Interview with Fayaz Ahmad Khan, Vice President Commercial Division, Byco Petroleum Pakistan Limited
‘Byco lauds fortnightly petrol pricing and Euro 5 launch, requests IFEM repeal’
Fayaz Ahmad Khan is Vice President of Byco’s Commercial Division. He has two decades’ experience in Pakistan’s petroleum industry, including stints at Shell and Total. Mr. Khan leads the charge for achieving Byco’s Oil Marketing Company’s corporate strategic goals, including expansion of retail outlets, which have gone from 300 only 3 years ago, to more than 400 today. Mr. Khan has been instrumental in building sales capability and talent at Byco.
Following are the edited excerpts of a conversation BR Research had with Mr. Fayaz Ahmad:
BR Research: What is Byco’s market position in Pakistan’s petroleum industry?
Fayaz Ahmad Khan: As Pakistan’s largest refiner, Byco is responsible for more than a quarter of the petroleum products sold in Pakistan. As the nation’s only vertically integrated oil company, Byco has its own port called the Single Point Mooring (SPM), a deep sea floating liquid port dedicated to the import (and export) of petroleum products. With a design capacity of refining 156,000 barrels of crude oil per day, Byco produces a whole host of petroleum products, including premium motor gasoline (PMG), high speed diesel (HSD), jet fuel, LPG, and fuel oil. We market our own brand of lubricants successfully through our more than 400 retail outlets across the length and breadth of the nation. We have also begun to sell our lubricants online very successfully through Daraz. Byco consistently ranks amongst the top 6 OMC’s of Pakistan in terms of market share and number of outlets and are striving hard to lead in our categories soon.
BRR: How has COVID-19 affected your industry that was facing headwinds even before the pandemic began? How has Byco responded?
FAK: Pakistan’s oil sector, particularly the OMCs and the refining companies have been operating in a challenging environment for the past few years, due to the evolving fuel mix in the country, and revisions in international regulations and standards. Byco managed to export fuel oil in January of this year, which was a creative solution to the challenge of the evolving fuel mix. Currently the industry is recovering from the recent ramifications of lockdowns in the wake of the coronavirus which wiped out demand for petroleum products overnight. One of the most damaging aspects, even before COVID-19 hit the country, has been the volatility of the Rupee-Dollar parity that has caused the industry to incur losses in billions of rupees. Thankfully, now that the lockdowns have eased and demand for fuel is increasing, the oil sector of the country has been moving back towards stability.
BRR: The government has recently switched from monthly price determination to fortnightly basis for petrol. What is your view of this move?
FAK: We applaud this move from the government. Now that the pricing revision mechanism has been changed to a fortnightly basis, oil companies can surely look forward to a more stable financial outlook. This 14-day pricing mechanism will encourage supply chain cost optimization for OMCs and refineries and will ultimately benefit the end consumer. The whole industry has lauded this new mechanism, hailing it as a commendable step in the right direction. We see only benefits from loosening price controls.
BRR: What is your opinion about the launch of Euro 5 fuels in Pakistan? What would be the positive implications for the economy, industry, and the environment?
FAK: The introduction of Euro 5 standards is certainly a big step in the right direction for Pakistan. The giant leap of shifting the country’s fuel supply network from Euro 2 to Euro 5 in a matter of months is a complex process that would normally take several years. This switch will highlight the agility and resilience of the domestic energy companies, particularly the oil marketing companies and refiners, who will make major operational changes in a tough business environment marked by low commodity prices, weak demand, and a global economic slowdown.
Euro 5 fuels are not only more efficient but they also have considerably less Sulfur content which makes them better for the environment. In Pakistan, Euro 2 fuels have been commonly used since 2017. Euro 2 contains 500ppm (part per million) or less Sulfur. With Euro 5, this drops to just 10ppm or lower. Adoption of Euro 5 standards will help in protecting the environment from the effects of climate change and global warming which has quickly emerged as a major threat, as evident from the devastation caused by the monsoon rains in Sindh this past summer.
Another key benefit of using Euro 5 fuel, is that it lowers health risks associated with material handling for industry workers. Pakistan’s transition to higher-quality fuels has long been overdue, considering several other countries have been using Euro 4 or better fuels for years. We laud the government’s decision in this regard. In developing the next standard for the local market, we recommend that the unique environmental conditions of Pakistan also be taken into consideration as they do differ markedly from the European context.
For refineries though, it presents a challenge in terms of capital investments and new plants to produce Euro 5 fuels. Refineries will need to be resilient as always and adapt to change in the years to come.
BRR: On the regulatory environment for OMC’s, what is your opinion on the Inland Freight Equalization Margin (IFEM)?
FAK: If you go to most developed countries, such as the USA or UK, and generally even in many developing countries, you will find that competing fuel stations in different locations are free to price their petrol and diesel themselves. In fact, it is nearly impossible to find two petrol stations even right next to each other that will have the exact same price of gasoline or diesel. What this shows is the free market in action. Every company is free to price their product based on their cost structure. This is the basis of perfect competition in a free market economy. If someone prices themselves too highly, the market will sort them out. The more competitive businesses will succeed, as customers will gravitate towards lower priced players. This has the major strategic social and economic benefit of rewarding those companies who are efficient and punishing those that are inefficient.
Unfortunately, in Pakistan the IFEM has the exact opposite effect, by unnaturally enforcing one price across the country for the same litre of fuel, regardless of the cost structure of transportation. Whether it is being sold in Karachi or Kohat, it costs money to transport fuel from the port all the way upcountry, but the Pakistani consumer is being forced to bear this burden disproportionately, causing inadequate distribution of fuel in the country including dumping, creating oversupply near the port due to the incentive structure (IFEM Pool) being manipulated by unscrupulous elements. For this reason we have been calling for the IFEM to be repealed to unleash market forces which will directly make petrol, diesel and other fuels distinctly cheaper for the average Pakistani. It will make for a cleaner, more efficient, and cheaper fuel industry for the customer.
BRR: Where do you see the petroleum demand headed - specifically for furnace oil, diesel, and petrol.
FAK: Furnace Oil is slowly being phased out due to both national and international factors. With fossil fuels in general, internationally we see a growing share of renewable sources of energy coming into play. But oil and gas will remain the mainstay especially for developing nations like Pakistan for a long time to come. Pakistan forecasted a very healthy 10 percent petroleum demand growth per annum in the near term. Though this took a hit recently due to the pandemic, we are still bullish on our industry for decades to come.
BRR: How does Byco envision the future of the oil marketing business?
FAK: Byco sees great changes coming in the near term in our industry. We see sustainability as a key factor in our business. We believe the world is headed in the direction of “Going Green”, for which we have already piloted several initiatives. Byco distributed millions of tree seeds for our customers to plant, in line with the government’s” Ten Billion Tree Tsunami”. We also had a competition for the greenest retail outlet in our network. To be a sustainable consumer of water, Byco signed a MoU with the United Nations Development Program. The MoU was to install water filtration plants at those Byco retail outlets which have car wash facilities. The first such plant has already been inaugurated at our station in Quetta, a region which suffers greatly from water shortages. We are working with our franchise partners to roll such filtration plants across our network nationally. Byco also plans to develop the Fuel Station of the future, which will be about greater convenience to the customer; it would be a one stop shop for allowing shopping, dining, and banking facilities under one roof.
At a corporate level, Byco is looking to sequester its carbon emissions through the process of afforestation using the Miyawaki Method; pilot projects of this plan have already showed great promise. This is our vision for the future.