Pakistan National Oil Refinery Limited – Managerial Policy Report
OIL REFINING INDUSTRY AT A GLANCE
Pakistan has four oil refineries and a topping plant at Dhodak. The two costal refineries, NRL and Pakistan Refinery Limited (PRL) have 64,000 bbl/d and 50,000 bbl/d production capacity respectively. Both the refineries collectively processed about 5.3 million tones a year of a blend of imported and local crude oils. Attock Refinery Limited (ARL) situated at Rawalpindi, has a capacity of 34,000 bbl/d can process about 1.2 million tones of local crude from the Northern region. ARL is wholly dependent on indigenous crude oil production and does not import oil in order to meet its production requirements. Pak-Arab Refinery Complex (PARCO) the new refinery, commenced production in September 2000, has a capacity to produce 100,000 bbl/d. Over the last decade oil / petroleum consumption grew at an average annual rate of 7.1 percent in the first half of the 1990s but slowed to an average of 5.1 percent in the second half of the 1990s. Pakistan’s consumption of refined petroleum products is nearly two and a half times the country’s domestic refining capacity . (A detailed chart of the consumption of Petroleum products is attached in the appendices, page 21.)
Pakistan is in a midst of a fairly critical phase of development. Economic sanctions in consequence to nuclear detonation have put severe constraints in the economy. In this backdrop, the steep slide in oil prices, probably the lowest in last 15 years, and recent abrupt roaring accession has led to the biggest ever disorder and instability in the refining industry in the world over. Pakistan is a developing economy that cannot keep itself insulated from the effects if these happenings. The financial destiny of refineries in Pakistan is linked with international crude oil and product pricing and therefore, starting from mid of 1995 the global/regional pricing and supply/demand influences started to act unfavorably on refinery economics . With little flexibility to vary the throughput levels, refineries in Pakistan survived in essence, from heavy subsidy from the government. Along with this milieu of unhealthy macroeconomic situation the refining industry is faced with an introduction of newer generation technologies, globalization and deregulated market concept, which poses a challenge for refineries in Pakistan.
NATIONAL REFINERY LIMITED
National Refinery Limited (NRL) was incorporated on August 19, 1963 as a public limited company and is engaged in the production and sale of petroleum products. The refinery complex of the company comprises three refineries: two lube refineries, commissioned in 1966 and 1985, and a fuel refinery added in the complex in 1977. The majority of the company’s revenue is generated locally, with export sales accounting for only 3% of fiscal 1999 revenues. Fuel accounted for 67% of fiscal 1999 revenues and lube 33%. In the Lube Oil production, National Refinery has a monopoly since these two refineries are the only ones of their kind in Pakistan. Besides, NRL also has a BTX (Benzene, Toluene and Xylene) unit with a designed capacity of 25,000 tones per annum, which was commissioned in 1979 as a result of the company’s ambitious efforts to establish Pakistan in the field of petrochemicals. The BTX Unit has not been under production for almost one and a half year, because of water shortages and also because of poor margins on the sale of the BTX related products . (Details of the capacities of the refineries and a list of NRL’s range of products are in Appendices, page 2.)
[Source NRL Website]
NRL – THE MANAGEMENT
National Refinery Limited is divided in two main divisions that are :
- Technical Division II. Marketing, Finance and Administration Division (MFA)
Two Deputy Managing Directors (DMDs) respectively head these divisions. There are a total of eight sub-divisions with each of the DMDs having four under their control. The DMDs report directly to the Managing Director (MD) who reports to the Chairman and the Board of Directors. (A detailed organogram is included in the appendices.)
The DMD Technical Division has the General Managers of the following sub-divisions reporting to him. These sub-divisions are:
- Operations: This is the core functional area of the company and includes:
- First Lube Refinery 2. Fuel Refinery 3. Second Lube Refinery
- Oil Movement & Utilities (OMU): The division has four departments:
- Supply 2. Oil Movement 3. Utilities 4. Kemari Terminal
- Maintenance and Engineering (M & E): has five departments under it:
- Power and Electric Terminal 2. Maintenance I – (Refineries & Workshop)
- Maintenance II- (Instrumentation, Electrical & Keamari Terminal)
- Maintenance III – (OMU, Boilers, Keamari Terminal Pipeline) 5. Projects
- Technical: Four departments come under the Technical Division. These are:
- Technical Services 2. Inspection 3. Energy 4. Quality Control (Laboratory)
MARKETING, FINANCE AND ADMINISTRATION DIVISION (MFA):
The DMD MFA has four General Managers reporting to him who head the following sub-divisions:
- Procurement: The procurement division has four departments under it.
- Warehouse 2. Imports 3. Local Purchase 4. Contract Services Department
- Marketing: The Marketing Division has two departments:
- Fuel Products Department 2. Lube and Asphalt Department
- Finance and Accounting: This division has four departments under its control:
- Accounts Department 2. Finance and Planning Department
- Corporate Affairs Department 4. Computer Unit, which includes a small MIS department that was set up a year ago.
- Personnel and Administration (P & A): The five departments under P & A are:
- C S O (Chief Security Officer) 2. C M O (Chief Medical Officer)
- Industrial Relations 4. Personnel and Administration (P & A)
- Training Department (also reports directly to the DMD Technical Division)
Each of the department at NRL is headed by Managers who report to the General Managers of their respective divisions. The functional structure of NRL groups activities by business functions as is apparent by its breakup of divisions. This allows for specialization of labor, encourages efficiency in their respective areas and at the same time is simple. However, the wide span of control along with many layers in the hierarchy has led to poor coordination and integration of the units, which is evident in the company’s poor strategic management process. Due to external government influence, decisions are taken by the top level of management with very little or no involvement of functional managers. The management has stifled creativity and initiative due to lack of participation from lower levels of management in decision-making process. Hence, the existing authoritarian organizational structure of NRL restraints strategy changes to some extent. There has been over the years resistance to change as far as induction of computer technology is concerned; a situation that has now been further aggravated by budgetary constraints .
EXTERNAL ENVIRONMENTAL ANALYSIS
Pakistan is in a midst of a fairly critical phase of development. Economic sanctions in consequence to nuclear detonation have put severe constraints in the economy. In this backdrop, the steep slide in oil prices, probably the lowest in last 15 years, and recent abrupt roaring accession has led to the biggest ever disorder and instability in the refining industry in the world over. Pakistan is a developing economy that cannot keep itself insulated from the effects if these happenings.
The foreign exchange reserve position has deteriorated over the past few years. Due to the lack of forex reserves and the uncertainty of economic deals with the IMF and World Bank, oil sector has to import raw materials at the composite rate which is higher than the official rate at which the companies in this sector have been importing over the past few years .
Government, Political and Legal:
Effective July 01, 1992, the government introduced an Import Parity Formula under which product prices had been fixed, restricting the profitability of the Fuel Refinery in the range of 10% to 40% (including other income) on the paid-up capital with no such restriction in respect of the Lube Refinery. The restriction on rate of return from refining operations has proved a major bottleneck in the growth of the refineries. The Ministry of Finance has exempted import and sale of furnace oil from central excise duty . The GoP exercises strict control over fuel prices, ranging from crude oil to the refined petroleum products, due to the essential nature of the product. Exempt from this price mechanism are lubricants, petrochemicals and aviation fuel. Regulation of oil sector is principally through the Ministry of Petroleum and Natural Resources (MPNR), although an independent and autonomous “Petroleum Regulatory Board” will be formed in the near future. Petroleum Exploration and Production Rules, and the provisions of the Petroleum Policy govern the upstream activities. The government through a pricing system governs ex-refinery prices and allocations with parity to border prices. Similarly, the government from time to time notifies end-consumer oil prices, keeping into account their parity with international prices. All major investment decisions in the petroleum sector are subject to scrutiny and approval of MPNR.
SOCIAL, CULTURAL, DEMOGRAPHIC, AND ENVIRONMENTAL FORCES:
Due to the rapid urbanization, there has been an increase in the demand of commercial vehicles, which is also driven from lease car financing. The social and cultural issues also have an impact on the oil sector. NRL has a policy not to sell their products to unregistered buyers. They are socially responsive and believe that with a little adulteration, the oil base products can be exploited and used for unethical means. The industry does not contribute much to environmental pollution. The waste of the Fuel Refineries is Furnace oil, which then becomes the input of the Lube Refineries. The final products of the Lube Refinery are Asphalt, which again is sold, thus creating absolutely no waste in the process. The gas emissions coming out during this process are also controlled and are not contributing to the pollution of the environment.
The need for automation is evident from the fact that PRL has already undergone a massive expenditure and installed the System Analysis Programme (SAP I) to support the managers in planning and forecasting, while ARL is also in the phase of implementing it. NRL on the other hand has thought about implementing it because its competitors are doing it, but a lot of paper work is required before its implementation and the local view is that it might never be implemented. This stems from the fact that NRL’s top management is not willing to have computers for networking because they are computer illiterate. Also the company has liquidity problems, highlight that the company cannot undergo such a massive expenditure.
Bargaining Power of Suppliers:
An analysis of the procurement indicates that in the case of proprietary items that are branded spares parts and chemicals; suppliers enjoy a degree of bargaining power. The company can take no measure to guard against this predicament except to negotiate and depend on its past relationship with them that have been exceptional over the years. However, in the case of non-proprietary items there is an absence of bargaining power on the part of suppliers as it is done through quotations, which gives NRL the freedom to opt for the lowest bidder.
Bargaining Power of Buyers:
Since the refining industry is regulated, the Oil Marketing Companies (OMCs) do not enjoy any bargaining power since they are registered with the government to buy crude oil from NRL at predetermined prices set by the government. In the case of deregulated Lube Based Oils, NRL enjoys a strong position since it can dictate prices due to its sole presence in the industry as Lube Based Oils producer.
Potential Entry of New Competitors:
Due to phenomenal amount of initial investments, the new firms cannot easily enter the market because of the difficulty to gain economies of scale quickly, lack of experience, government regulatory policies, tariffs and quotas and counterattack by the existing companies.
Development of Substitute Products:
The recent emphasis by the government to switch over from Fuel to Compressed Natural Gas (CNG) has very little importance for NRL. The reason being that NRLs 85% of sales come from the Lube Based Oils and therefore, any substitute for Fuel is not a major threat.
Rivalry Among Competing Firms:
There is very insignificant rivalry as NRL enjoys a monopolistic situation in the Lube Base Oils. However, with the advent of PARCO in the industry, which will also be producing Lube Base Oils from January 2001, the competition will thrive.
VALUE CHAIN ANALYSIS
- OPERATIONS DIVISION:
The Operations Division is an important area in the overall functioning of the Technical Division. The division is basically responsible for the following key activities:
i). Refining of crude oil ii). Storage of crude oil iii). Storage of inventory including intermediate and finished products
iv). Supporting excise, shipping and billing activities v). Coordinating import and export activities with other departments
The Operations department is responsible for the refining processes taking place at the following three refineries:
- The First Lube Refinery (Design Capacity of 539,700 Tons per year of Crude processing and 76,200 Tons per year of Lube Base Oils)
- The Second Lube Refinery (Design Capacity of 100,000 Tons per year of Lube Base Oils)
- The Fuel Refinery (Design Capacity of 2,170,800 Tons per year of Crude processing)
The raw material in the form of crude oil is imported from Saudi Arabia and Iran through pipelines at Keamari. The crude oil is transported to NRL through four pipelines that run from Keamari to the refinery. The crude oil is processed and ultimately converted into various final products. The process of converting crude oil into the different products is carried out in the huge distillation plant in which the various products are extracted from the several refinery streams at different temperatures (Flow diagram). These products, after extraction, are sent out through pipelines to Keamari terminal, and through tankers to nearby customers. NRL also owns the B.T.X. (Benzene, Toluene and Xylene) plant, but these products are no longer produced. The raw materials used for B.T.X. production are now used to produce Lube base oils, which is the company’s area of strength and profitability. The country meets its requirement of B.T.X. through imports at present. This is because they are cheaper in the foreign market than if produced locally. The supply of raw material in the form of crude oil from Saudi Arabia and Iran is ensured well in advance by the preparation of a 3-month schedule that determines the volume of crude oil that will be required by the nation for the next quarter. There has never been serious supply of raw material problems for NRL since it became operational in 1963 as per our research. NRL’s refining facilities are one of the best in the country. This is mainly because of their highly trained and skilful manpower. The company’s flexible refining systems have enabled it to effectively and efficiently produce what is required and is relatively feasible. The company’s storage facilities are reasonably good and provide strong support to other related departments such as Oil movement and Utilities.
- NRL’s Lube base oil extracting capability is its major strength that has given it a monopolistic position in the country
- NRL’s flexible refining capabilities are another of its strength that has enabled it to refine products that are in demand and are relatively feasible.
- NRL’s highly trained and professional manpower, especially its technical workforce, is also its strength that makes NRL the leading refinery in the country.
- The fuel refinery is only capable to process and refine Arabian light and Iranian crude oil and not indigenous oil. This makes it highly dependant on imported crude oil.
- Increase in the demand for Lube base oils due to growing population.
- The coming up of PARCO in the fuel oil market with an automated and technologically advanced refinery is a threat for NRL’s fuel oil refinery.
Internal Suppliers: Procurement (for parts), Marketing, HR and Commercial (for crude oil)
Internal Customers: Oil movement and Utilities
External Suppliers: Aramco, Saudi Arabian Oil Company, and Iranian oil suppliers
External Customers: Oil Marketing Companies such as PSO, Shell and Caltex
- FINANCE AND ACCOUNTING DIVISION
Finance is a service department, which serves the company as a whole. The Finance Department deals with a whole range of inter-firm activities be it budgeting, corporate affairs, investing in certain levels of stocks, legal affairs, Government Regulations or conducting feasibility analysis amongst other things. It is a customer-oriented department that ensures the release of analytical information to departments and the management team in the forms of budgets, profit and loss statements and balance sheets, and cost-benefit analysis.
- The team plays a strong role in compliance with legislation and other legal activities 13
- Well qualified personnel have sustained the financial standing of the company
- There is lack of coordination that results in poor planning.
- Refinery’s system is not so much cultured regarding costing. It is because the refinery does not set the prices of its own product. Prices are set by government and by international price forces
- There is a lot of adhocism, as NRL does not have an officially approved Organogram. This creates problems for employees as to whom to report to
- Since there is increase in the legal dealings involved externally with the Government and internally with the employees there is lack of personnel in legal department
- Lack of trained personnel makes the task hideous for the employees on the lower level
- The MIS is in the midst of implementing Enterprising Resource Planning (ERP), which would give a better standing to the division at large. This would produce more timely and needed information. Delays would be eliminated
Value-addition by the Finance Department is done through pointing out to other departments how and where costs can be cut or processes shortened. At times the department is makes a thorough analysis of suppliers on the basis of price and if deemed necessary, goes on the lookout for additional sources. The bottom line is to provide guidance to management to maximize profit.
Internal Customers: The various responsibility center managers, internal auditors and Management
Internal Suppliers: Entire Company
External Customers: Tax auditors, Government, Ministry and Law Governing Bodies
External Suppliers: Government Regulatory Agencies
- LIQUIDITY EFFECT: NRL being the only refinery in the public sector has to strictly adhere to the import parity formula under which the government based which makes the payments of 10% fixed on equity to the shareholders. On the supply side, the government has to pay outstanding subsidies as per regulations to NRL regarding the old formula of 10 to 40%. On the customer side of NRL, PSO has long outstanding dues up to Rs. 10 billion, which includes Rs. 4.5 billion as financial charges. This has created liquidity problems for NRL.14
- Regulatory problems due to restrictions from the Ministry and the government in the internal matters. That is the reason the division as a whole is not working to the optimal level due to daily procedural hurdles.
- Where the competitors are shifting to a paperless concern especially in the finance area where there is only paper work, NRL is still positioned in tremendous overlapping procedures and red tapism due to minimal MIS usage.
(A detailed Financial Analysis is given in the appendices
III. PERSONNEL & ADMINISTRATION:
Improving the skill levels of employees and maintaining good employee relations are vital to creating value and lowering costs to an organization. NRL has the most extensive and thorough training program in the refining industry; a fact that has been validated by the high demand of NRL trained engineers in Saudi Arabia and Middle East over the last many years. The management of PARCO has also taken a number of NRL trained engineers on contractual basis, which further establishes the reputation the company enjoys in the industry. NRL is bound by law to train fresh engineers every two years. The company has a well laid down selection system; however, due to a ban on hiring in state-owned organizations, NRL being one of them, there has been no active hiring in the last decade. The last time the company inducted engineers were way back in 1994, and that through special permission from the government. This external influence from the government has hindered the department in effectively planning its internal staffing and placement needs.
An internal strength of the P&A division is its strong relations with the labor union. There is no politicization among the workers, and the management seeks to keep the workforce motivated through periodic agreements with the union on compensation packages, which are good enough to keep the employee turnover low as far as job satisfaction is concerned. Performance appraisal is a process that is carried out on an annual basis, which along with continuous job rotation and job enrichment keeps the workers satisfied. The P&A division is unable to contribute to the development of NRL’s departments, for example implementation of MIS, due to the ban on hiring. There are several vacant positions that require fresh recruitment, but the management has no choice than surviving in the current scenario.
Internal Suppliers: all the departments of the company, which provide inputs for coordinating and developing employees.
Internal Customers: includes all the divisions and sub-divisions of NRL
External Suppliers: Engineering Universities, competitors, Technical Institutions
External Customers: Refining complexes in Saudi Arabia, Middle-East and local competitors
The procurement division is divided into three departments namely, local purchases, Imports, and contracts division. This division is concerned with procurement of chemical, spare and parts for the machinery, while the procurement of the basic raw material that is crude oil id carried out by the marketing department. The proprietary vendors have bargaining power since they are in monopoly, care is taken to ensure that there have been no huge price differentials as compared to the past. If so, then the vendors are inquired about the reason for such a problem and if they are able to justify this price increase then the purchase takes place through the accounts department of Finance and Planning Division. However, it was also noted that even if the vendors do not justify the price increase then still NRL has no option but to go to these vendors, because no one else will be able to cater to their needs. Hence, the bargaining power of suppliers in the case of proprietary items is significant.
The internal audit confirms the entire procurement process and the competitive statements are formed thereby. This statement includes the number of competitors, lists of names, costs, FOB, C&F arrangements, the requirements, and the number of parts to be purchased.
In case of a close tender then 15 – 20 days are given for the shipment. And in the case of a process ad, the period is greater than 21 days or so. While in the case of imports of foreign products the time given is 4 – 6 months. According to the specifications by the Government of Pakistan they are required to make use of PNSC for importing goods form abroad, which is a weakness because PNSC may not have the ships docked at the required harbors, which in results in greater lead-time thereby increasing the overall time specified for the import of goods, thereby effecting NRL’s efficiency. However, in such a case care is also taken that National Shipping Corporation is used i.e. PNSC, which again helps in lowering the cost. In case of the purchases being lower than 1 million than a closed tender is asked for and the process and documentation is the same but only this is not done in open.
The relationship with the suppliers is not very strong, because they do not believe in building relationships and long-term relationships. The difference between the local and the foreign purchases is that one requires the opening of Letter of Credit (LC). The process in both the cases is the same, requiring the input of the internal audit department at each and every stage. However in the case of the proprietary items, the bargaining power of suppliers is immense.
(A detailed process flow chart for the local purchases and imports is attached in the appendices: pages 26, 27)
Internal Suppliers: Warehouse, Production/operations division, maintenance and engineering division
External Suppliers: Proprietary vendors and other vendors
Internal Customers: Once their needs are met the internal suppliers become the internal customers Production/operations division, maintenance and engineering division
V. MARKETING DIVISION
The company enjoys a share of 43.70% as against to its nearest competitor, PRL with 34.95%, and ARL with 19.6% of the market share. NRL has the largest product range with 26 products under its belt. It has a 100% monopoly in the production of lubes and is currently meeting the entire lube demand of the country. NRL is also the sole producer of NAPHTHA (which is exported), BTX, process oil, carbon oil and wax. The high quality products along with highly trained work force have further enhanced the position of the company with respect to its competitors. The marketing department is involved in forecasting and estimating the demand for fuel, lubes and asphalts. The input is taken from the finance department while the entire planning is done in the marketing division itself. Apart from the forecasting and estimating of demand, the marketing division is also involved in the procurement activity for crude oils, which are the major raw materials. An over lapping of activity is seen over here as the marketing department is also doing the procurement function. The marketing department currently is not performing the traditional role of marketing, which includes pricing, promotion etc. due to industry dynamics. It is felt that the formation of a marketing company is a viable option, however, such decision would require massive investments, which NRL cannot sustain because of its liquidity problems.
Internal Customers: Finance & Accounting division, Operations Division
External Customers: Oil Marketing Companies, other registered companies
Internal Suppliers: Finance and planning department, Production department
External Suppliers: Arabian Light and Iranian Light, Japanese Firm for export of Naphtha, other secondary sources
- MAINTENANCE AND ENGINEERING:
Maintenance and Engineering sub-division plays a key support role in the over all technical division of the company. It is fully equipped to handle any emergency situation that may arise and hinder the continuous process at the facility. This sub-division abides by the strict safety regulations prescribed by the organization, thus providing good working conditions to the work force.
Internal Customers: Operations, Kemari terminal
Internal Suppliers: Human Resource Division
External Suppliers: Contractual services
VII. OIL MOVEMENT AND UTILITIES:
Oil movement and utility is responsible for the smooth and constant flow of oil to and from NRL to Keamari. For the purpose of movement of oil there are four pipelines that link the Keamari terminal and the processing plant. Each pipeline is designed to carry a separate product depending upon its characteristics. As the refining process is a continuous activity, it is of utmost importance that this sub-division is operating to its maximum ability. The concerned personnel are highly trained and qualified to handle any unexpected malfunctioning in order to ensure smooth flow in the operations division.
Internal Suppliers: Human Resource Division, Operations Division
External Suppliers: Importing Firms (Crude oil)
External Customers: Kemari terminal
MAJOR AND MINOR PROBLEMS
The major problem that NRL faces is the degree of government influence in the company’s operations, it being the only state owned organization in the refining industry. Hence, while regulated prices affect all refineries, NRL is further subjected to the above stated predicament. The level of government influence not only hinder its everyday operations but also any long term plans the management may have. The full brunt of the government’s decision to ban hiring in the public sector organizations has been borne by NRL alone in the refining industry. So, for example where other refineries are being able to keep pace with the changing technological trends, NRL is yet to develop…..its workforce to sustain its competitive advantage it has enjoyed for so long.
- Personnel and Administration Department is being unable to strike a balance between the demand and supply of in the past five years is an indicator of the poor management of the organization
- The MIS department only serves the Finance department and that too only in programming and not in networking. The department has not been fully developed due to procedural hurdles and resistance to change
- The Operations department is at times termed inefficient as it exceeds the compensation budget due to improper monitoring of overtime
- Finance and Planning department faces the shortage of trained manpower
- No standby arrangement for power failures. 7.5 mega watts of electricity is in transitory phase.
Although NRL is operating in a highly regularized environment, it has a number of internal strengths that have made its success possible over the past ten years. The company has the best training program for engineers in the industry which makes available to it highly qualified and trained engineers for its core process, that is operations, as well as other support activities such as Maintenance and Engineering. However, NRL has not been able to capitalize on this opportunity to its fullest in the light of the ban on hiring in the last ten years. NRL’s ability to produce large range of products due to its three refineries is another strength, which cannot be ignored. The refining capacity lends to support to it enabling it to be a market leader with competitors like PRL, ARL and PARCO producing fuel oil.
However, like any other organization NRL also faces certain internal weaknesses, which should be over come through effective measure to ensure future success. One of the weaknesses that NRL faces at present is the liquidity crunch due to default in payment by PSO amounting to RS 10 billion. The collection of these outstanding dues will enable NRL to pay 10% higher than what they are paying right now. The company is also susceptible to changes in technology in the refining industry. PRL has already completed its first stage of SAP and ARL is on its way to installation, NRL lags behind with no automation. The reason being the government influence, which makes decision-making, strategic planning and implementation difficult and a lengthy process. Also, since there has been a dearth in hiring over the last decade, the current employees are not well versed with latest information technology.
(The Internal Factor Evaluation Matrix is given in the appendices: page 22)
A number of opportunities existing in the industry make the industry viable to enter. Firstly, the growth potential for the oil products is great, which comes from the population growth rates of 2.8%, has lead to the overall increase in the transport sector by 0.8%. As the number of cars in the country is increases, the greater will be the demand for the fuel products and therefore the more the company will be profitable. Apart from the growth rate of the population, the increase in demand of Lube oils, which are used in machines, and also asphalts, used in the production of roads. As the fuel products are being deregulated, this is a great opportunity for the companies, because previously the profit margins were also restricted because of regulation of the fuel products, which will now be at the discretion of companies itself, to charge according to their feasibilities. Also, restrictions in terms of the type of customers and suppliers will also be reduced and therefore help the companies in becoming more competitive. Since Naphtha is the only oil product exported abroad (Japan), as a result of this deregulation, the exports are likely to increase and therefore the companies exporting Naphtha can enjoy greater profits if they concentrate on its production. With the deregulation of the fuel products, the opportunities of exporting more of the fuel products will also improve and thereby strengthen the company’s position.
Apart from the opportunities, a number of threats are also existent in the industry which help the companies in taking guard and thereby make the company’s more cautious in the future. The entry of competitors in the industry is a threat for the existing companies. Since the existing companies work under somewhat of collaboration, in importing the crude oil and also in sharing the manpower resources as well, then the arrival of the new entrant is a potential threat to all the participants in the industry.
The industry is susceptible to changes in the technology of the refining process. The more sophisticated the refinery, the greater its output and therefore more profitable that company is in the industry. Therefore constant technological changes should be used in order to change this threat into an opportunity. The heavy dependency on the foreign suppliers is also a major threat to the organization. Emphasis should be laid on indigenous crude oil processing, because it will not only help the company in maintaining its foreign exchange reserves, its will also help the companies in maintaining their liquidity. The recent reduction of capacity utilization by the government to 75% is a threat to the industry because with such a decision, the industry will suffer and the demand supply gap will have to be met by importing thereby affecting the country’s foreign exchange reserves. (The External Factor Evaluation Matrix is given in the appendices: page 22)
Competitive Profit Matrix Analysis
For the refining industry, de-regulation of fuel oil has been identified as the most important critical factor. De-regulation would allow refineries both in public and private sector to dictate prices and determine their margins. However, this would not affect NRL as much because its main products, which are lube-based oils, are already de-regulated, but would be a critical success factor for PRL and ARL as they are purely fuel oil refineries.
Second most important factor comes out as devaluation and range of products. Since all refineries use imported crude oil, they are highly susceptible to fluctuations in foreign exchange rate as well as devaluation of local currency. Similarly, the ability of a firm to produce a varied range of products including lube-based oil is important especially with new oil refineries being set up. This ability allows a refinery to utilize its capacity to the maximum. NRL is differentiated from PRL and ARL, as it’s the only refinery to produce lube-based oil among the three refineries, allowing it to switch to the production of these products when faced with competition from other refineries.
Technical advancement, level of skilled work force and availability of finance is the third most important critical success factor. Modernization of plant is essential for the efficient use of facility and capacity utilization. For this purpose, availability of funds is important. Funds are also important to ensure continuous training of employees and adaptation of systems such as SAP. Both PRL and ARL being in private sector have better access of capital whereas at NRL most capital budgeting decision has to go through a lot of documentation. (The Competitive Profile Matrix is given in the appendices: page 23)
NRL has the highest production capacity of 100,000 bbl/d along with an opportunity arising from the export of Naphtha to other countries, the company can capitalize on its strength and produce by utilizing 100% capacity and therefore can also export other products to other countries as well.
NRL has the strength of having the best technically trained workforce. An opportunity has arisen in the market because of the growth potential for oil products due to the increase in population growth rate by 2.8%. NRL can capitalize on this opportunity by having greater capacity utilization, which is possible by employing greater workforce or by increasing the hours worked by the workers.
With the largest product range and being the market leaders in the lube base oils along with the export potential of Naphtha to foreign countries, NRL can utilize their strong market position to cater to the needs of the market abroad.
A weakness with National refinery is that its processing plant is only able to process Arabian Light and the Iranian light crude oil only and can barely process the indigenous crude oil. With the deregulation of the fuel products is a form of an opportunity, NRL should reduce dependency on the Middle East and the Iranian Oil companies and should emphasize more on indigenous oil refining.
NRL ‘s production capacity makes it the market leader in oil processing capacity, however, with the advent of other competition like PARCO, they should concentrate more on Lube Base, which is their monopolistic market and therefore should strengthen their position by differentiating in the Lube Base Oil category.
NRL is facing liquidity problems arising from the lack of payment from PSO, as bad debts. Apart from this, their dependency on foreign crude oil suppliers is making the company’s financial position worse off. The payments made to the foreign vendors are in $s and with greater devaluation of rupee, the purchasing company ends up paying more and more. For this purpose, the manufacturing process at the refinery should be such that they able to process the indigenous crude oils as well.
NRL has no computer networking or proper database management system. It is because of this, that most of the tasks and duties in the organization are overlapping, which hampers efficiency. Also, because a major threat exists in the industry in the form of susceptibility to technological changes in the refining process, NRL should develop in-house MIS system, based on local computer experts instead of going for Systems Analysis Programming (SAP), which is extremely expensive. It should not be forgotten that the company’s major weakness is its Liquidity problem and therefore maximum efforts should be directed towards costs reduction.
(TOWS Matrix is given in the appendices: page 24)
After conducting a thorough analysis using inputs from the external evaluation audit and internal evaluation audit and formulating a Quantitative Strategic Planning Matrix (Included in the Appendices, page), we generated two significant strategies that NRL can pursue. NRL should revisit business activities, capitalize on synergies, diversify in related fields, improve performance and efficiency, reduce costs and introduce new technologies to become competitive and compatible in meeting with the new trends. This requires a discreet investment strategy for the up gradation of fuel oil capacity which could make the refinery self reliant without subsidies being provided by the government. Besides it would allow the company to enjoy high margins.
The other alternative is the pursuit of an export oriented strategy. Since NRL already produces Naphta and exports it to Japan, it can concentrate on other products such as Asphalts and Keresone.
 Economic Survey 1999 – 2000, Energy Sector
 NRL Annual Report Analysis
 Interview Findings: Mr. Qasim Ali Rizvi – Manager, Lube and Asphalts
 Organizational Chart of NRL as of June 30,2000
 Interview Findings: Mrs. Butt. Senior Personnel Executive and Col. Amjad – Manager P & A
 Interview Findings: Mr. Nazirullah Khan, Manager, Fuel Products & Col. Amjad, Manager, P & A
 Economic Survey 1999-2000
 “Briefings about National Refinery Limited” – Business Recorder: January 3, 2000
 “Import, Sale of Furnace Oil Exempted from Central Excise” – Business Recorder: September 1, 2000
 www.privatisation.gov.pk – OGDCL Sector Report
 Interview Findings: Mr. Nazirullah Khan, Manager Fuel Products
 Interview Findings: Mr. Asad A Siddiqui, General Manager Finance and Accounting
 Interview Findings: Mr. Ashiqeen, General Manager, Operations Division
13 Interview Findings: Mr. Aftab Ahmad, Manager, Legal
14 Interview Findings: Mr. Akhlaq Ahmed, Head, MIS
15 Interview with Mr. Asad A Siddqui, GM, Finance & Accounting
 Interview Findings: Mr. Abrar Akram – Imports