Local refineries are habitual rent seekers. The business viability is diminishing on existing model without an active support of government. The refineries are playing the hard ball to extract economic rents at the expense of the consumers. The era seems to be over. Refineries have to get their act together or exit from the business. Government is determined to not support without actual plans to upgrade.
The refineries operate on Gross Refinery Margins (GRMs). They refine crude to get white oil (petrol, diesel etc) and the residual comes out as fuel oil (Furnace oil -FO). The margins on white oil are positive, and they are negative on fuel oil. The government fixed the refining margins on white oil (including deemed duty) to compensate for the losses of FO.
All the refineries in country (barring Parco) operate on age old technology of hydro skimming, producing substandard products. The contribution to environmental degradation is high. The fuel oil has to be produced invariably in this method. Globally, refineries are mostly upgraded to deep conversion. The white oil production is of better quality (Euro 4/5) and residual black oil can be converted into other refined products.
Since the margins are supported and low standard white oils are picked up, refineries have been rather passive. Now, two fundamental shifts are taking place. One is Pakistan specific and the other is global.
In Pakistan, the demand of FO is reducing. There is no demand in winters. In the past two seasons, government kept on facilitating refineries to store the product, and consumed it by running FO based power plants which were low on merit list. This year, there are adequate orders of RLNG. Government will not run FO based plants. The country wide storage is exhausting.
Globally, black oil (high Sulphur FO) prices are nose-diving due to IMO 2020. The high Sulphur oil usage in bunkering will finish by the end of 2019. The writing was on the wall. The government was pushing refineries to put their act together. They didn’t. The discount of FO to crude is at $30 (around 50%) and to make the GRMs positive, higher spread on white oil has to be given. The incremental cost will be incurred by the consumers.
The GRMs of four refiners (PRL, NRL, ARL and Byco) were 3-3.5 percent last fiscal year. This year due to IMO 2020, the GRMs will slide further. The government has two choices. Pay them higher spread on white oil to compensate for losses on fuel oil and let refineries afloat. The other is to import white oil. Import has two benefits. One is better quality fuel (Euro 4/5). The other is to not have higher white oil prices.
The disadvantage is of higher import bill. Nearly 70 percent of crude refined is imported. If white oil replaces crude, the incremental import cost is 3-3.5 percent, or even lower. The issue is of port capacity to handle white oil. Government is confident that the capacity is to be built by converting crude and fuel oil handing to white.
Petroleum ministry is in talks with FOTCO jetty to convert unloading and pulping of fuel oil into white oil. Tanker handling capacity can be managed. The government is eager to work on one damaged oil pier. The dual pipe line to transport white oil up country will be open till Sheikupura by January. Rest will be completed in two years.
If push comes to shove, inefficient refineries have to shut down one by one. Parco is doing better. It is going to mid conversion in Feb-2020. It will take two months to upgrade to produce white oil quality of Euro 3 /4. The residual fuel oil production will go down from 2.7k tons per day to 1.7k tons per day. For further upgradation, full cracker is the solution. That will take 3 years. The cracker can be installed at the side, and in three months it can be integrated with the main refinery.
The worst refinery is Byco with a nameplate capacity of refining 155k barrels per day, but it never operates at full capacity. The cost of upgrading is huge and seeing the weak financial position, it might be the first to shut. PRL is subsidiary of PSO; it’s in government interest to upgrade it. PRL has a capacity of processing around 50K barrels a day. The authorities are in talks with Chinese for joint venture. Cracker installation is not viable below 100K barrels per day capacity. Others have to join hands. Together, the four refineries have processing capacity of 250-300K barrels par day.
Attock is the problem child. NRL is owned by Attock. It is in government interest for Attock to operate. Domestic crude extracted in North is not viable to be transported to South. Without domestic crude production, gas supply for North will stop. Attock has to continue operating for consuming North fuel. The government can live with its 1-1.1K tons daily fuel oil production as its margin compensation impact on white oil prices is a few paisas per liter.
The best deal for local four refineries (barring PARCO) is to jointly install a cracker at their choice of location. Three refineries (PRL, NRL & Byco) in South – can jointly make one. In case Attock becomes a partner too, mid-country could be a way out. PRL cannot do it independently. Government through PRL can facilitate. The joint processing facility will be economically feasible. The minimum handling will be over 100k barrels per day. The white oil can be upgraded to Euro 4/5 at respective refineries through isomerization.
The PM is determined to have better quality white oil. Government will start importing Euro 4/5 from Jan-2020. Nadeem Baber has categorically said that government will stop buying white oil from refineries if they do not give a viable plan to upgrade in four months. Two new refineries are in pipeline. PARCO Coastal Refinery and ARMACO. It will take 4-5 years to construct one. PARCO Coastal Refinery may have 300-350k barrels per day capacity and will be more than enough to offset the requirement of the inefficient 4 local refineries.