Pakistan, as the Dutch firm has been withdrawing from financially unviable markets worldwide.
As of May 2023, Shell Pakistan holds a 7% market share in volumetric sales nationwide and maintains a strong lubricants business. However, sales data shows a decline of 40% to 1.30 million tonnes in petroleum product sales in May 2023 compared to the same month last year. Cumulatively, sales dropped by 26% to 15.26 million tonnes in the first 11 months of the outgoing fiscal year compared to 20.62 million tonnes in the previous year.
The sharp increase in petroleum product prices, resulting from the withdrawal of subsidies and the imposition of a Rs50 per litre petroleum development levy, has severely impacted purchasing power and contributed to reduced sales for all oil marketing companies in Pakistan.
The Pakistani government recently projected a deceleration in economic growth to 0.3% for the outgoing fiscal year 2023, compared to 6.1% in the previous fiscal year. This downturn is the consequence of operating a controlled economy with critically low foreign exchange reserves and a high risk of default on foreign debt repayments.
Foreign direct investment (FDI) has also declined by 23% to $1.17 billion in the first 10 months of FY23, compared to $1.52 billion last year, further highlighting the challenges faced by the country.
