From its share in power generation in the previous years to its high price as a fuel cost and its repercussions on the environment, furnace oil has been a troublemaker. It started when the furnace oil started being replaced in the power generation mix by coal and RLNG, and it made sense as the expensive furnace oil was no longer feasible relative to the imported RLNG and new coal power plants coming online. The curtailment gave a breather to petroleum imports.
However, it is also when furnace oil started wreaking crisis after crisis and the refineries a run good for their money. Refineries in Pakistan run on hydro-skimming technology, where the percentage of FO production is much more than in a system of deep conversion refineries that produces more of the other value added petroleum products. Apart from the regular winter crisis where domestic offtake came under threat due to lower power demand, FO curtailment’s adverse effects on the downstream oil and gas sector have taken up a notch with the IMO 2020 Regulations that has resulted is spiraling down of furnace oil prices. With no recovery insight for prices, FO is a threat to the downstream oil sector.
Lower furnace oil offtake is becoming unfeasible for the refineries as the government is not in agreement with increasing the FO offtake by the power sector. However, with FO prices coming down, analysts have started looking into the revival of FO-based power generation. Will the government agree to increasing the power sector FO consumption? Technically, the discount at which FO is trading to coal and LNG is large, which is bringing fuel-oil based power plants (IPPs) up the merit order. Reportedly, the oil refiners have approached the standing committee and petroleum division to run efficient furnace oil based plants to move the FO inventories and production sitting with them.
One lacuna here however, is that the demand for power (electricity) is low, and will continue to be low in the following couple of months due to the seasonal slowdown. With already excess power in the system, will the government give in to the pressure of significant fall in FO prices that is making it attractive once again? Not running the coal plants or pushing LNG down has their own repercussions.
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