::: Pakistan Refinery Limited :::

The Directors are pleased to recommend a final cash dividend of Rs 100 million i.e. 33.33%, which will be paid to the shareholders on the Company's register on september 18, 2007.

During the current year, Pakistan Refinery contributed an amount of Rs 286 million to the National Exchequer in the form of Direct Taxes. In addition, through the exports of Naphtha product, your Company brought valuable Foreign Exchange of approximately USD 140 million into the economy, thereby reducing burden on the country's balance of payments.

Corporate Governance

The Company is committed to high standards of corporate governance. There is no material departure from the best practice of corporate governance, as detailed in the listing regulations. The Company has been and shall remain committed to the conduct of its business in line with the Code of Corporate Governance and the listing regulations of the Stock Exchanges, which specify the role and responsibilities of the Board of Directors and management.

A Statement summarizing key operating and financial data for the last six years given on page 30

Value of Investment in Post - Employment Benefit Funds

The value of investments of provident, gratuity and pension funds on the basis of un-audited accounts as at June 30, 2007 are as follows:

This year witnessed a major milestone for your refinery as turnaround activity was carried out after 52 months of continuous operations, the longest period so far in the history of the refinery. The refinery was shut down for a total of 28 days to carry out major overhauling and maintenance work.

Planned shutdown of a refinery is a very complex and methodical process which requires meticulous execution as per documented plans. Various pre-shutdown activities are also required to be carried out many months prior to the shutdown itself to ensure smooth coordination between various business functions like Engineering, Operations, Procurement & Material Management and Inspection.

Throughout the turn-around period, a very spirited approach was taken by all concerned staff i.e. engineers, technician and contractors in order to successfully complete this mega project. Excellent planning, hard work and commitment on part of the refinery staff for carrying out all planned and unforeseen activities led to the successful completion of the activity without any incident or accident

Your refinery has yet again displayed technological leadership and innovativeness by successfully implementing a first of its kind cutting-edge technology in the refining sector i.e. Advance Process Control system. Historically, your refinery has been relying on the conventional pneumatic instruments which inherently cause larger variations in process and hence compliance with product specifications has always remained a challenge.

In 2002 your refinery kicked off a project to digitize process area instrumentation. Within two years the Crude Unit instrumentation was digitally automated. Consequently, the project to implement Advance Process Control (APC) system commenced and after rigorous quality control testing in late 2006, your refinery commissioned the first deployment of APC in Pakistan.

APC is a model predictive controller with builtin linear programming (LP) optimizer. APC optimizes Key Crude unit parameters keeping in perspective their control constraints and economic benefits. It also maximizes Gas oil and Kerosene yield from lower priced furnace oil thus minimizing fuel gas consumption in furnaces, and maintains crude unit process within operating and safety constraints. The system ensures that there are minimum product giveaways by maintaining product quality. It allows to operate optimum controlling and economically most feasible operating point while remaining within safe operating limits.

Given the existing storage capacity position at Korangi and Keamari locations and given the fact that two crude tanks are annually pulled out under the standard repair and maintenance cycle there was a shortage of 20,000 metric tons for crude storage. The construction of a new tank kicked off in 2006 and is now nearing completion. The commissioning of this tank will help fulfill all future crude storage requirements. Further, construction of the new tank will also facilitate storage of fuel oil during lean periods resulting in storage rental savings. The tank has a floating roof, 160 feet diameter and a height of 48 feet.

Your refinery considers Human Resource function to be a strategic business function as in today's global marketplace, the competitive advantage lies not just in product differentiation or cost leadership but in also being able to tap into the Company's special skills and core competencies of its staff. In other words, competitive advantage lies in management's ability to consolidate corporate-wide technologies and operational skills into competencies that empower individual businesses to adapt quickly to changing opportunities. Your refinery prides itself on its ability to tap into the available skill pool, recruit the best and train the human capital of the Company in order to develop a workforce which has specialized skills and competencies.

On the operational side, our HR department provides all the necessary support ranging from manpower planning to recruitment, from performance appraisal to training needs assessment, from compensation survey to salary and benefits adjustment and from training to training evaluations and feedback. On the developmental side in order to ensure human capital retention, HR plays its role through formal succession planning for the key organizational positions and facilitates employees in planning and managing their career paths.

On the technological front, one of the recent and commendable achievements has been the implementation of SAP Human Capital Module (HCM), a project that was completed well ahead of planned timelines. This module will greatly help in payroll, time, personnel and organizational management.

During the course of the year, a number of initiatives were taken by Information Technology department to ensure that all information services requirements are fulfilled. Following improvements have been successfully incorporated during the year:

SAP services upgrade to ECC 6.0 version. This seamless upgrade was a complete success as the production server was kept online for all users during working hours.
PRL network upgrade. To date approximately 50% of the entire network has been successfully modified to Gigabit platform. Gigabit platform allows for much quicker access to data and network connectivity. The remaining 10/100 mbps network is estimated to be phased out during the coming year.
Disaster recovery procedures and new storage servers to facilitate data replication have been put in place. Each year a disaster recovery drill is carried out and various test scenarios are exercised to ensure integrity and availability of primary data.
Active Directory Domain up gradation along with Domain Name Server (DNS) and Distributed File Systems (DFS) have now been migrated to new storage servers.

Future Expansion Project

During the year, the Board of your Company finalized the investment plan whereby a total investment of USD 320 million will be made for up gradation of refinery operations.

The Project's primary objective is to ensure compliance with Government of Pakistan's requirement of Euro-II diesel specification i.e. 500 parts per million (ppm) sulfur. Additionally, the Project will also help pave the way for sustained profitability by altering the production slate towards increased production of higher margin products and thereby justifying the investment. The entire future product slate would be marketable and mainly for local consumption.

During the year, the project governance structure has been put in place and the project team has been formed. Specific initiatives include;

Presently, preliminary work is ongoing which will be the basis for the Front End Engineering Design (FEED) stage which is expected to last approximately a year.

Your Company is dedicated to giving back to its community in many ways. It believes in doing work that has meaning and that makes a difference in the lives of people and the community at large.

Focused efforts during this year were made in the areas of health and education. Your Company supported local charity-run hospitals by giving donations for equipment purchase and facility renovations. Further, during the year, our contribution included donations to and even individual employee participation in HIV/AIDS awareness programs and even individual employee participation in these programs .

In the area of education your Company took on the task of renovating two government-run primary schools where major structural renovations were carried out along with providing basic educational amenities like uniforms and stationary.

Additionally assistance was provided to various responsible institutions and non-governmental organizations (NGO’s) who work on humanitarian grounds and provide free services like eye check up and surgery, AIDS awareness mission etc.

Corporations have a clear responsibility to ensure that their operations and business practices are not detrimental to society. Over the past few years, there has been an increasing pressure to take this responsibility very seriously. One measure of successful globalization is a world in which corporate social responsibility (CSR) becomes a force for sound business practices, democratic reform, and healthy communities. The global framework for successful CSR continues to be constructed. Within this framework it is the responsibility of corporations to take the lead and make CSR a corporate commitment.

Your refinery regards social citizenship as a primary responsibility and we regard it as our commitment to ensure that our materials and products produced are both environmentally friendly and technically sound. For your refinery CSR means “doing the right thing”. In developing meaningful CSR practices, your Company goes beyond the gut-check definition and analyzes how its actions impact a wide variety of stakeholder groups. Important stakeholders include shareholders, employees, suppliers, the environment, community members, customers and partners. Your Company at all times acts in a socially responsible manner and makes efforts to minimize any negative impact its business practices may have on any stakeholder group.

Your Company, through its CSR strategy, demonstrates good faith, social legitimacy and comitment that goes beyond the financial bottom line. To this end, since 2005, your refinery has voluntarily committed to the U.N. Global Compact Principles and submits a CSR report to the UN annually.

Your refinery is proud to be amongst the industry leaders in upholding and maintaining HSEQ practices. The accolades and honors received during the year give a clear indication of your refinery commitment and pursuance of controls in HSEQ.

For the third consecutive year, your refinery received the “ACCA-WWF Best Environment Reporting Award”. Other accolades in HSEQ include, “Annual Environment Excellence Award 2006” organized by National Forum for Environment and Health, “Occupational Health and Safety Award” for best practices from Employers Federation of Pakistan and “Excellence in Environment Award” from HELP.

In line with increased global focus on efficient energy consumption and emission reduction, your Company initiated a study with Foster Wheeler to design a waste heat recovery unit (WHRU) thereby helping to minimize emission of flue gases, emission of which contributes towards the global warming phenomenon. Resultantly, temperature of gasses released through stack has markedly reduced by approximately 100 degrees. The Waste Heat Recovery Unit also helps improve the overall efficiency of the existing Platformer & Hydro Furnaces as the recovered heat is utilized to run the furnaces thereby resulting in utility cost savings.

PRL encourages its contractors working on its behalf or on its premises to also apply health, safety, environment and quality standards.

Your refinery has an established Crisis Management Plan in place to make certain that the defined responsibilities of its employees are regularly exercised in case of any emergency or crisis situation. For this purpose, mock drills are conducted bi-annually to test the effectiveness of plans and to create awareness amongst the employees who will be responsible for playing pivotal roles during a crisis. Due to the nature of refinery products the major focus of the mock drill is fire fighting. The fire section of your refinery comprises of trained professionals and further supported by nominated individuals from various business functions. We have a Mutual Aid Emergency Response Plan (MAERP) in place which allows your refinery to pull in additional support from other local refineries as well as OMC's. Lessons learnt through each mock drill help bring in continual improvements in the system.

Your refinery, over the years, has taken concrete initiatives to reduce soil and ground water contamination and stricter controls have now been placed on activities that affect our environment. For this purpose, yearly soil & ground water monitoring is carried out. The objective is to pull in contamination levels of soil and ground water and at the same time develop base line data for analysis. The sampling points were identified in 2001 with the assistance of Environmental Technology Program for Industry (ETPI), a joint project of FPCCI & Government of Netherlands. For 2006 the monitored results of soil and ground water samples remain within the defined permissible limit of NEQS (National Environmental Quality Standards).

Your refinery carries out ambient air quality sampling on an annual basis of Oxides of Sulfur, Carbon Monoxide etc. at various locations of the refinery in order to check the pollutant level in the environment. The objective is to monitor pollutant level in our refinery so as to take concrete steps to alleviate the hazardous air contents. The annual air quality measurement results during 2006 in your refinery have remained within the defined permissible limit of NEQS (National Environmental Quality Standards).

The Board places on record its appreciation for the valuable services rendered by the outgoing directors Mr. Quentin D'Silva, Mr. S. Ali Raza and Mr. Sabar Hussain. The Board also welcomes aboard Mr. Asif S. Sindhu, Mr. Shahid Anwar Khan and Mr. G.A. Sabri.

During the year, five Board of Directors meetings were held and the attendance of each director is given below:

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