On June 14, 2023, global energy giant Shell made a significant announcement that cast more doubts on Pakistan’s economic prospects. The multinational corporation, which has been operating in Pakistan for 75 years, stated its intent to exit the country, marking a major turning point for Pakistan’s energy sector.
While this decision may come as a surprise to some, a closer examination reveals that Shell’s exit is not just about the bleak economic prospects in the country.
Global multinationals frequently go through periods of expansion and retrenchment. Sectoral booms and cheap availability of capital fuels expansion, while shifting technological, environmental, and financial winds force strategic retrenchment across business units and geographies.
Shell is currently going through such a shift and it has been actively divesting from various markets. In the recent past, the company has attempted to divest from Nigeria, exited the home energy retail market in parts of Europe, and even sold its Permian basin business.
As part of its announcements on June 14, the company also announced that it is conducting a strategic review of its assets in Singapore. These strategic moves indicate a consistent pattern of divestment in line with the company’s global strategy, which aims to cut costs by “$2-3 billion by the end of 2025,” per a recent release by Shell.
All of this is to say that Shell’s decision to exit Pakistan is definitely part of a broader global shift the company is undergoing.
However, this does not mean that the deteriorating economic situation in Pakistan has not played a role in Shell’s decision-making process. In recent months, many companies have announced a retrenchment or divestment of their operations in Pakistan.
This includes Lotte Chemical, which announced in January 2023 that it was selling its entire 75% stake in the Pakistan business, and Puma Holdings, which sold its 57% stake in Pakistan in January 2023 as well.
As companies assess their global footprint due to tightening economic conditions, a worsening economic outlook for Pakistan increases the likelihood of these companies exiting from Pakistan. A few weeks ago, the Overseas Investors Chamber of Commerce and Industry (OICCI) said that “multinational companies (MNCs) are faced with serious foreign exchange remittance issues.”
This trend has been seen even among venture capitalists, who arguably have a higher risk appetite and longer time horizon as compared to publicly listed companies that face more short-term pressures from their shareholders. Based on this evidence, it is clear that the economic situation in Pakistan has become a deterrent for foreign companies, influencing their decisions to exit the market.
Finally, the prospects for Pakistan’s energy sector are also bleak at best. The energy value chain faces a whole host of issues and the lack of reforms exacerbates the disincentives for companies like Shell to continue investing. The 2020 inquiry report is a must-read for those wanting to dive deeper into the myriad issues facing this sector, which at one point was overseen by a director-general who was trained as a veterinary doctor!
Ongoing issues such as the rampant growth of smuggling in the market — an open secret in the country — and liquidity problems stemming from the government’s liquidity crunch are only creating additional headwinds. These obstacles not only impact the profitability of energy companies but also introduce considerable reputational and legal risks for multinationals given their exposure to anti-corruption laws in Western countries. Consequently, Shell’s exit from Pakistan can be attributed, in part, to the sector-specific issues that have remained unresolved.
It is essential to recognize that the decision of companies to exit or invest in countries stems from a variety of factors, including exchange rate risk, economic risk, and political risk. In the case of Shell, these factors have evidently played a significant role in their departure from Pakistan.
Exchange rate risk, for instance, can pose substantial challenges to multinational corporations operating in countries with volatile currency markets — recent quarterly earnings released by Shell Pakistan point to this issue.
Economic risk refers to the overall stability and growth prospects of a country’s economy, and when these factors deteriorate, they can impact investment decisions — we are all familiar with how growing economic uncertainty is forcing businesses to shut down across the country. Finally, political risk, including government policies, regulations, and growth of informal markets, also influences companies’ strategies and willingness to operate in a particular country.
Some argue that Shell’s exit is evidence of the failures of the PDM government — and they are right. Others argue that this exit is part of Shell’s evolving global strategy — and they are also right.
In a polarized environment, things are often viewed as binaries and through a particular lens. But the reality is far more complex and nuanced. While Shell’s exit from Pakistan is undoubtedly noteworthy, it reflects a complex interplay of these factors and the company’s own strategic considerations.