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Upgradating oil refineries remains a challenge

The government had given oil refineries a dead line up to June 2017 for the fourth time and asked the refineries to complete the isomerization and diesel hydro de-sulphurization projects in order to enhance petroleum production and produce environmentally friendly Euro-II fuel. Economic Coordination Committee (ECC) has already withdrawn its multi-million dollar bailout package for oil refineries that was meant for them to deposit the ‘extra earnings’ in an Escrow account and then use the proceeds to upgrade their plants to produce higher quality fuel. The package was approved by the former government in order to allow oil refineries collect around $1.5 billion from consumers and use the proceeds to produce Euro-II fuel.

The former government had imposed 7.5 percent duty on sale of diesel and directed that the proceeds be deposited in a special account to be utilized by refineries to upgrade their plants. The refineries, however, failed to deposit any money in the Escrow account, despite lapse of three years. Ironically, instead of shifting the amount in special reserves to an Escrow account, the refineries spent the entire special reserves on upgrading their plants. Oil refineries asked the government for waiver in opening the Escrow account. Oil refineries have so far got three extensions in the deadline and now the ECC has extended it by another year, also keeping the duty unchanged at 7.5%.

Pakistan has an installed refining capacity of 12.82 million tons a year from its five refineries — National Refinery Limited, Pakistan Refinery Limited, Attock Refinery Limited, Pakistan-Arab Refinery Limited and Indus Refinery Limited. Pakistan-Arab Refinery Company (PARCO), a joint venture between Government of Pakistan (60%) and Abu Dhabi Petroleum Investment (40%). Pakistan’s consumption of petroleum products currently stands at about 21 million tons, of which about 85 per cent was met through imports. The country meets only 15 per cent of the consumption from indigenous crude production, while 30 per cent crude and 55 per cent refined products are imported. With a refining capacity of 13 million tons, Pakistan meets only half of its annual requirements.

Pakistan is largely dependent on oil imports. The energy statistics of Pakistan shows that around 50 percent of the need is met by the indigenous gas production and 29 percent by domestic and imported oil and 11 percent by hydro-electricity. The country’s annual energy requirements are expected to more than double to 177 million tons of oil equivalent by the year 2020. The country’s demand for petrol is likely to increase in the coming years. The demand for petrol will cross 8m tonnes by 2019-20 from the current 4.73m tonnes, according to one estimate. The country imported petroleum products worth 3.47 million tonnes in July-April 2015-16, with a monthly record of 414,396 tonnes in April 2016. In the fiscal year 2014-15, the country imported 3.12m tonnes of petrol. Diesel growth remains one to two per cent per annum and will reach 8m tonnes by 2018-19 from the current 7.41m tonnes. Furnace oil demand is likely to continue to stand at 9.2m tonnes. In view of the enhancing petrol demand, the refineries are currently upgrading for better products.

Critics say that the upgradation projects, which have already cost the refineries about $1billion, do not attract any value addition and are not viable on a stand-alone basis. They contend that the packages or incentives in duties and taxes as well as product pricing are given by the incumbent government but later withdrawn, causing losses to refineries.

 

Country’s strategic fuel supplier

PARCO (Pak-Arab Refinery Limited) is presently is considered the fulcrum in the country’s strategic oil supply and logistics. Incorporated in May 1974 as a public limited company, the PARCO has emerged as the strategic fuel supplier to the country. PARCO is a Joint Venture Company between Pakistan and Abu Dhabi. Under the bilateral deal, the Abu Dhabi government has the first right of refusal in case the government decides to sell its shares. PARCO is actively involved in various facets of oil storage, transportation, refining and marketing of energy products. The company has 100,000 barrel per day refinery capacity. It is considered as the only company producing Euro-II compliant diesel. In 2012, PARCO had commissioned its DHDS (diesel hydro desulfurization) for Euro II diesel.

PARCO has a total equity of Rs750 billion and its total assets increased to Rs126 billion in 2015. In the last fiscal year, the company’s revenue increased to Rs307 billion and its after tax profit stood at Rs13.6 billion. The company has been a profitable entity despite plunge in the global oil prices because of its unique business model. In the last ten years, PARCO has made payments of Rs600 billion to the government on account of dividends and various taxes and levies.

Though PARCO has been on the privatization list since 1997, yet the former government approved it for privatization in October 2013.

Present PML (Nawaz) government is however not interested in its privatization. The government has already informed the International Monetary Fund (IMF) that it may remove PARCO from the list of public sector enterprises that it plans to privatize under the $6.2 billion bailout program.

The Ministry of Petroleum and Natural Resources has reportedly opposed the move to sell at least 10% stake in PARCO. Following the ministry’s refusal, the Privatization Commission called a meeting of its board to review the option of removing PARCO from the list of entities that have been selected for capital market transactions. The Petroleum Ministry wants the country to continue maintaining its existing 60% shareholding in PARCO. It has opposed any government’s offer to sell its 10% shares to Abu Dhabi or any divestment plan through enlisting on the stock exchange. It has asked the commission that the entity be deleted from the list of companies being considered for privatization. The ministry believes that government’s control over a strategic asset of the country will be disturbed in case of privatization of PARCO.

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