Why oil refineries are underutilised? | The Express Tribune


The demand for petrol and diesel remains strong in Pakistan but the country’s oil refining capacity can’t meet all of its energy needs.

And to add to the misery, lately, the oil refineries have been running well below their nameplate capacities. This underutilisation, if resolved, could give the government an opportunity to save foreign exchange.

There are five main oil refineries in Pakistan. Byco Petroleum and Pak Arab Refinery (Parco) are the largest, which represent more than half of the nation’s throughput capacity and processed volumes.

The five refineries can process up to 19.4 million tonnes of crude oil annually but their total output was around 11.6 million tonnes in the last financial year, as per data of the Economic Survey of Pakistan and Oil Companies Advisory Council.

From this, we can estimate that the country utilised just around 60% of its oil refining capacity in FY21.

Refineries turn crude oil into petrol, diesel, furnace oil, and other refined products. As such, they play an important role in Pakistan’s energy landscape.

Moreover, the refineries also cause forex savings for the country by cutting down the need to import expensive refined products.

However, the refiners only satisfy around 30% of petrol and 50% of diesel demand, due in large part to the low utilisation rates. As a result, the country spends a lot of cash on buying refined products from foreign sellers, which hurts its trade balance.

Pakistan imported $18.75 billion of goods in the July-September period of 2021, according to data released by the Pakistan Bureau of Statistics, including $2.18 billion spent on buying 4.25 million tonnes of petroleum products.

The country usually spends more money on procuring petroleum products from foreign buyers than any other commodity. But this import bill can be lowered if refineries were to operate near their nameplate capacity.

Oil refineries in Pakistan configured their plants to produce mainly diesel, furnace oil, and petrol. Four refineries are based on hydro-skimming technology whose output is approximately 40% to 45% diesel, 30% to 40% furnace oil, and 15% to 20% petrol, based on the type of crude these facilities usually process.

One has better technology and its furnace oil yield is estimated to be around 20%. Furnace oil, therefore, is one of the main products of these companies.

Global shift

Until 2017, this fuel was used primarily for electricity generation by independent power producers (IPPs), who consumed both locally produced and imported furnace oil.

In 2017, however, the power generation companies were directed by the government to move away from furnace oil towards its cleaner burning alternative – natural gas (imported re-gasified liquefied natural gas).

This shift was in line with the global tilt towards using environmentally friendly fuels for producing electricity.

The consumption of dirty fuels like coal and furnace oil is declining around the world. For example, in the US, more than a hundred coal-fired power plants have converted to natural gas since 2011, as per a US Energy Information Administration (EIA) report.

Environmental concerns among the masses have been growing and environmental regulations are getting stricter by the day, which is driving this change. The International Maritime Organisation (IMO) has also prohibited the use of high-sulphur furnace oil by all types of ships.

This global trend is unlikely to reverse and it has put Pakistan’s refiners in a tough spot. The demand for one of their main products has disappeared.

Pakistan witnessed a big drop in furnace oil consumption, which fell to a little under three million tonnes in 2020-21 from 9.6 million tonnes in 2016-17.

Each refinery, however, still produces 20% to 40% furnace oil whenever it processes crude. This created inventory management issues for the refineries, which soon ran out of storage capacity and had to cut down plant utilisation.

This hurt the financial performance of oil refiners, raised concerns about their prospects, and forced the country to import greater quantities of refined products.

Who is to blame?

Refiners have been slow to react to the changing market dynamics. They’ve had more than six years to reduce their furnace oil yield by upgrading plants, but they failed to do so.

However, the policymakers who abruptly shifted the country’s energy mix in favour of LNG are also to blame.

Pakistan got its first LNG shipment in 2015 and within a couple of years, furnace oil demand plunged by nearly 70%. This was far too quick for the refiners.

Perhaps, a more prudent approach could have been to gradually phase out the demand over a longer period. It would have given the refiners more time to make necessary adjustments.

Remember, oil refining is a highly capital-intensive business where up-gradation or expansion requires substantial investment. Companies may have to install expensive equipment like fluid catalytic cracking (FCC) or hydrocracking units to improve their Euro-V and Euro-VI standard petrol and diesel yields.

PSO’s subsidiary Pakistan Refinery, for instance, estimates that it could spend around $1 billion to modernise its facilities. Byco Petroleum has given an estimate of more than $850 million.

Additionally, the up-gradation process can take well over two to three years. It requires significant planning, time, and financial resources and it certainly can’t happen in a short time frame.

The good thing is that the refineries have already made up-gradation plans and some like Byco Petroleum have moved into the implementation phase.

The government also seems to have finalised a new oil refining policy that may give the industry incentives like income tax holidays and exemption from customs duty on import of machinery and critical equipment.

The refiners plan to spend tons of cash on up-gradation work and with the introduction of a favourable policy framework, they may get the necessary support from the government and will likely finish their projects on time.

After a few years, as the refiners finish modernising their plants, their petrol and diesel output should climb meaningfully. A vast majority of their production mix will likely be Euro-V and Euro-VI standard petrol and diesel while furnace oil will take a backseat.

Utilisation rates will likely rise to normal levels of 90% or higher. Moreover, with the increase in petrol and diesel volumes, Pakistan’s petroleum product imports should decline, which will have a positive effect on the trade balance.

The writer is a business and economics writer, specialising in the oil and gas sector


Published in The Express Tribune, November 8th, 2021.

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