Analysis: How Byco’s new refinery might change the industry

Investors may not be happy with the project, but competitors should pay attention.

KARACHI:

By global standards, Byco’s new refinery is not technologically very advanced. In fact, it is not even new, having first been set up in the United Kingdom in 1967. But it represents an important step forward for the country’s refining sector, and Byco’s competitors are likely to have noticed.

Byco Petroleum currently operates the smallest refinery in the country, which has a capacity of processing about 36,200 barrels per day. Its parent group, however, plans to expand the refining operations by adding about capacity for about 120,000 barrels per day.

To do this, the group imported a refinery that was owned by Chevron in Milford Haven, UK. The entire refinery was taken apart and moved to Byco’s 600-acre site in Hub, Balochistan where it has since been re-assembled and re-calibrated to operate in the Pakistani environment. It took almost two years – from 2007 to 2009 – just to move the refinery and another three years to reassemble it.

Byco’s main sponsors – the Abbasi family and the Dubai-based private equity firm Abraaj Capital – have thus far invested $750 million into the refinery project. “We will begin commissioning in the third quarter of 2012 and will begin commercial production from October,” said Muhammad Akram Paracha, the head of refining operations at Byco.

Yet it is not the size of the refinery that is impressive. After all, the Khalifa Refinery being built not much further down the Balochistan coast will be even bigger, with a capacity of about 250,000 barrels per day. What distinguishes this refinery is its ability to process crude oil beyond a level that is currently possible in Pakistan.

Tucked away in the massive refinery complex at Hub is a small segment called the isomerisation unit, the first of its kind in Pakistan and the pride and joy of the company’s engineers. This unit will allow the refinery to convert 12,500 barrels per day of naphtha into motor gasoline, commonly known as petrol. That may not sound significant, but in the world of refining, it is big news.

A majority of the product produced by most refineries in Pakistan yield negative margins, meaning that they sell for below the price of the crude oil that went into making them. Furnace oil, liquefied petroleum gas and naphtha yield either negative margins or at best flat margins. Refineries make their money off diesel fuel and petrol, and even there, the margins are quite narrow, often in the single digits.

Taken together, petrol and diesel constitute about 50% of the refinery’s production. If, however, a refinery is able to add the roughly 8% of its production that is naphtha and yields negative returns into petrol – which yields positive returns – the refinery will significantly boost its profitability.

Byco’s refinery may be old, but it is the only one in Pakistan that will have the capacity to do so, boosting the company’s returns significantly.

Other refineries are also trying to boost their processing capabilities. Pak-Arab Refinery Company, currently the owner of Pakistan’s largest refinery company, wants to begin producing asphalt out of furnace oil, which yields higher margins.

So why are investors not happy?

Despite plans of becoming the largest refinery in the country, most investors appear unimpressed with Byco. The reason: the new refinery will not be owned by the publicly-listed Byco Petroleum, but rather its unlisted parent company, Byco Oil Pakistan.

“Investors are not interested because it [the new refinery] is not going to be part of the listed company,” said Fawad Khan, a research analyst at KASB Securities. “There could be synergies going forward, but the retail investor will get not benefit for now.”

Published in The Express Tribune, April 7^th, 2012.