OMCs ask govt to link oil prices with 3-month LCs

Oil industry faces hefty loss of Rs40b due to rupee’s free fall

ISLAMABAD: With a reported loss of over Rs40 billion due to free fall of Pakistani rupee against the US dollar, oil marketing companies (OMCs) have approached the government, asking it to link the revision in petroleum product prices with three-month letters of credit (LCs).

“Now, the OMCs want to link petroleum product prices with the actual price of imported oil based on three-month LCs,” an official said, adding that the Oil and Gas Regulatory Authority (Ogra) had opposed the proposal.

OMCs should open LCs based on one month, the regulator said. However, the OMCs were reluctant and wanted to link oil prices with three-month LCs. At present, the oil prices are linked with the actual price of one-month LCs opened for oil import by Pakistan State Oil (PSO).

Oil prices drop on demand worries, Saudi Arabia supply pledge

“Yes, OMCs have approached the Petroleum Division for linking oil prices with three-month LCs and Ogra has been asked to look into it,” Petroleum Division spokesperson Sher Afgan told The Express Tribune.

The future of Pakistan’s oil sector appears to be bleak as the industry is said to have suffered losses of over Rs40 billion in the past eight months following the free fall of the rupee against the dollar, which may lead to job cuts in the near future.

Industry sources said the slump in the rupee’s value since November 2018 had caused hefty losses to refineries and OMCs, especially those relying on imported fuels.

A conservative estimate put these losses in excess of Rs40 billion in just eight months, oil industry sources said, adding that all the companies had been declaring losses and the next step by the industry would be staff lay-offs, which was quite imminent.

Since independence, only one refinery has been established in Rawalpindi. In the 1960s, two refineries were set up in Karachi namely Pakistan Refinery and National Refinery but still the production of these refineries was insufficient to meet the growing demand, which made the country dependent on the import of finished petroleum products.

Later, Pak Arab Refinery (Parco), a joint venture between the government of Pakistan and the emirate of Abu Dhabi, with production capacity of 100,000 barrels per day, was established in Muzaffargarh. In 2002, Byco installed a second-hand refinery in Hub, Balochistan, followed by the setting up of another refinery in 2015.

Except for Parco, all the refineries are old and cannot produce high-quality fuels. As a result, Pakistan’s fuel standards are among the worst in the world, especially for diesel.

When a barrel of crude is processed by an old and outdated refinery, almost 35-40% of fuel oil is produced depending on the nature of crude oil processed and refinery configuration. The fuel oil contains 3.5% sulphur and it has been the main fuel for electricity-generating plants.

When burnt, the fuel oil releases sulphur dioxide and trioxide, which combines with water molecules in the air and converts into sulphuric acid, causing acid rain.

Since 2002, numerous attempts have been made and refineries have been given deadlines and incentives to produce fuel of international standards but the strong lobby of refineries succeeded in getting extension in the implementation deadline every time.

There are also international forces which are working to clean the environment. The International Maritime Organisation (IMO) in 2008 set deadlines, saying no ship can burn fuel containing more than 0.5% sulphur from January 1, 2020 and after March 2020 no vessel will be allowed to transport high sulphur fuel.

This regulation will cause an increase in the cost of import as low sulphur fuels are expensive by $150-200 per ton than the high sulphur fuel. Luckily, the consumption of fuel oil has been declining since the introduction of liquefied natural gas (LNG) in Pakistan and in the last fiscal year only three million tons of fuel oil was consumed against the peak of 9.5 million tons a few years ago.

The Ministry of Energy, a few months ago, advised refineries to reduce the production of fuel oil without realising that the reduction would also hamper the production of petrol and diesel - the two highly consumed petroleum products in Pakistan. The shortfall of these products is being met through imports, which is putting an extra burden on the squeezed foreign currency reserves of the country.

Problems have been compounded by the National Electric Power Regulatory Authority’s (Nepra) merit order, which has made around 6,500 megawatts of power plants dysfunctional, forcing the government to pay capacity charges to independent power producers (IPPs) without utilising their plants for power generation. On the other hand, if fuel oil is not lifted from the refineries, it will result in lower output, including that of gasoline, diesel and other products.

“There is only one solution available at the moment. The government must link the price of domestically produced fuel oil with the price of imported LNG ie the LNG price of $11.37 per million British thermal units (mmbtu) as announced by Sui Southern Gas Company (SSGC) earlier this month,” energy expert Dr Nazir Abbas Zaidi told The Express Tribune.

Railway wagons sit idle as PSO unable to boost supply

“When the fuel oil price is linked with LNG, it comes to around $275 per ton. Thus, the plants running on fuel oil will qualify under the merit order and gas can be diverted to other sectors where it is badly needed.”

The energy secretary, in a recent meeting of a standing committee, acknowledged a shortfall of 2-3 billion cubic feet of gas per day. Now the question arises from where this gas will come and where it will be stored?

After the setting up of two LNG terminals at Port Qasim, there has been no progress on the other three planned terminals and with no major gas discovery, the gap will keep on widening. Iran-Pakistan (IP) and Turkmenistan, Afghanistan, Pakistan and India (Tapi) gas pipelines are a dream, which may never come true. Domestically produced gas and LNG saved by utilising fuel oil will fill the demand-supply gap to some extent but work must commence seriously on other LNG terminals.

In addition to that, “the refineries should be given stringent deadlines for upgrading their plants in line with the IMO regulation and globally accepted Euro specifications,” Zaidi said. If the suggested measures were not taken immediately, the refineries would face closure and around 8 million tons of petrol, diesel and other petroleum products would have to be imported to keep the wheels of economy moving, oil industry sources said.

Refineries say the government should give incentives for setting up plants to covert furnace oil into other petroleum products. They say the deemed duty had replaced the 10% return guaranteed by the government in 2002. The government has allowed 7.5% deemed duty on high-speed diesel and it should also give the incentive on petrol to help set up conversion plants, the PRL managing director said.

The government had announced tax holiday for new refineries with refining capacity of 100,000 barrels per day, he said, adding that old refineries should be given the same incentive in order to help them in setting up conversion plants.

Published in The Express Tribune, July 24^th, 2019.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.