Adil Khattak, CEO of Attock Refinery, has been associated with the Attock Oil Group in Pakistan for the last 34 years. He also serves as CEO of Attock General, Attock Hospital, and National Cleaner Production Centre.
A Director on the board of Attock Petroleum and Attock Information Technology Services, Khattak also has some philanthropic work to his credit being the President of Attock Sahara Foundation - an NGO working for the poor and needy people of Morgah and its surrounding areas.
CRUDE REALITIES OF REFINING BUSINESS Attock Refinery - the country's only local refinery capable of processing heavy crude discovered in Pakistan -- is planning to undergo a series of business expansion plans over the course of next two years.
"We are working on an add-on unit which will increase our refining capacity by almost 25 percent.... secondly, we are setting up an isomerisation plant which will enable us to convert all of the inter-mediate product, Naphtha, into value-added motor gasoline," Adil Khattak, Attock Refinery's Chief Executive Officer told BR Research in recent interview.
The bids for the projects, which will take roughly around two years to complete and will cost around $100 million, have already been invited. The Attock Group is also planning to set up another IPP of 200 MW after their successful Attock Gen Ltd's 165 MW plant commissioned in 2009.
Attock Refinery (ARL) is currently the only refinery in the country which is running at almost full capacity, at a time when others are not able to run optimally because of the circular debt issue. ARL has managed to do so by not paying to OGDC on account of crude supplies as PSO continues to default on payments to ARL.
"The circular debt problem has left OGDC and PPL with not enough money to carry on their exploration activities. Then the refineries are hardly operating at 50-60 percent capacity which augments the problem. This is resulting in heavy imports of all kind of products, for which valuable foreign exchange has to be doled out," said Khattak.
ARL is part of the Attock Group which is the only fully integrated group of the oil & gas sector of Pakistan with Pakistan Oilfields, National Refinery Ltd and Attock Petroleum Ltd. The synergies have helped the group in the oil marketing business as well; Attock Petroleum has now become the third largest firm, in terms of market share, after having beaten Chevron.
CIRCULAR DEBT Khattak laments the often 'overstated' energy sector circular debt numbers. "They often double the actual amount.....the correct amount at the moment would be somewhere around Rs 180-190 billion, which is still huge, and if not dealt urgently, can lead to a total collapse of not only the energy sector but of the national economy.
Commenting on the root of circular debt, Khattak explains that the power companies are not generating enough revenues to pay the oil marketing companies, who in turn do not have enough to pay the refineries, who in turn stop payment to the crude suppliers.
"We all know why Pepco does not have the money....the biggest issue is line losses followed by theft. Then there is the issue of billing collections, especially from the government itself. So, they are just increasing the tariffs and ignoring the root cause, which is not going to address the issue," says Khattak.
The refinery boss also puts the blame on inefficient power plants "that are very old and have not been maintained properly, which supplements the high technical losses....less efficiency results in burning of more fuel for lesser electricity, which means high cost of generation". But aside from the circular debt, there is another issue that is responsible for the reduced efficiency of the refineries: the pricing mechanism.
PRICING WOES The pricing of refinery products has been a major bone of contention between the government and the refiners over the last few years - one which allegedly hinders the optimal production.
"We have been negotiating the pricing formula with the government for two years," says Khattak. "Our Gross Refinery Margins, which is the difference between the price we pay for the crude and the price which we get on our product, have been under immense pressure," he added.
Since both these prices are linked with the international prices, the Gross Refinery Margins often turn negative. "Another issue is that Ogra used to announce petroleum prices every fortnight, which has been changed to a monthly revision, a move that increases our volatility risk," says Khattak.
The Economic Co-ordination Committee has approved the idea of allowing the refineries to raise their prices to the level of imported price which could have given refiners some room, but the government has not yet allowed that despite the ECC's nod.
Then what should be the ideal pricing formula for refineries and OMCs, we asked Mr Khattak. "De-regulation of product pricing with reasonable duties structure for protection of local refineries", he replies.
"The ECC has decided to abolish the IFEM from the pricing mechanism, when that happens, the prices will vary from one place to another. Secondly, they have decided in principle to allow the ex-refinery price of petrol to be equated with that of the imported product, but both of these decisions have not yet been implemented".
Fixed margins for the OMCs are "absolutely not sustainable". "You can carry with it for a shorter period but you cannot live with it for a longer period because the cost of doing business is inching up and the inflation is in double digits. It does not make any business sense to expect the OMCs to continue operating with fixed margins," says Khattak.
Yet, while advocating deregulation as "the definite answer", Khattak calls for government protection to continue if the refineries are to survive in Pakistan.
"Every country protects its important industries even if we keep aside the point of strategic asset for a moment. Doesn't the USA protect its steel industry? We are asking for protection which happens all over the world, this is nothing new that we demand," he said.
"The investors will always demand a reasonable return if they ever invest in desulphurisation plants, which is impossible in the current scenario where the pricing mechanism is unjust," Khattak asserted. Explaining the refiners' position on deemed duty currently in place to make allocation for the desulphurisation plants, Khattak elaborated that the government had put a cap on their dividends to the shareholders in 2002, with the allocation of profit after dividends going to a special reserve fund that serves two purposes.
"One was to adjust against any losses and the other was to invest in up-gradation projects. The amount in special reserves was not enough to setup desulphurisation plants, as it did not even cover the 20 percent equity requirements," said Khattak. Then, post 2009, the refiners suffered huge losses which nearly wiped off all the special reserves, leaving no money to be invested for up-gradation.
"If you remove the duty, your refineries will shut down and you will be importing 100 percent petroleum products," Khattak cautions against the calls to remove deemed duty. INFRASTRUCTURAL ISSUES There is need for expansion of the refining sector as the current capacity is only 12 million tons as against demand of over 20 million tons per annum but the circular debt problem and the pricing anomalies are keeping the new projects -- such as Khalifa Point Refinery of 250,000 barrels per day capacity, the Indus Refinery and Trans Asia Refinery project- at bay.
Pakistan is also facing serious infrastructure constraints. These include the port handling capacity of furnace oil in Pakistan, which Khattak thinks is going to be a serious issue in the near future and could turn into a crisis situation.
"The only handling terminal has already reached its maximum capacity, so the new power plants that are coming online will face serious issues as there is no handling facility at the port to cater to the increased demand," warns Khattak Moreover, lack of oil pipelines for transportation is also a major issue as oil transportation through the road network is not the best idea. "We have a plan to lay pipeline from Lahore to Peshawar but we have not received the required government support so far," he said.
Interview by Ali Khizar Aslam