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Oil refining most important segment of energy chain

Crude oil refineries are the most important segment of the energy chain in Pakistan. They not only save billions of dollars every year, but also add value, provide employment and make substantial contribution to the national exchequer. However, it will not be wrong to say that refining units receives little support from the government and is often attract undue criticism due to sub-optimal capacity utilization and higher cost of production. This shakes the confidence of the sector’s participants, who have already invested billions of dollars in the country and could impede the energy industry’s growth.

Some critics allege that the sector needs government subsidies and payouts for its profits and the state shouldn’t strive for investments in oil refineries. This one sentence has two glaring misconceptions, which should be corrected. Firstly, Pakistan’s energy sector in general and oil refining in particular neither receive nor depend on direct subsidies or heavy payouts from the government for its survival. Their business model is fairly straightforward and usually profitable. However, margins are underpinned by movements in oil prices in the international markets. The exploration and production sector earns profit by extracting and selling hydrocarbons.

The oil refining segment comprising of Attock Refinery, Byco Petroleum, National Refinery, PARCO and Pakistan Refinery) turning crude oil into various refined products that are sold to oil marketing companies and other buyers. The energy sector also feeds petrochemical and other ancillary industries. In Pakistan, unlike the power and food sectors for whom significant subsidies are allotted in the annual budget, the energy sector doesn’t receive any special treatment. On the contrary, the energy sector participants pay hundreds of billions rupees each year as taxes and duties. In its last fiscal year, for instance, Attock Refinery contributed around Rs49 billion to the national exchequer as taxes, levies and duties.

In fact, Pakistan’s leading refineries have shown that they can turn decent profits even in a tough business environment. The refiners typically thrive in a weak oil price environment, since they use crude oil as a raw material and any reduction in international oil prices lowers their cost of production, they can report losses when oil price jumps higher. For refiners in Pakistan, the third quarter of this calendar year was a difficult period with the price of the international benchmark Brent crude climbing to $80 a barrel by late September and its negative impact was compounded by the Pak Rupee’s depreciation. But for this period, Byco Petroleum still posted a net profit of almost Rs400 million.

It should be kept in mind that in a free market economy, the state does not dictate which investments will be allowed. The governments can, and often do, encourage investments in one sector over another due to strategic reasons but the ultimate decision is made by the market forces which determine which industries are the most profitable and economically viable. In Pakistan, the message from the market forces, particularly foreign investors, is loud and clear – the country needs more refineries.

 

A number of foreign investors have shown interest in setting up new oil refineries in the country. Following Prime Minister Imran Khan’s recent visit to Saudi Arabia, the kingdom has agreed to set up a new oil refinery near the deep-sea port of Gwadar. A Chinese company has shown interest in developing an upcountry deep conversion oil refinery. PARCO, which is a joint venture between the Government of Pakistan and the Emirate of Abu Dhabi, is already working to develop a new deep conversion refinery at Hub near Karachi.

Global investors are eager to invest billions in Pakistan’s oil refining, which is a testament to the fact that this industry promises solid returns on investment over the long run.

Another misconception about the oil refining industry is that it doesn’t create significant foreign currency savings for Pakistan. In reality, Pakistan saves tens of billions of dollars every year by importing crude oil and refining it at home, instead of buying the expensive refined products from foreign sellers. The combined processing capacity of only four Pakistani refiners – Byco Petroleum, PARCO, Attock Refinery and National Refinery – is close to 365,000 barrels per day. Even if these refiners create savings of just 75 cents per barrel and utilize 70 percent of their capacity, then they will still create foreign currency savings of $70 million each year, or around Rs9.5 billion at the ongoing exchange rate of Rs137 to a dollar. Note that these are fairly conservative estimates and the actual positive impact of the entire refining industry on Pakistan’s foreign exchange reserves will likely be considerably larger.

Similarly, it is erroneous to assume that the refining sector creates just a few hundred jobs. National Refinery alone, which is Pakistan’s third-largest refinery, has almost 1,260 people on its payroll. These are the direct employees working either on a permanent or contractual basis. The refineries also create a number of indirect jobs by utilizing the services of a variety of market and non-market actors, such as private contractors who provide transportation services. As a result, taken together, all of Pakistan’s refineries employ thousands of employ directly and indirectly.

Additionally, the oil refineries are criticized for running old and antiquated facilities, which is also not true. PARCO has built one of the most modern refineries in the world near Multan. The National Refinery is well-established player whose plants were originally built more than four decades ago but it has recently revamped and upgraded its facilities. Attock Refinery also went through a major overhaul as early as 2016. Byco Petroleum installed equipment which was previously used in the US and Europe but its facilities are still younger as compared to some of the older players in the industry. Although occasionally, the refineries in Pakistan experience disruption, just like any other chemical process based facility, overall, they have been running smoothly.

Pakistan’s energy industry and its refining sector certainly deserve better given their contribution to the country’s economy.

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