Pakistan has been declared “furnace oil free” in terms of power generation on multiple occasions in the past three years. Every time, it backfired. This time around, FO based power generation has come back stronger than ever before. And as always, the blame game is on. This has now happened one too many times for it to be brushed aside. Nothing suggests this is the last episode either.
The story goes that Pakistan is sitting on unusually high stocks of furnace oil, the bulk of which has been arranged and imported by the government herself. On cue, the refineries were out with SOS calls pleading the government to uplift the FO they end up producing. Only that, there is not much storge left, and a couple had to shut operations for a brief while.
Rest assured the help came, as government has reportedly started to uplift FO and the IPPs are once again running in good steam. As per the energy minister, refineries “will be consuming 13,000 tons/day of FO” in a couple of days. The stocks are believed to be north of 0.75 million tons, and even if the IPPs consume 10,000 tons per day, the next two months could see FO being the single largest fuel source in the generation mix – and the stocks would still not have evaporated.
Monthly FO consumption of 300,000 tons per month could mean a bill in excess of Rs30 billion, which would be a first since May 2017, when FO used to be the main source of power generation. Rest assured, running FO based plants for two months just to ensure the fuel stocks get utilized will mean disregarding the merit order of dispatch, and a substantially high incidence of monthly fuel adjustment.
Recall that the monthly FCA has already stayed north of Rs4/unit in the last two months, leading to high inflation. Another two months of the same or even worse, is just going to be a Rs60-70 billion burden on the paying consumer. And no, not all of it was unavoidable. There is a clear case of lack of foresight in planning, and a clearer case of giving in to the refineries pressure. It now happens almost every winter.
The ministry had apparently arranged FO imports foreseeing a potential LNG shortage during winters. The shortage was lower than earlier envisaged, leading to lower FO utilization. The question arises that did the ministry not see an FO glut in the coming months when RLNG was not as short as foreseen. It was always going to be a case of delaying the inevitable since power demand remains subdued all winters till mid-March.
The bigger question that needs to be addressed is what happens to the refineries. How long will the consumer pay the price of their inability to get rid of FO production, which eventually leads to higher generation fuel cost? It is time the authorities decide if it is worth keeping the refineries afloat at the expense of the consumer. Is there a case of exporting FO at loss, if the “strategic” nature of the refinery business means they can’t be left high and dry. What is the cost and benefit analysis of procuring the FO and compelling the consumers to pay and the resultant inflation that follows versus earning foreign exchange at loss?
One has not seen much coming out in terms of evidence-based answers from the relevant players. All what you see are newspaper appeals and the resultant “amicable resolution” of the matter year after year. Here is hoping the upcoming refinery policy does not offer a get-out-of-jail card and another decade long holiday to refineries in terms of upgrading their plants, at consumers expense. The consumers deserve better.