The refining segment is beleaguered as the oil and gas sector keeps moving away from furnace oil – once a key fuel in the energy mix. While phasing out of furnace oil is the right decision, it has left refineries distressed. Part of it has to do with inadequate refining capacity and no upgrade in the refining process.

Attock Group has two refineries: National Refinery Limited (PSX: NRL) and Attock Refinery Limited (PSX: ATRL), both demonstrating a sloppy earning position. The refineries posted 9MFY19 financial performance recently, where ATRL saw its earnings go down from a profit of Rs1.23 billion in 9MFY18 to a loss of over Rs3 billion in 9MFY19. Similarly, NRL posted a loss of Rs5.19 billion in 9MFY19 versus a profit of Rs1.57 billion in 9MFY18.

The situation in 3QFY19 worsened as ATRL’s losses increased by 68 percent, year-on-year, while NRL’s losses in the quarter increased by more than 20 times that of 3QFY18.

Where up-liftment of furnace oil has remained a challenge, the decline in refineries’ profitability is also due to higher crude oil prices in the beginning of the fiscal year and thus higher product prices, squeezing the gross refining margins. In the second half, substantial decline in crude oil prices resulted in inventory losses. The overall performance of the refineries was also impacted by the currency depreciation that wreaked havoc on net margins overall, as the refineries incurred high exchange losses in the first two quarters of FY19.

For Attock Refinery Limited, the non-refinery income could also not contain the losses. And for NRL, the lube segment could not save the overall profitability of the refinery due to asymmetrical increase in prices of lube products and also lower sales volume of bitumen amid lower development activity in the country.

The government has planned to give a 5-year window to the existing refineries as well with similar concessions offered to new refineries to upgrade. In a recent interview with BR Research, Nadeem Babar, Chairman Energy Reforms Taskforce pointed out that the plan is that the refineries will export furnace oil for the next two years where the government will give them some financial incentive in the first six months- as FO is a negative margins product due to import price parity – after which they will have to compete on their own or go to deeper conversions.