Increasing capacity: PARCO set to approve investment in $6b refinery

Circular debt had delayed the project; managing director of the firm likely to be sacked.

Zafar Bhutta September 04, 2011


The board of directors of the Pak Arab Refinery Company Ltd (Parco) is expected to approve the firm’s participation in setting up the $6 billion Khalifa Coastal Refinery at their meeting on September 9 (Friday).

Sources told The Express Tribune that Parco’s board of directors is expected to finalise a ‘participation agreement’ for the formation of a joint venture company that will invest in the Khalifa Refinery, to be set up in Balochistan. The government has already allocated 1,000 acres of land for the project.

The project would create Pakistan’s largest oil refinery, with a capacity of refining up to 250,000 barrels of crude oil per day. Parco also owns what is currently the largest refinery in the country, with a capacity of processing 100,000 barrels of crude oil per day.

Parco is expected to have about a 26% share in the company, with the remaining 74% of the investment coming from Abu Dhabi’s state-owned International Petroleum Investment Company (IPIC).

IPIC is indirectly one of the parent companies of Parco, which is 60% owned by the government of Pakistan and 40% owned by the Abu Dhabi Petroleum Investment Company, a subsidiary of IPIC.

The project had been put on hold in January 2009 due to the global recession that caused oil prices to plummet from above $140 per barrel to just over $33 per barrel in a matter of less than six months.

While oil prices have since recovered, the management of the company has had issues with the government’s energy policy, particularly the inter-corporate circular debt which has caused massive liabilities to pile up at most refineries owing to the government’s inability to pay the subsidies it promised to the energy companies.

“IPIC management has been concerned over the receivables owed to it by the state-run oil marketing company Pakistan State Oil (PSO),” said one source familiar with the matter.

The government has been trying to find a long term solution to the circular debt problem, and even made a Rs30 billion payment to Parco in May, added the source.

Yet another reason cited for the delays in investing in the Khalifa Refinery was IPIC’s commitments to build another two large refineries, one of which is to be located in Turkey.

Parco’s board of directors have already approved $500 million (Rs43 billion) in initial funding for the Khalifa Refinery project. About $13 million has already been released to begin the groundwork for the project.

“As IPIC management has assured us that they will resume work on the Khalifa Refinery project, we are hopeful of finalising the participation agreement at the coming meeting of the Parco board of directors,” said a source at the petroleum ministry.

After the signing of the agreement, the contract for the engineering, procurement and construction of the project will be awarded.

Once in production, the refinery will be able to produce about 13 million tons of petroleum products per annum.

MD likely to be kicked out

At the same board meeting, Rasheed Jung, the managing director of the company is likely to be pushed out of the firm. A controversy about an extension in Jung’s contract had caused a row between the governments of Pakistan and Abu Dhabi and had contributed to the suspension of the Khalifa Refinery project.

When Petroleum Minister Asim Hussain first took charge as the prime minister’s adviser on petroleum in 2008, he had announced that the heads of all state-owned energy companies would be changed. In a letter to the government on December 15 of that year, IPIC, however, insisted that Jung be retained.

IPIC believed that removing Jung would delay the Khalifa Refinery project and the $132 million disel hydro desulphurisation project. The petroleum ministry offered to move Jung to the company that would manage the Khalifa Refinery, but IPIC insisted that he stay on at Parco and eventually got its way.

Published in The Express Tribune, September 5th,  2011.