In Pakistan, oil refineries in hot water as low prices dent margins

Prices crashing due to Jan 1 deadline for stopping production of high sulphur oil

KARACHI: Petroleum refineries in Pakistan are facing a new crisis as rapidly declining furnace oil prices are denting their profit margins while they are searching in vain for potential buyers of the oil.

“Furnace oil prices stood around 34% lower at Rs50,500 per ton at the beginning of November compared to Rs76,000 on October 1,” JS Global analyst Arsalan Ahmed said while talking to The Express Tribune.

“The drop came despite no (major) change in imported and local crude oil prices and the rupee-dollar parity also remained stable,” he said.

The share of furnace oil stands at one-fourth of all the refined products produced from crude in the country.

Prices of crude and refined petroleum products being produced at the refineries in Pakistan are linked with the international prices. The Arab Light crude is the benchmark for Pakistan.

Furnace oil prices are crashing around the world ahead of the approaching deadline of January 1, 2020 for halting production of all kinds of oil which contain 3.5% sulphur content and replacing them with a new furnace oil having only 0.5% sulphur content.

The United Nations (UN) International Maritime Organisation (IMO), in March 2018, ruled that the maritime sector would have to reduce sulphur emissions to control marine pollution by January 2020.

“Almost all the refineries around the world have upgraded their technology to produce furnace oil with low sulphur content. Even our neighbour India became IMO compliant in October,” he revealed. While the price of furnace oil containing 3.5% sulphur is diving, the price of the same oil with 0.5% sulphur has been on the rise since its introduction.

“The price of very low sulphur furnace oil (VLSFO) stands at $480 per ton in world markets compared to the price of high sulphur furnace oil (HSFO) at $285 per ton,” he said.

Almost 60% of demand for furnace oil comes from the marine sector across the world. IMO regulations state that if a ship is found operating on high sulphur content oil after the deadline, it will be detained globally to replace the oil with the new one and it will be fined as well.

“However, neither our refineries nor the government or the refineries’ regulator (the Oil and Gas Regulatory Authority - Ogra) paid any attention to the IMO decision,” he pointed out.

Owing to the dismal situation, Pakistan’s refineries are in hot water and that too at a time when they are struggling to find buyers of furnace oil.

Earlier, the government was the biggest buyer of furnace oil but now it has massively reduced reliance on furnace oil-fired power plants because it is the most expensive option in the energy mix.

The drop in furnace oil prices is hitting the refineries’ revenues hard.

“A fall of $50 per ton in prices of furnace oil results in a loss of Rs27 billion to the refinery sector, keeping other margins constant,” he said, adding that prices had dropped around $100 per ton from October 1 to November 1, 2019.

Refineries are operating on an outdated technology called hydro-skimming. This needs to be replaced with the deep-conversion technology.

“Newly planned refineries in Pakistan, such as the one to be set up by Saudi Arabia in the near future, will be equipped with the new technology,” he said.

Upgrading the refineries may cost between $400-600 million for an installed capacity of 50,000 barrels per day. More importantly, the replacement of the technology will take at least three years. The government and Orga should at least introduce a policy for upgrading the refineries and also set a deadline for that purpose.

In the meantime, any drop in furnace oil prices may encourage the government to resume power production by furnace oil-based plants as this option will eventually become feasible.

However, the upward movement in prices of the newly introduced furnace oil will enhance the freight cost of imports and exports across the world, including Pakistan.

“This element may contribute to an increase in inflation in the country,” the analyst cautioned.

Published in The Express Tribune, November 21^st, 2019.

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