Presented by:

Sheikh Imran ul Haque

Managing Director and CEO

Pakistan State Oil Company Limited

Pakistan LNG Story

Effective LNG Import Structure by MPNR

PSO

SSGC

SNGPL

LNG Importer

Receiving LNG at terminal Transmission of regasified LNG (RLNG) to SNGPL through swap

Supply RLNG to end consumers

And Why PSO ? GOP assigned the role of importing LNG to PSO owing to its:

• Financial strength

PSO imports around 200 vessels of POL products annually, amounting to

USD 6 bn (USD 8 bn in 2014) with margins supporting trading business risks:

• International Credibility

With oil suppliers which would grandfather with LNG Suppliers (ENI, BP,

Petrochina, Trafigura, Gunvor, Glencore, Shell, GNF)

• Expertise in Financial Management, Skills in Energy Supply Chain

Despite severe constraints, has managed its debt and kept the wheels of

industry operating

Description PMG HSD

OMC Margin 2.35 2.35

Equivalent in USD/MMBTU 0.69 0.62

As %age of cost 5.5% 5.4%

LNG Journey Starts

• Three procurement streams were utilized for import of LNG to Pakistan: • Direct negotiations under Government to Government arrangement; • Spot purchases; • Term procurement for a period of time

• Meetings were held with: • Petronas, Malaysia’s designated entity and • PB Trading Sendirian Berhad, Brunei Darussalam’s designated entity, • Qatar which has liquefaction facilities to produce 77 Mtpa of LNG with

all 14 LNG trains running at full capacity which confirms Qatar as the world’s main LNG supplier with a market share of over 30%.

• PSO and GOP’s international consultants were engaged to develop contracts and provide market intelligence

• ECC vide decision dated 2nd July 2013 authorized Ministry to engage in

negotiations with Qatargas on Government to Government basis for importing

LNG on delivered Ex-ship basis.

• Pakistan State Oil Company Limited (PSOCL) and Qatargas Operating Company

Limited (QOCL) were nominated by respective governments to negotiate the

LNG Sales Purchase Agreement (LNG SPA).

• Resimulations undertaken in Spain and meeting of Port Qasim, Engro & PSO

held in November, 2015 in Doha, Qatar. Qflex can deliver LNG. Port Charges

(USD 660,000 – 809,000) capped Port at USD 320,000

• The pricing and principal commercial terms of the LNG were reviewed and

finalized by the Price Negotiation Committee constituted by the GOP. The

negotiations have taken time to complete and agreed at 13.9% of Brent

G to G

PSO – Qatargas Long term SPA Highlights

Tenure 2016 to December 31,2031

Extendable with mutual consent

Terms Take or Pay

Type Delivered Ex-ship

Volumes 2016 (prorate of 2.25 mtpa)

2017 (3.75mtpa)

Buyer

Seller

Pakistan State Oil Company Limited

Qatar Liquefied Gas Company Limited 2

Price revision After 10 years

Price negotiated by Price Negotiating Committee setup by GOP/ECC

Support PSO and GOP’s international consultants have been engaged in negotiations with Qatargas, the State of Qatar’s designated entity, on the terms of a long term LNG Sale and Purchase Agreement (LNG SPA) for 15 years, on Government to Government basis.

Current LNG Import and way forward

Government to Government Deal with

Qatargas

Presented to ECC 2 months ago

The LNG Journey Continues

Spot/Multi-Cargo Tender

PSO has issed Spot / Multi cargo tenders since May 2015 and first cargo received in July 2015.

17.80% 16% 18.90% 25.40% 25.10% 33% 29%

2008 2009 2010 2011 2012 2013 2014

Long Term

The Long Term, Spot & Short Term Market Afforded and Opportunity

Nuclear Shutdown

in Japan

Japan`s long term contracts

extended at roughly half of the

volumes

Mild 2013-2014 winter, South

Korea retreats from Spot Market

A number of key factors have contributed to the rapid growth of non long-term trade in recent years including

• The growth in LNG contracts with destination flexibility, mainly from the Atlantic Basin and Qatar, which has

facilitated diversions to higher priced markets.

• The increase in the number of exporters and importers. 26 exporters & 28 importers in 2014 as compared to

6 exporters and 8 importers in 2000.

• Reliance of Japan, South Korea & Taiwan on spot market for sudden changes in demand (Fukushima) due

to lack of domestic production or pipeline imports.

• The large growth in the LNG fleet, which has allowed the industry to sustain the long-haul parts of the spot

market (chiefly the trade from the Atlantic to the Pacific).

Over USD 400m Procurement Has Ensured Supply Chain Cargo Berthing at Quantity Quantity Quantity FOB/DES

PQA [m3] [M Tonnes] [MMBTU] $ / MMBTU

1 26-Mar-15 145,545 65,297 3,419,330.00 8.6527

2 24-Apr-15 144,219 63,354 3,294,832.00 7.8900 3 11-May-15 143,959 63,310 3,293,143.00 7.8800 4 28-May-15 143,959 63,246 3,290,990.00 7.9000

5 15-Jun-15 147,653 63,404 3,297,446.00 7.8800

6 9-Jul-15 136,994 60,188 3,133,192.00 8.0900 7 17-Jul-15 125,010 56,146 2,904,160.00 8.2321 8 28-Jul-15 131,455 58,779 3,041,320.00 8.5754

9 28-Aug-15 134,713 60,738 3,139,390.00 7.6142

10 10-Sep-15 142,001 64,170 3,305,580.00 8.7758

11 20-Sep-15 131,385 57,604 2,999,340.00 6.6757 12 6-Oct-15 142,951 60,345 3,155,050.00 7.6208 13 16-Oct-15 138,658 58,415 3,057,050.00 8.1275 14 27-Oct-15 130,058 57,008 2,966,850.00 6.0988 15 15-Nov-15 143,013 60,138 3,147,590.00 7.8132

16 05-Dec-15 139,180 62,625 3,241,970.00 7.5057

17 16-Dec-15 140,597 61,677 3,210,010.00 7.4622

Total 2,361,350 1,036,446 53,897,243.00 7.8114

The End Journey

Term Tender Two term tenders issued to cover the deficit with Qgas and bring in increased volumes required

LNG Players Participated in PSO’s Tenders

1. GUNVOR

2. BP SINGAPORE

3. TRAFIGURA

4. PETRO CHINA

5. SHELL

6. GAS NATURAL

7. ENI SPA

8. EDF

9. GLENCORE

10. MARUBENI

11. VITOL

12. EXCELERATE

But …..Supply Chain Needed to be Maintained

Government to Government Deal with

Qatargas

Spot/Multi-Cargo Tender

Term Tender

Deal in ECC approval process

PSO had to issue Spot / Multi cargo tenders for 1Q2016

Two term tenders issued to cover the deficit with QGas already underway

Supply Chain Being Maintained

Cargo Berthing Schedule % of Process Remarks

at PQA Brent

1 17-19 Jan -16 17.9034 Spot Tender - 15 awarded

2 9-11 Feb -16 18.9349 Spot Tender - 15 awarded

3 23-25 Feb -16 18.0850 Spot Tender - 15 awarded

4 9-11 Mar -16 13.3700 Term Tender -13 awarded

Scenario 1. Based on Q Gas response and ECC approval 1/2 cargoes in Jan and Feb from Q Gas 2/3 cargoes per month from QGas starting March 1 cargo per month from Gunvor starting March 2 In case of no approval Term Tender for 2 additional cargoes per month starting March 1 cargo per month from Gunvor starting March 1 cargo per month from Shell starting March

Imported Gas Price at Brent of USD 50 per barrel

Offers in the Past Gas

Price

mmbtu

Quantity

Bscfd

Total

Investment

US$

5 year contract

Qgas current offer

Scrapped tender

Qgas earlier Offer

Maashal offer

13.37% of Brent

13.9% of Brent

83.5% or 14.4% of Brent

89.9% or 14.9% of Brent

91.0% or 15.2% of Brent

$6.69

$6.95

$7.20

$7.45

$7.60

0.60

0.50

0.50

0.50

0.13b

0.20b

Current Status

Government to Government Deal with

Qatargas

Spot/Multi-Cargo Tender

Term Tender

Under ECC approval process and Qgas Visited

PSO has issed Spot / Multi cargo tenders since May 2015 and first cargo received in July 2015.

1) Term Tender # 13 has been awarded to Gunvor

2) Shell is the lowest bidder in Term Tender # 14 and bid valid till 15-01-2016

• Low Margins

• Infrastructure

• Circular Debt

• Volumes for 2nd Terminal

Challenges

- 18 -

As per ECC Decision dated June 6, 2015, RLNG pricing

components for PSO include:

i. LNG DES/ FoB price (including freight)

ii. Other import related actual costs

iii. PSO margin upto 4 percent of LNG DES Price, subject to

review after 3 months by an Inter-Ministerial Committee

RLNG Pricing Guidelines

• Note the DES price of September 2015 has been fixed by OGRA for all cargoes

that fall in the preceding period- March to September 2015

RLNG Price

Cost Components Provisional RLNG Price per OGRA

Delivered Ex-Ship Price (DES price) Actual

PSO Margin Restricted to 1.82% of DES

Insurance Premium Actual

Wharfage Actual

Load Port Surveyor Charges Actual

Discharge Port Surveyor Charges Actual

Stamp Duty Actual

Infrastructure Cess Disallowed

Exchange Loss/Gain Actual

Excise Duty Actual

Terminal Charges Fixed at $ 0.66/MMBTU

SSGC & SNGPL Cost of Service Disallowed

SSGC & SNGPL Admin Margin Disallowed

Retainage Restricted to 0.75% of total LNG cost

Transmission Losses 0.5% of DES price

- 20 -

Subsequent to the ECC Decision, OGRA issued its Provisional Price

Determination on October 7, 2015 wherein:

PSO’s margin was reduced from 4.0% to 1.82% (Est. Loss to PSO: Rs. 750

mn) *

Infrastructure Cess paid by PSO to Sindh Government was disallowed

(Est. Loss to PSO: Rs. 342 mn)*

Lower Sep 2015 price made applicable to all previous cargoes from April to

August 2015 (Est. Loss to PSO Rs. 749 mn)*

PSO filed a petition for review of the above determination on December 7,

2015

First session of Public Hearing conducted by OGRA in Karachi on

December 28, 2015. Next session held in Lahore on January 4, 2016

OGRA Price Determination

* Note: Amounts are based on cargoes imported till December 2015

- 21 -

Return to Shareholders

HSD

(Rs. Per Ltr)

PMG

(Rs. Per Ltr)

HSFO-IMPORTED

(Rs. Per MT)

Cost 35.41 43.03 17,371

Margin 2.35 2.35 695

6.64% 5.46% 4.00%

Distribution & Marketing -1.49% -1.49% -1.49%

Administrative -0.27% -0.27% -0.27%

Infrastructure cost -0.43% -0.43% -0.43%

Subtotal Margin 4.44% 3.27% 1.81%

Taxation -1.73% -1.27% -0.71%

Return to Shareholder 2.71% 1.99% 1.10%

Average 1.94%

Net return to shareholders imbedded in other products is

around 1.94% of import cost

- 22 -

Return to shareholders

-

50

100

150

200

250

0

5

10

15

20

25

30

35

40

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Cir

cula

re D

eb

t (R

s. in

bill

ion

)

Div

ide

n p

er

shar

e

Dividend per share Circular Debt

• Due to PSO’s support to power sector, dividend payment to its

shareholder have declined from Rs. 34 to Rs. 10 per share

• LNG project carries significant risk and any unforeseen event

might turn PSO into a loss making company

• Therefore, fair return to shareholders (includes GoP) to ensure

long term sustainability toGOP’s Strategic Company

- 23 -

Business Risk Consideration

Following PSO exposures have not been considered:

I. Take or Pay due to Term LNG SPAs

II. Delay in Payments

III. IPP Capacity Charges Payment

IV. Risk of regulatory disputes

V. Guarantees for Term LNG imports (SBLC Arrangement)

VI. Demurrages

One major risk event can wipe off PSO’s return. The allowed margin of 0.5% fails to provide an adequate return to PSO for the business risks. The will also impact our other Businesses as LNG business will become 37% of PSO’s total business and

is already consuming significant time of key management personnel and

support departments

Way forward

Long Term Deal

Spot/Multi-Cargo Tender

Term Tender for LNG Supplies

Retain flexibility

Be part of the portfolio

Government to Government Initiate

with Qatargas, Petronas, Malaysia, PB

Trading Sendirian Berhad, Brunei,

Angola LNG and CNOOC

Thank You

OGRA Determined

Margin

ECC Approved

Margin

Margin 1.82 4.00

Tax Amount at import 1.32 1.32

Net Margin 0.50 2.68

Tax as a % age of margin 72.5% 33%

Tax Impact on Margin Exemption on Withholding Tax on LNG Import withdrawn through Finance

Act 2015. Accordingly 1% withholding tax on the import value increased by

Custom duty , sales tax and federal excise is applicable on LNG import

As a result, the Tax on LNG Business is more viz a viz the normal

corporate tax rate as depicted below:

Normal Corporate tax rate is around 40%

- 27 -

Margins in Other Sectors

Sector Gross Margin EBITDA Margin Net Margin

Cement 38.6% 38.6% 22.7%

Automobile 15.7% 13.4% 8.7%

E&P 49.4% 55.1% 35.5%

Power 23.8% 17.9% 10.7%

Fertilizer 34.3% 29.3% 11.1%

Data compiled based on annual reports.

- 28 -

LNG Business Risks

Take or Pay and IPP Capacity Charge Liability of over Rs 7bn

In the LNG market, supply contracts are structured on ‘Take or Pay’

basis

PSO is liable for full cargo value (approx USD 21-24 mn) to the

supplier(s) if PSO is unable to take delivery

Estimated financial impact of failure to take delivery of even a single

cargo is Rs. 2.2- 2.5 bn

SNGPL under Tripartite Agreement may order upto 4.5 mtpa of LNG

for a term of upto 30 years and PSO is required to supply/procure

these volumes

In case PSO is unable to supply the required volumes:

It is liable to pay capacity charges to IPPs

Capacity payment for a single month is estimated at Rs. 6 bn

This is 4 times the margin of both the 5 year term contracts that

PSO has bid recently

- 29 -

LNG Business Risks

Risk of Delayed Payments & Shortfall in SBLC Arrangement

Average receivable of Rs. 9 bn during the last 9 months

PSO has a loss in its LNG business due to delay in payments

SNGPL/IPPs

At full capacity the amount is expected to increase to Rs 36bn at current

low brent price (2 month cargoes)

Interest liability is estimated at around Rs 2.1 bn p.a

For 600 mmcfd of RLNG, PSO has to open Standby Letter of Credit

(SBLC) worth USD 150 mn for the LNG suppliers

SNGPL SBLC in favor of PSO is renewable and replenish able only

when the IPPs’ SBLC(s) in favor of SNGPL are renewed and

or/replenished

Resultantly the imbalance in credit support mechanism as per LNG

Supply Agreements vs against credit support mechanism in the

Tripartite Agreement is to be managed by PSO

Moreover, the opportunity cost is significant for PSO and it could obtain

a higher USD return by investing in business that yield better returns

- 30 -

Furnace Oil & LNG

Risks in LNG are high because of the uniqueness of the LNG supply chain

Yet the return on LNG is about one-fourth of FO

PSO will bleed unless adequate margins are not provided

Description FO LNG

PSO Annual Import USD 1.8 bn USD 1.7 bn

IPP Capacity Payment

Risk Yes Higher

Financial Risk Yes Higher

Credit Risk Yes Higher

Margin 3.50 1.82

Income Tax 1.36 1.32

Gross Margin 2.14 0.50

Margin Determination LNG as per OGRA Other Business LNG proposed

Sales 159,300 913,094 159,300

Gross Margin 2,843 31,448 7,749

Gross Margin % 1.82% 3.44% 4.96%

Operating Cost (351) (14,932) (351)

Take or pay (1,593) - (1,593)

Cost of Working Capital (1,062) - (1,062)

Capacity charge to IPP (730) - (730)

Tax Expense (2,062) (5,097) (2,062)

(5,798) (20,029) (5,798)

Net Margin (2,955) 11,419 1,951

Margin % -1.85% 1.25% 1.25%

……..Rs. In mn……..

- 32 -

PSO has unique skills to manage multi billion dollar supply chain

LNG project requires highly sophisticated treasury and buying

department with good reputation in local and international

banking sector

LNG business will become 37% of PSO’s total business and is

already consuming significant time of key management personnel

and support departments

Therefore, PSO’s total common administrative expenses (Other

than marketing and operations) will be allocated to LNG business

PSO is required to operate commercially and its commercial

margin ranges between 3.5% to 5.5%

Private sector customer is already paying 4% on LNG and is not

opting direct imports/ sourcing through other Companies.

Margins Justification

- 33 -

Components of Margins

Administrative Expenses 0.68%

Distribution Cost 0.00%

Marketing Cost 0.00%

Infrastructure Cost 0.00%

Working Capital Cost (Rs. 29

Billion)

2.40%

Taxation 1.32%

Insurance of risk elements 0.33%

Return to Share holders 1.94%

Total Margin 6.67%

- 34 -

LNG Expenses

Amount

Rs. in million

Total PSOs’ Operating Expense 10,668

Less: Distribution and Marketing

Expenses

8,296

Administrative Expenses (Common

Expenses)

2,372

Share of LNG business 37%

Allocation of Common Expenses 879

Direct LNG related expenses 110

Total LNG related costs-Annual 989

Estimated DES Cost-Annual 145,152

Cost as %age of DES 0.68%

- 35 -

Working Capital Cost

Annual imports Cost (Rs. In million) 145,152

GST rate 20%

GST amount 29,030

Annual import Cost with GST 174,182

Delay in receipts 60.00 Day

Average receivables 29,030.40

Cost of Fund 12%

Cost of Fund 3,483.65

Working Capital Cost as %age of DES 2.4%

- 36 -

Return on Businesses

Sector Internal Rate of

Return Risk Free Rate Risk Premium

All KSE Companies * 18.00% 10.75% 7.25%

Power Generation 17.00% 10.75% 6.25%

Gas Utilities 17.00% 10.75% 6.25%

Solar 17.00% 10.75% 6.25%

Local Coal 26.50% 10.75% 15.75%

Imported Coal 24.50% 10.75% 13.75%

Pipeline Infrastructure 18.00% 10.75% 7.25%

LNG business (PSO) - - -2.52%

LNG is being imported mainly for the Power Sector. Average return to other suppliers in this sector is more than 17% excluding any expenses

* Source: i) Pakistan & gulf Economist 17.11.2014 Issue Ii) State Bank of Pakistan Domestic Markets & Monetary Management Department

* Note the DES price of September 2015 has been fixed by OGRA for all cargoes that fall in the preceding period of March to September 2015

RLNG Price

Cost Components Provisional RLNG Price per OGRA RECOMMENDATION

Delivered Ex-Ship Price (DES price) Actual Allow at actual from March 2015

PSO Margin Restricted to 1.82% of DES

Allow as Proposed

Insurance Premium Actual Same

Wharfage Actual Same

Load Port Surveyor Charges Actual Same

Discharge Port Surveyor Charges Actual Same

Stamp Duty Actual Same

Infrastructure Cess Disallowed Allow at actual

Exchange Loss/Gain Actual Same

Excise Duty Actual Same

Terminal Charges Fixed at $ 0.66/MMBTU

Allow as per actual

SSGC & SNGPL Cost of Service Disallowed Allow

SSGC & SNGPL Admin Margin Disallowed Allow

Retainage Restricted to 0.75% of total LNG cost Allow as per actual

Transmission Losses 0.5% of DES price Same

- 38 -

Recommendations

Margin be enhanced to gross margin of 6.84%

which will be 1.94% for shareholders