Refineries not great investments country can strive for

Resources should be diverted to better opportunities which may have larger impact on economic activity

ISLAMABAD: Prime Minister Imran Khan has made his economic ideology very clear in a recent interview on a television network.

He has spoken against anti-profit and anti-investment thinking which has discouraged business activities in Pakistan. In the wake of this interview or simultaneously, the petroleum minister has also indicated that he is withdrawing his campaign against liquefied natural gas (LNG) projects.

Yes, business and investment activity brings economic growth and employment. However, it should be in competitive sectors, where profit is earned in the market and not through government payout and subsidies or extraction from consumers and people, as generally the energy sector is currently composed of. This is, however, poised to change as there is now a consensus in policy circles that competition should be introduced.

Last government would not have come under criticism, especially in the LNG sector, had it resorted to competition and not have had a negotiated deal with Qatar. One can have G2G negotiations for an overall framework of cooperation, but finally procurement should be under competition, as much as it can be possible. The same is true for CPEC, wherein genuine competition among Chinese companies could have been ensured.

News is coming out about investment prospects in oil refineries. It is not for the first time that such initiatives have emerged. Latest is the news of Saudi investment in an oil refinery in Gwadar. There was similar news about Chinese interest in this respect as well.

The most important proposal is the Chinese one involving an oil refinery to be installed at Gwadar with a capacity of 21 million tons per year (500,000 barrels per day - bpd) and an investment of $12 billion. The output is to be shipped to Kashgar through a pipeline.

There are proposals to install deep refineries in Punjab. There is also an old proposal of an oil refinery of 300,000 bpd at Khalifa point under a UAE investment of $5 billion. Nothing has happened on these proposals that have been floated for more than a decade.

No forex savings, less employment

Oil refining is a capital-intensive business. Today, an oil refinery of 200,000 bpd would not cost any less than $4-5 billion. In comparison, a power plant of 1,000 megawatts costs less than $1.1-1.4 billion.

Pakistan consumes petroleum worth $12-16 billion annually, 85% of which is imported. Thus, it is the largest product in Pakistan’s import bill. It would be nice, if we can do away with these imports or reduce them considerably.

Would oil refineries make a significant impact in this respect? Not really. Refineries are a low margin business worldwide - $5 per barrel, while a barrel may be costing $70-80 on the average. This would amount to 5-6%.

This is not profit. It is value addition, out of which all expenses are to be paid other than the crude oil. Thus, savings in foreign exchange by oil refineries may be hardly $1 per barrel or 1-2%.



In our case, where oil refineries require protection of 2.5% or even more, the aforementioned savings may evaporate. So, it comes out that there is hardly any foreign exchange savings in this business.

Does it create employment? Hardly any. Billions of dollars worth of refinery may not create more than a few hundred jobs. There are other sectors in the economy in normal industries where tens of thousands of jobs may be created with this kind of investment.

The question is why not import high-quality environmentally acceptable finished products like gasoline, high-speed diesel, kerosene, etc. Oil refineries in Pakistan have been churning out low-quality dirty products having sulphur content of 5,000 ppm vs 10-50 ppm in most countries.

On every directive to improve, this industry has been dragging its feet. The latest is the manganese content, which is injurious to both car engines and human health. Outdated and used oil refineries are relocated from abroad which cannot meet quality and environmental standards in the parent countries.



Capital padding is practiced siphoning out the declared investment outlays. Approval for an oil refinery project is considered to be a gift to the participating elite from all sides.

Advantages

On the other hand, there are two major issues which go in favour of oil refinery investments.

One is energy security under which one would like to spread options so as not to depend solely on a fixed route or solution. There may be situations where supply bottlenecks may occur in the way of import of finished petroleum products. Thus, one would like to spread the options in terms of local production in oil refineries and imports.

Secondly, if foreign direct investment (FDI) is there and not causing any liability, why not? Also, the FDI is an investor’s priority and may not be prepared to divert investments in other sectors.

However, we should know, as it has come out, that oil refineries are not great investments to be strived for. If alternatives are feasible, resources should be diverted to better opportunities which may have much larger impact on economic activity and employment.

Governments should not award wholesale tax exemptions for long periods and provincial governments should charge adequate local taxes. The government should make it sure that products and technology meet the required quality and environmental standards. If large projects are implemented and taxation is not greatly reduced, it can generate some income. For instance, in India and elsewhere, large oil refineries are the order of the day producing zero waste and many byproducts and petrochemicals. An example is Jamnagar Oil Refinery Complex, with a capacity of more than 1 million bpd, which is compatible with the market situation pertaining in India.

In or around Gwadar, a similar refinery of 1 million bpd may be planned along with a petrochemical complex. This may cost $40 billion. A Saudi-Chinese joint venture can be expected.

Crude will come from Saudi Arabia and output will be pipelined to China. Pakistan can get 200,000 bpd at international prices which can be shipped to various parts through pipelines. Pakistan can charge for land, property tax, some corporate tax, security and other services fee.

Thus, a major policy question is whether to accept smaller proposals or go for larger ones involving world-scale refineries of 1 million bpd supplying Pakistan market as a byproduct?

The immediate priority in the petroleum sector today is elimination of furnace oil from the energy scene of the country. While LNG terminals are underutilised resulting in excessive capacity payments, (20-60%) expensive furnace oil has to be utilised, because oil refineries while producing gasoline and diesel also produce furnace oil.

Stopping furnace oil production would mean stopping gasoline and diesel production as well. Immediate solution is exports and the other is refineries’ balancing, modernisation and replacement (BMR) to add furnace oil conversion components such as Coker units.

Apparently, no action is there which should receive priority of the competent authority and the stakeholders. An incentive or disincentive would be to reduce purchase price of furnace oil by 20%, which would do away with the inaction or go-slow of the oil refineries.

Needless to say, policy announcements are required first, otherwise emergencies will be continually created and furnace oil will continue its ride.

The writer is former member energy of the Planning Commission

Published in The Express Tribune, December 10^th, 2018.

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