The oil sector in Pakistan is benefiting from the increase in consumption of petroleum products that is being driven by economic growth. The petroleum companies can grow at a healthy pace in the coming years on the back of rising demand for crude oil. They can help push the country’s economic growth higher.
The oil refineries that produce petrol, diesel, and other refined products play a vital role in fulfilling the country’s energy needs. Besides ensuring energy security, they save the country billions in foreign exchange by cutting down reliance on fuel imports and contribute significantly to the national kitty through duties and taxes. Moreover, oil refineries also directly or indirectly employ thousands of people.
The refining industry, however, seems to get little support from the government. Rather, the sector has often been a subject of unwarranted and unfair criticism. For example, the refining sector is commonly accused of operating on government subsidies. This is highly misleading. Although some sectors often receive substantial direct subsidies and heavy payouts from the government, oil refining isn’t one of them.
Instead of subsidies, oil refineries have been getting tariff protection in the form of a 7.5% duty imposed on high-speed diesel. However, since refineries produce numerous petroleum products, not just high-speed diesel, the net impact on the entire barrel is a modest 2.25%.
The oil refining sector pays hundreds of billions of rupees each year in duties, taxes, and levies. For example, National Refinery, which is the country’s third-biggest refiner in terms of installed capacity, paid Rs 52.86 billion in the form of direct and indirect taxes in the previous financial year. Others also made significant contributions.
The companies operating in the petroleum sector have a simple business model and they typically earn a low-to-moderate profit margin which largely depends upon shifts in oil prices and fuel demand. For the exploration and production industry, profits come primarily from crude oil and natural gas extraction and sales. The oil refineries, on the other hand, turn crude oil into high-value refined products, like petrol, which are then purchased by oil marketing companies and other businesses.
However, it’s not always a win-win scenario for oil refiners. An increase in oil prices combined with the decrease in the valuation of the local currency can hurt their bottom-line, as we have seen in the previous years. For the most part, refineries use crude oil as a raw material so a reduction or rise in international oil prices influences their production costs and profit margins.
Refineries are also often denounced for running outdated plants and equipment. Although the industry is in need of up-gradation, it is unfair to label them as obsolete since practically all oil refineries, from time to time, have made investments to improve their product quality. As a result, the Research Octane Number (RON) for motor gasoline (petrol) has improved substantially, lead content has been removed, and sulphur from motor gasoline and high-speed has been reduced significantly.
However, the oil refiners have recognized that a lot more needs to be done, which is why they have planned major upgrades. The nation’s biggest oil refiner by installed capacity CnergyicoPk Limited (formerly Byco Petroleum) has already started working on a massive project to modernize its facilities. Karachi-based Cnergyico plans to spend approximately $850 million to install more than a dozen new plants at its oil refining complex to produce higher quality and more environmentally friendly fuels, particularly petrol and diesel. It is looking to upgrade its product slate to Euro-V specifications. Other refiners, such as Pakistan Refinery, have also laid out capital expenditure plans to modernize their plants.
The oil refining industry’s critics also often claim that the industry neither creates foreign currency savings nor employment opportunities. In reality, however, the local refineries save the country significant foreign exchange each year by locally producing petrol and diesel. Otherwise, Pakistan would have to import these expensive products. And when it comes to employment, the livelihood of around 3,500 individuals is either directly or indirectly linked with a single oil refinery. Taken together, the operations of the country’s five oil refineries help run tens of thousands of people.
Petroleum refining plays a critical role in the economy. It strengthens and safeguards the country’s energy security. The government should, therefore, take steps that can take this industry to new heights so the refiners can play a bigger role in the nation’s economic development.
(The writer is an oil and gas sector analyst)
Copyright Business Recorder, 2022
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