Vertical integration: PSO to set up refinery in Khyber-Pakhtunkhwa

Oil marketing company tries once again to enter the refining business.

ISLAMABAD:

Pakistan State Oil’s (PSO) two-year old plan to enter the refining business has finally made some headway as Khyber-Pakhtunkhwa (K-P) has agreed to allot 400 acres of land to set up a refinery.

In May 2010, the country’s largest oil marketing company PSO announced plans to buy a 30% stake in Pakistan Refinery Limited (PRL) and increase its share to 48% but the deal did not go through. PSO termed ‘prevailing dynamics’ as the reason for the fallout, however, sources claim that some lobbies intervened to stop PSO from creating a monopoly in oil supply.

The proposed PSO refinery will produce 40,000 barrels per day, only 7,000 barrels less than Pakistan Refinery Limited.

A senior official said that a meeting was held in the petroleum ministry on Wednesday between PSO and K-P officials.

“Now K-P will identify a site for the refinery,” said a senior government official adding that the oil refinery will process crude oil being produced in K-P.

The province’s production of oil and gas is increasing and experts forecast the supply to grow with every passing day.

Pak-Arab Refinery Company is the largest player in the refinery business while the other main companies are Pakistan Refinery, National Refinery, Attock Refinery and Byco.

“PSO has decided to set up refinery to reduce dependence on oil imports and supplies from local refineries,” official said adding that PSO is currently finding it hard to get oil supplies from local refineries through Letters of Credit (L/C). A letter of credit is issued from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount.

As on June 13, PSO’s total receivables stand at Rs217.45 billion and payables at Rs182.89 billion, showing the intensity of the circular debt.

“PSO has been bound to get oil supply from oil refineries through L/C but the power sector is not ready and the entire plan is in jeopardy,” the official said adding that now oil refineries were demanding payments in advance.

Of the total receivables, Rs55.5 billion is due from Wapda, Rs103.21 billion from Hubco, Rs30.19 billion from Kapco, Rs2.93 billion from PIA, Rs396 million from OGDC, Rs7.15 billion from KESC, Rs1.33 billion from Pakistan Railways, Rs551 million from NLC, Rs1.38 billion price differential claims (PDCs) on High Speed Diesel, and Rs1.35 billion PDC on imported petrol.

From the total receivables, PSO has to pay Rs31.42 billion to Pak-Arab Refinery Company, Rs16.02 billion to PRL, Rs8.81 billion to NRL, Rs31.38 billion to ARL and Rs2.63 billion to Byco.

“The establishment of the refinery will also help provide cheap petrol and diesel to consumers of the province due to reduction in inland freight equalisation margins (IFEM),” official said. Customers of petrol and diesel in Khyber-Pakhtunkhwa pay more than those in Sindh due to the higher cost of transportation.

Published in The Express Tribune, June 14^th, 2012.