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A brief review on Pakistan’s rising oil import bill and its refining capacity

COUNTRY’S OIL REFINING CAPACITY

Pakistan’s oil production reached a two-year high at around 97,000 barrels per day in December 2016 after oil and gas exploration and production companies geared up their drive to find new deposits of hydrocarbons in the country. The surge in production became possible with find of new oil reserves from Nashpa and Mardan Khel fields. Both fields added around 11 percent to December 2016’s oil production, a cumulative flow of around 10,000 barrels per day (bpd) of oil. The production meets around 20 percent of domestic demand. The remainder is met through imported crude oil and finished petroleum products.

Local production was reportedly hovering below 90,000 bpd up till December 2016. This was standing at 87,000 bpd in the previous fiscal year ended June 30, 2016 and 95,000 bpd in the year before. The decline in production in fiscal year 2015-16 (FY16) was seen after oil producing firms put on hold their projects under the then prevailing steep low oil prices in the world market.

Today, Pakistan has a total refining capacity to process around 400,000bpd or about 19MTPA of crude oil, against the current demand of 24MTPA. Total global refining capacity is 97 million bpd, and Pakistan, with nominal world share of 0.4 percent, is ranked 48th. Demand for oil products in the country is expected to grow steadily at seven percent on year-on-year basis, according to recent studies, in particular for the furnace oil, motor spirit, diesel and aviation fuel, which accounts for 78 percent of total oil demand. Thus, the demand-supply gap will continue to strain heavily on the imports in future, if oil refining capacity is not added at a large scale.

Global refining capacity is expected to reach 115 million bpd by 2020 despite low crude oil prices and consequently the gloomy scenario for the oil and gas sector. It is however speculated that the global trend of declining oil prices would be arrested in the near future. Interestingly, most recent oil refining capacity additions have taken place in the Asia-Pacific region. Pakistan should therefore be no exception as future energy consumption poses a serious challenge for the nation and refining margins are high.

Currently, there are seven oil refineries operating in the country. Major players in the sector are Pak-Arab Refinery Co Ltd (Parco) of 100,000bpd (4.5MTPA), National Refinery Ltd (NRL) of 64,000bpd (2.9MTPA), Pakistan Refinery Ltd (PRL) of 47,000bpd (2.1MTPA), Attock Refinery Ltd (ARL) of 43,000bpd (1.9MTPA), Byco Refineries of 155,000bpd (7.0MTPA) output capacity, which was commissioned in June 2015.

CONTRIBUTION OF OIL IN IMPORT BILL

The rise in overall import payments was mainly driven by higher purchases of fuel and capital equipment. This is understandable, given that Pakistan is transitioning from a low-growth to higher growth phase, and is addressing supply-side bottlenecks in energy and infrastructure. This indicates strong positive impact on broader economic activities.

Quantum imports of all POL products (particularly HSD and petrol), have recorded significant growth this year, indicating strong transport sector activity. This has also corresponded with a hefty increase in imports of buses and heavy commercial vehicles. Similarly, an increase in power generation from furnace oil in H1-FY17 led to higher imports of the fuel.

Up till Q1-FY17, the savings on oil import payments had been offsetting rising non-oil imports and partially compensating for declining exports. This, coupled with growing remittances (till FY16), had been providing adequate FX cover to the external account and indirectly contributing to reserve accretion. However, as mentioned earlier, this comfort has now started to diminish. Moreover, Pakistan’s import bill may further increase with the surge in oil prices following the supply cut agreement between OPEC and key non-OPEC members in December 2016.

In a span of three years – i.e. from Q1-FY15 to Q1-FY17 – the cumulative decline in the country’s oil payments amounted to US$ 7.3 billion. This decline was almost entirely driven by the dramatic fall in oil prices, as quantum POL imports have been generally increasing during the period. This essentially provided room for the country to finance rising non-oil imports (including that of power generation and construction-related machinery for CPEC projects), without exerting any pressures on the external account.

But with oil payments rising in Q2-FY17 on a YoY basis for the first time from Q1-FY15 onwards, the overall import bill swelled 11.5 percent to US$ 11.2 billion in the quarter. Even though exports reversed their multi-year declining trend and rose 1.2 percent (to US$ 5.5 billion), this uptick was insufficient to offset the rise in the import bill. As a result, the trade deficit widened by 23.8 percent to US$ 5.7 billion in Q2-FY17 – the second-highest quarterly trade gap. This brought the half-year trade deficit to US$ 10.8 billion (against US$ 9.4 billion in H1-FY16), and pushed up the current account deficit to around US$ 3.5 billion.

Pakistan’s food and oil imports have increased 18 percent year-on-year to reach $10.652billion in the first eight months of the current fiscal year although crude and grain prices have fallen globally. The proportion of these products in the country’s total import bill in July-Feb was 32percent, straining the country’s balance of payments.

According to Pakistan Bureau of Statistics (PBS), petroleum imports have increased 20.97percent year-on-year to $6.682billion in July-Feb. Imports of petroleum products went up 23.28percent to reach $4.193billion during the reviewed period. However, a decrease of 7.13percent was witnessed in import bill of petroleum crude. The reduction in the oil import bill in July-Feb led to a sharp rise in import of petroleum products, highlighting that local refineries are operating under capacity.

The International Monetary Fund (IMF) has cautioned Pakistan and other oil importers against rising oil bills for 2017 as a result of the rising global prices. The oil import bills are expected to be around 30percent higher than the previous year. Any further increases could affect consumption, increase fiscal risks, and worsen external imbalances, the IMF has signaled in its May 2017 Regional Economic Outlook for the Middle East, the Gulf, and North Africa, Afghanistan and Pakistan (MENAP).

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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