Shifting away from furnace oil has been a good decision, but its execution has been anything but satisfactory. The problem of excess furnace oil and its slowed upliftment has created an air of supply chain disruption in the oil and gas sector.

However, this furnace oil supply chain disruption is not new; similar issue erupted a year back when there was an abrupt fall in furnace oil orders from power plants that led to a staggering rise in stockpiles at domestic refineries, all of which led to the fear of petroleum products shortage in the country.

Anyways, the government has finally decided to stop FO import and allow export of the same in the medium term in a bid to help oil refineries ease their surplus that threatened to break down petroleum supply chain - something that this space has been highlighting for over a year now. Meanwhile, it has directed the refineries to keep the excess supplies with the IPPs – a short term solution to a much bigger problem.

However, the government’s attempt to address this structural issue seems late as chinks have started appearing in the supply chain. For one, the decreased off-take of furnace oil has slowed down local refineries that are currently operating at their lowest utilisation of 65 percent. The disruption can be seen in the decline in oil sales of all major petroleum products. Excluding furnace oil, oil sales plunged by 22 percent year-on-year in November 2018.

What is of more concern is that the cracks have now started appearing in the upstream oil and gas sector, something that this space had warned about on November 30, 2018 (Read,” Furnace oil: Embrace it, don’t destroy it “). According to the latest figures, crude oil and gas production has fallen significantly in the week starting November 27, 2018 to December 4, 2018. Crude oil production has fallen by 17 percent, week-on-week, while the natural gas production has slipped by three percent, week-on-week. This weekly production decline in oil to 75,897 bpd stands in sharp contrast to over 90,000 bpd on average crude oil production in the previous 9 weeks. Refineries use crude oil for making petroleum products. It seems that the decline in refinery activity amid excess FO supply has decreased their demand for local crude oil, which has resulted in lower extraction by the domestic E&P companies.

Tal Block, which accounts for over 20 percent of total crude oil production has seen majority of the decline. Operated by MOL, Tal block is house to significant production by all the three key E&Ps: OGDCL, PPL, and POL. Tal Block alone has seen a decline of 29 percent in the latest weekly update, and the same has witnessed a fall of 20 percent week-on-week in gas production. The other important fields like Nashpa and Kunnar Pasakhi Deep Tando Ala Yaar KPD-TAY too saw a decline of over 30 percent in oil production.

This chain reaction is scary, and the government is not realising the gravity of the issue at hand. Shutdown or inactivity of the refineries has started showing signs. If this continues, shortage of petroleum products in the country is not far away. The government needs to buckle up as a fall in local crude could signal higher imports and even imported petroleum products, and all this could trigger another issue of limited port handling capacity.