FY’06 has also been marked by continued national and global recognition of PSO’s corporate transformation and strategic development. The company actively pursued its strategic objective of participating in and contributing to broader strategic development through various initiatives. Several business enterprises received advice on strategy formation, corporate planning and development of management systems.

In addition to World Economic Forum, the Company assumed a lead role at World Business Council for Sustainable Development (WBCSD) Geneva, Switzerland. It became the first company in the Muslim world to have its CEO on WBCSD’s Business Role Focus Area Core Team (FACT). PSO has also been awarded the top-most advisory position at WBCSD.

Global oil price trends have been volatile and unpredictable. Oil prices typically are sensitive to any incremental tightening of supply during periods of high economic growth. Geo-political tensions in major oil producing countries contributed to the volatility in pricing. An element of uncertainty has been added by the situation developing with respect to Iran and turbulence in Iraq. Although, rising crude oil prices impeded petroleum demand growth despite economic activity, world consumption rose by 3.9 mb/d over the last two years on account of economic double-digit growth in China, followed by India and other countries.

in the consumption of Furnace Oil. During the first three quarters of FY’06, FO consumption declined as compared to same period last year. Main factors contributing to the decline were sufficient reservoir levels for the generation of hydroelectric power projects at the start of the fiscal year. The situation reversed after March 2006 when water availability declined, thus increasing FO-based thermal power generation. LDO experienced a decline of around 17% over FY’05 due to substitution by HSD and electricity, coupled with low demand in agriculture.

New entrants in fiercely competitive petroleum sector significantly affected the market composition and posed challenges to established OMCs. A few existing players lost their market share to the new entrants while PSO maintained its leadership in key products.

OMCs suffered a setback when the government changed the oil pricing formula effective March 16, 2006, resulting in reduction of OMCs margins by around 20%. In addition, OMCs faced a financial burden as a result of government’s subsidy to the consumers, through OMCs, to protect them against oil price increase. The mandate for setting fortnightly oil prices was given to the Oil & Gas Regulatory Authority (OGRA), effective April 1, 2006.

As a whole, downstream oil market in Pakistan had been quite competitive during FY’06 with a thrust on product differentiation as the key to future business growth of OMCs, mainly in Mogas and HSD. PSO took a lead in innovative strategies, including introduction of high-value plastic card technology, differentiated fuels, investment in technology-driven solutions, etc.

PSO improved its retail marketing position in Mogas and CNG and thus consolidated its position. The company also added over 200 New Vision Outlets to its retail network, bringing the total to over 1,450.

Capitalizing on its state-of-the-art fuel management solution via plastic cards along with extra emphasis on Non-Fuel Retail businesses, enhanced its market share in Mogas from 44.7% to 45.3% and sustained market shares in other products. A number of marketing initiatives in collaboration with major brands were launched during the period under review.

To meet the ever-growing CNG demand, in addition to persistently increasing CNG facilities at PSO outlets, the company pioneered an innovative concept of Mother-Daughter CNG facilities at retail outlets on highways where piped gas is not available.

In HSD, despite intense competition and initial teething problems in SAP start-up, PSO’s market share stood at around 59%. Volume declined by 6.1% during the year with recovery poised towards second half of the year where PSO’s market share reached 60.3% as compared to 57.5% recorded in July-Dec 2006.

The company achieved over 32% market share in Lubricants, despite the unfortunate fire incident in July 2005 at Lube Manufacturing Terminal at Korangi and ever-increasing base oil prices. The insurance claim relating to this incident has been settled to the company’s satisfaction.

The company’s Cards business operations remained the big winner. PSO had embarked on this journey of unmatched and unparalleled technological breakthrough in 2002, initially launching the country’s first Loyalty Card followed by the PSO Fleet & Corporate Card & finally, the Prepaid Cards.

The infrastructure widened to encompass more than 1,200 outlets in over 170 cities. With a customer base of over 4,000 entities and having a sizeable cards population, the sales revenue of Fleet & Corporate Cards has grown steadily over the past four years.

During FY’06, PSO Prepaid Cards sale increased by 20% over the prior year. Further, a new denomination of Rs 10,000 was introduced to target another tier of customers in the market. A successful joint-promotion was carried out between Pizza Hut and PSO. Owing to its great success, a second series was launched subsequently.

PSO also took the initiative of expanding its coverage by introducing the technology of VSAT connectivity for its cardholders. The technology has been installed at all Motorway stations for PSO and non-PSO cards, including Visa and Master Cards in order to facilitate all kinds of customers.

The company extended its Retail Automation network from 1,034 last year to over 1,200 New Vision Retail Outlets during FY’06. Facilities at outlets were enhanced to 171 Shop Stops, 33 Business Centres and 1,150 Internet Kiosks as compared to 108, 15 and 783 respectively during FY’05.

In addition to establishing centralized Price Updating on monoliths from head office, the company installed ‘automated price change units’ at 40 NVROs. A model C-Store was established in Karachi.

The company also successfully launched its pilot project of Vehicle Identification System.

During FY’06, four divisional offices of Industrial Consumer Department were awarded ISO 9001:2000 Quality Management System certification along with re-certification of Central Laboratory KTA for ISO 9001:2000 Quality Management System. This certification has been achieved for the third time. Keamari Terminal-C was re-certified against current version of Environmental Management System Standard - ISO 14001:2004.

entire industry. The company saved almost Rs. 2 billion by importing HSD at cost- efficient price compared to the competition, passing on the benefit of low cost to the end consumer.

Despite permissions granted for HSFO imports to new entrants and severe berthing restrictions at FOTCO, the company managed to import 1.8 million tons HSFO in FY’06 to cater to the high demand of the power sector. During the last quarter of FY’06, PSO reacted swiftly to the upsurge in power sector demand and imported the highest-ever volume of 1.1 million tons HSFO -– an all-time record for any quarter in a year.

In FY’06, PSO supplied around 270,000 tons of locally produced LSFO from ARL to KAPCO. Through this, the company saved a substantial amount to the national exchequer on account of LSFO/HSFO import price differential.

The company also undertook renovation/up-gradation of depots and installations for improved performance and safety, implemented Operations and HSE Standard procedures and upgraded its fire-fighting outfit to NFPA standard. This was complemented by ISO 9001:2000 & 14001:1996 certifications for 15 locations.

In its endeavors towards Terminal Automation, the company installed closed-circuit televisions at all depots and terminals; introduced first of its kind, Tank Truck Loading Automation system at Keamari Terminal-A, along with state-of-the-art Radar Tank Gauging Electronic Metering systems at major locations for improved efficiency, reliability and convenience. Biometric Attendance Machines have also been installed at all location.

Disaster Recovery was shifted to the new location, which supports network infrastructure and is accessible to all business locations. At the communication infrastructure end, progress was made to improve and raise the service levels for various communication services provided for LAN and WAN setups.

PSO is also endeavoring to run its operation according to international standards. Work has been started to implement and achieve Information Security Management System (ISO-27001: 2005) for IT department.

Based on this financial performance, the company declared a cash dividend of Rs. 18/- per share to its shareholders for the 4th quarter ended June 30, 2006. Combined with the earlier declared interim nine-month dividend of Rs 16/-, the total dividend comes to Rs 34/- per share for FY’06.

The earnings during the period were impacted by higher financial costs due to outstanding receivables from the government. However, better management of resources reduced the adverse impact on profitability and cash flow of the company.

Based on this financial performance, the company declared a cash dividend of Rs. 18/- per share to its shareholders for the 4th quarter ended June 30, 2006. Combined with the earlier declared interim nine-month dividend of Rs 16/-, the total dividend comes to Rs 34/- per share for FY’06.

The earnings during the period were impacted by higher financial costs due to outstanding receivables from the government. However, better management of resources reduced the adverse impact on profitability and cash flow of the company.

Employees at PSO like to feel they are living up to the image of their organization, particularly when the organization has been achieving many landmarks in recent years, and realizing its future plans, is accelerating towards the goals that it has set for itself. The company continued to motivate its employees through proper placement, challenging assignments, employee recognition, empowerment, two-way communication, and skills-development programs.

After the New Vision retail outlets and cards technology, the implementation of SAP is another milestone for PSO. The total implementation of SAP at PSO is the biggest ERP achievement in Pakistan’s corporate history. The significance of this event was expressed through a ‘SAP Implementation Appreciation’ ceremony. The efforts of SAP System Implementation Team were highly appreciated by the Managing Director and by the entire PSO family as this ERP implementation is the largest of its kind in this region and, undoubtedly, no experience of such significant scale of implementation existed in the country’s oil industry.

For the Workmen Union to perform with greater zeal for the company, the management signed an accord with the PSO Workmen (CBA) for the period 2005-2007. This agreement was the outcome of cordial relationship and coordination between the negotiation committee from the management side and the committee constituted by the CBA.

The Training and Organization Development function forms an integral part of HR and plays a crucial role in ensuring that employees’ skills are developed to bring them at par with the organization’s professional requirements, while enhancing their personal development.

Employee training has grown in importance in this dynamic work environment where new techniques and methods are constantly being used and the employees need to keep themselves abreast of these changes. To ensure this regular training sessions, presentations, workshops and seminars are conducted within and outside the organization. Employee development programs, including in-house customized courses have been arranged through identified trainers from both abroad and Pakistan.

In the face of ever-intensifying competitive environment where the market is being further fragmented with new oil marketing companies and earnings being affected by the downward revision of OMCs margins, this scenario is indicative of extremely tough and competitive times ahead where sustained profitability will depend upon high operating efficiencies, innovation and robust business practices.

With numerous marketing initiatives, the company is ever-more prepared to meet future challenges through differentiated products and services, enhanced utilization of technology,

continued operational excellence and innovative value-addition. In order to maintain its leadership, PSO will continue to make investments in strategic projects like expansion of New Vision retail outlets, technology-driven initiatives, operational infrastructure, product handling facilities, etc, to ensure the maximum returns for its shareholders.