Pakistan’s refineries: a tale of missed opportunities

Imagine a highly skilled individual who has been forced into unemployment and is now grappling with the burden of supporting his family.

He faces mounting bills, educational expenses, and other financial pressures, yet there is no income to alleviate the strain.

Envision if, despite possessing the capabilities to open new revenue streams, he doesn’t capitalise on available opportunities and instead spends his days idly at home, watching movies and commenting on social media. What would one label such an individual if not indolent and unambitious? In a similar vein, Pakistan has been grappling with issues such as slow economic growth, high unemployment rates, decreasing foreign direct investment (FDI), and contracting foreign exchange reserves.

Picture a sector with the potential to alleviate these issues, yet the government fails to support the sector and remains hesitant to implement the necessary reforms. How should one characterise such a government if not inefficient?

In 2019, Saudi Arabia’s Energy Minister Khalid al-Falih expressed interest in setting up a $10 billion oil refinery during his visit to Gwadar. Later, Saudi Crown Prince Mohammed bin Salman visited Pakistan and signed agreements worth $20 billion, including funding for a major oil refinery.

Meanwhile, Pakistan’s five existing oil refineries, which have a combined production capacity of around 19.5 million tonnes per annum of refined petroleum products, also made plans to modernise and expand their facilities. They wanted to increase output of high-value petrol and diesel while phasing out low-quality furnace oil production, and also to expand their capacity.

Four years ago, it seemed like the oil refining industry could catalyse growth and prosperity in Pakistan. With a new Saudi oil refinery and increased investment from domestic players, substantial job opportunities could be created.

The scale of investment, reaching tens of billions of US dollars, would likely stimulate economic activity and attract much-needed FDI from Saudi Arabia and other nations as well, such as China.

One critical aspect was the potential for export opportunities. With the expansion and modernisation of existing refineries, combined with the installation of the new Saudi facility, Pakistan’s output could have significantly increased, allowing excess production of petrol and diesel to be exported. This could have essentially transformed refining into an export industry that also brings in precious foreign exchange. With their import-substitution nature and potential for exports, the oil refining industry could have helped Pakistan in strengthening its forex reserves.

Another promising prospect was the arena of petrochemicals. A country with established oil refineries can benefit from developing a petrochemical industry.

Petrochemicals are essential for modern civilisation and used in various consumer goods, from furniture to pharmaceuticals.

Producing petrochemicals not only creates new avenues for exports but also strengthens other industries that use them as raw material, presenting productive opportunities for the country.

All that the policymakers needed to do to realise such ambitious goals was to bring business-friendly policies and create a favourable climate for oil refineries. The oil sector’s existing and new participants also expressly sought a new oil refinery policy, a reasonable request given that industries need government support to flourish.

It’s important to note that we are not discussing subsidies here, but rather long-term incentives such as tax breaks and tariff protection. Such measures instil confidence in investors and offer a clear understanding of their potential return on investment. It enables them to make substantial investments without concerns, such as an abrupt change in government, leading to a dramatic decline in the business climate.

The Pakistan Tehreek-e-Insaf (PTI) government started working on a new oil refinery policy, which was initially expected to be finalised in 2021 but has yet to be introduced. Several factors, including changes in key government positions and a shift in power from PTI to Pakistan Muslim League-Nawaz (PML-N) after a successful vote of no confidence, have contributed to the delay.

In addition to political instability, the lack of progress could also be due to the disinterested attitude from certain quarters and a seemingly missing sense of urgency from the government.

Recently, the government requested that refiners submit their audited financial data, including details on upgrade projects. This move seems like another attempt to stall the introduction of the refining policy, as authorities have made similar requests before, which the refineries have already fulfilled. This situation hints at a potential lack of political will. Consequently, the delay has had adverse effects on investment in the oil refining industry and the overall Pakistani economy.

Expected benefits such as foreign exchange savings, job creation, enhanced energy security, increased domestic fuel production, and growth in both domestic and foreign investment in the refining sector have not materialised. Instead, the economic slowdown has exacerbated problems within the refining industry.

Various challenges, including decreased demand, high fuel prices, Letter of Credit (LC) opening issues, limited credit facilities, increased diesel smuggling from Iran and its unchecked sale across Pakistan have significantly impacted oil refiners.

Consequently, some are considering temporary shutdowns or significant reductions in production. Pakistan’s refinery utilisation rates, already low at 50% to 70% compared to over 90% in other countries, may decline further if refineries cut back operations.

The writer is a corporate consultant who writes on subjects of business and economy, specialising in the oil sector

Published in The Express Tribune, May 15^th, 2023.

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