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BR Research

Interview with Farhan Abbas Sheikh, CEO — OilBoy

‘We want to bring structure to the energy commodity market’ Farhan Abbas Sheikh is an entrepreneur and a...
26 Nov 2021

‘We want to bring structure to the energy commodity market’

Farhan Abbas Sheikh is an entrepreneur and a professional banker and has been associated with national and international banking organizations in his career. He has experience with leading banks such as Deutsche Bank, Singapore Bank (assigned in Pakistan), Habib Bank Ltd and Barclays Bank International, Dubai. He returned to Pakistan in 2011 and became a full-time entrepreneur through a partnership in Gas & Oil Pakistan Ltd. His educational background comprises BCS, BSC Finance, MBA & LLB.

After Gas & Oil Pakistan Limited (GO), Farhan decided on having a conglomerate of his own and that’s when SGC came into being. SGC, Sunny Group of Companies, includes diverse companies like OilBoy, French Corner, EMC, Food Partners, Value Exchange, and Flow Logistics.

Farhan Abbas Sheikh is the CEO of OilBoy, which deals with energy and petroleum products which include, coal, lubes and petroleum. Following are the edited excerpts of a conversation BR Research recently had with him:

BR Research: Tell us about your venture OilBoy and how did you begin?

Farhan Abbas Sheikh: I was a banker till 2011. When I came back to Pakistan, I started my own company by the name Gas and Oil Pakistan Private Limited (GO) and got it registered with SECP. In 2012, the government gave me the provisional licence for the OMC. By 2014, I fulfilled the requirements and in 2015, the government gave me permission to start sales. In the span of about 6 years, the company went from zero to billion-dollar sales; and zero pumps to over 600 operational pumps.

With the growth in sales, there was also international interest, and one of the international traders to show interest was Vitol. In 2018, the company went into a strategic partnership with Vitol with a 10 percent equity investment and I thought it was a good time to take an exit for myself. Bidding farewell to GO in June 2018, I started a new company OilBoy Private Limited with a view to bring some structure and platform to the totally unstructured energy commodity market.

As a commercial trader, we started out with coal; we are getting into petrochemicals, and are trying to get into the oil and gas markets again. These are the products that we will be tackling to bring a platform to the market where it can trade physically, or somehow on paper. However, paper trade is still far away as the market is totally unstructured.

BRR: So how is the business going and what are your plans for the next few years?

FAS: We started with coal and with a very small volume, which was around 1000-2000 tons a month only. And then we grew up to 15,000 tons a month. This is the volume we actually aimed for the commercial market to structure and ready ourselves before reaching out to bigger players like cement plants or power plants. For context, a typical cement plant in Pakistan needs around 40-45K tons of coal a month. And that’s 600,000 tons a month for the cement sector alone. So in the next year or two, our plan is to structure the commercial markets for Pakistan. Our midterm plan will be structuring the markets for bigger players.

In the next phase of growth, OilBoy is also planning the revival of a shell-listed company, Drekkar Kingsway Limited (DKL) along with Modaraba Al-Mali. Under this revival plan, DKL’s name shall be changed to OilBoy and the energy trading business of OilBoy shall be acquired by the shell company. This plan has already been approved by the shareholders of DKL as a special resolution, and the decision of Islamabad High Court is awaited following the submission of the revival plan to the Court.

BRR: Within two years, what capacity growth are you foreseeing in coal for yourself?

FAS: We are looking at about 40-45K tons a month. As most of the big players are self-importers of coal, we are looking to capture the marginal needs of the big players.

BRR: What kind of customers do you have on the commercial side today? And how many other players are competing with you in this space?

FAS: We have textiles, chemicals, solar power generation units, glass, ceramics, tiles, etc. They don’t import on their own and need a commercial importer. If you talk about commercial players on a regular basis, there are about 5-7 players that are competing and catering to this market. There are also seasonal players that are very small, e.g. 1000-1500 tons a month capacity to import, which is a small informal chuck.

BRR: What is the source of coal that is imported generally for commercial use?

FAS: On a conventional day, Pakistan gets South African or Indonesian coal. But because prices went through the roof in recent times, every industry started converting to local coal or Afghani coal to remain competitive. If the prices do come down, which they are at the moment, we foresee that the South African and Indonesian coal will be coming in again. Will the coal prices fall to previous lows? It’s hard to say right now. Will Afghan coal now always be coming in permanently? We foresee that it will be because of otherwise high transportation and freight costs and also Afghan coal is the only option for the North. Our clients have also moved towards Afghan coal primarily because the cost does not match what they are looking for in the market. If pre-Covid norms do come back, we are always geared up to substitute it with either South African coal or Indonesian coal, and upgrading or downgrading it as per the customer requirement.

Generally, cement plants prefer South African coal because the quality is always guaranteed for certain parameters they are looking at. The heat value of Indonesian coal is high, which comes in handy in the textile sector. Afghan coal has a high GCV value but its other parameters are not in compliance with the local industry requirements; so its quality is upgraded or downgraded by blending to make it fit the parameters. We provide them the solutions because they are focusing on energy for their core business and it is our core business to upgrade or downgrade the coal by either blending or substituting with other coal. We try to get what works for the client. We try to give our clients off-the-shelf products, and not what we have.

BRR: Why do cement plants prefer South African coal? Can you provide them with the same quality coal?

FAS: South African coal has different grades. The one that comes into Pakistan and is liked by the cement plants is Rb1 grade. The only reason is that the shipload comes around 55K-60K tons with guaranteed quality and everything’s the same every time. So, all they have to do is pick it up from the port, take it to their factories, and burn it off.

When I mentioned that we are trying to bring in a platform, the idea is to provide a solution such as building up the heaps here, and we can certify those heaps by bringing in a third party to test it out according to the specs.

BRR: Providing such solutions, what kind of expertise is required and why is no one else doing that in the market?

FAS: To start with, the market was very unstructured and the players’ core business was not dealing with coal. But now the structured market is coming in; Lucky Commodities - one of the bigger names in the market - is not coming in for themselves but is also commercially trading. However, for players like us, targeting the smaller segments and units that need the coal but have liquidity issues help us create the delta for us by substituting the need and providing commodity credit that is not catered to by bigger players. Players like us that trade commercially have the opportunity to structure and take advantage of the transparent pricing mechanism.

BRR: What’s the scope for our indigenous coal?

FAS: Pakistani coal has a lot of opportunities, but the problem with our local coal is that certain parameters are totally out of bound. The opportunity is if we can somehow start blending in local coal within certain limits with either the international coal such as the South African or Indonesian coal or the Afghan coal. Pakistani coal does give a particular heat value, matches the pricing mechanism, and fulfils the parameters if blended properly.

BRR: Apart from oil, what other areas are you getting into in energy commodity trading?

FAS: We specialize in coal. We have a specialization in petrochemicals as well. We are currently importing products from major international suppliers. We are trying to be a supply chain partner for the industry not only in terms of energy but also in terms of raw material when it comes to petrochemicals.

BRR: With your experience in investment banking, do you have any plans to get into any sort of partnership with banks, fintech for smart credit solutions rather than the conventional credit cycle?

FAS: We are definitely looking into putting up thoughtful products out there for the investors. The platform has to have a lot of financial backing to sustain, which is why we would like to come up with good and innovative financial products to sustain our business. For example, we would like to get listed on the stock exchange; there is no energy trading company in the secondary market.

BRR: Could you share some growth figures with us? Where do you see your size in 5 years?

FAS: From zero revenues when we started out, we closed our last year at about Rs2 billion. We are hopeful that we will close this year with a 50 percent growth in revenues and continue to 50 percent year-on-year growth. Typical gross margins for such a business are somewhere between 30-40 percent. In 5 years’ time, we foresee our revenues touching Rs10 billion.

BRR: When do you plan to get listed? And what other things are you going to add before getting into the secondary market?

FAS: We are planning to get listed in a year’s time because we would like to share our financial cost with the investors. We see a glut coming in for furnace oil (fuel oil) in the local market. So we are definitely tapping into the global bunkering business especially in the region. This will be our next way to move forward.

BRR: The market for FO globally has fallen massively. The prices local refiners get are much better than the exports. How are you going to make this bunkering business viable especially with IMO 2020 requirements?

FAS: As a trader, I would say that we have virgin fuel oil, which China is very hungry for. Till someone comes up with a desulphurization unit, we foresee that we will keep trading in fuel oil. We know that the world is not ready for IMO 2020 at the moment, and still, a lot of vessels are sailing especially in this region, the Middle East region, the East Asian and the African markets that are not very IMO2020 compliant.

BRR: Why aren’t the refineries capturing this opportunity of trading fuel oil then? Why are they risking their business and waiting for traders like yourself to capitalize?

FAS: There are a couple of things that come into play. For one, energy trading is not their core business. Secondly, the bunkering business requires a lot of cash flow.

The global market today has no refinery in the bunkering business; there are always traders involved because they can fetch commercial solutions that can bridge the need of the refinery and the need of the investor.

The bunkering business and fuel financing are actually covered by a lot of global financial institutions. They already have financial products designed specifically to cater for the international marine market.

BRR: So, when do you plan to commence the bunker in business?

FAS: We have started the business planning, and hopefully, we will start off within the next six months.

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