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Bleaker outlook for Pakistani oil refineries

According to media reports, tougher rules on sulphur emissions from ships will come into effect next year in the biggest shake-up for the oil and shipping industries for decades. International Maritime Organization (IMO) will ban ships from using fuels with sulphur content above 0.5%, existing limit is 3.5%. The regulations are aimed at improving human health by reducing air pollution.

Only ships fitted with sulphur cleaning devices known as scrubbers will be allowed to continue burning high-sulphur fuel. Ship owners can also opt for other sources of cleaner fuel such as liquefied natural gas (LNG). Failure to comply with the global regulations will result in fines or vessels being detained and in some jurisdictions the risk of imprisonment, which could affect vital requirements such as insurance cover. Enforcement will be policed by flag and port states rather than the IMO and industry officials are still unsure about whether there will be full compliance when it kicks in. Refineries are expected to face significant hike in costs to produce fuel of new specifications.

A quick review of producers indicate that leading oil majors i.e. BP and Royal Dutch Shell are already producing very low sulphur fuels that meet the 0.5% requirements. While major fuel bunkering ports such as Singapore, Fujairah in the United Arab Emirates and Rotterdam in the Netherlands have compliant-fuel supplies. However, analysts and shipping firms are still unclear what will happen at smaller ports given the need for ships to plan their sailing routes.

It remains unclear what impact there will be with mixing very low sulphur fuels of 0.5% together, which at this stage have not been fully tested on ship engines. One of the risks is that the level of sediment created could damage engines at sea. While guidance has been issued on avoiding mixing different fuel batches, the issue continues to raise worries especially after a major problem with bunker fuel contamination in 2018.

There is still a question over whether jurisdictions and ports could restrict the use of certain types of scrubbers due to uncertainty over the effects of the waste water that gets pumped into the sea. Earlier this year ten environmental groups called on the IMO to impose an immediate ban on the use of scrubbers. Users of the devices argue that there is no conclusive scientific research showing that discharges from open loop scrubbers – which wash out sulphur – cause environmental harm and their use was safe. Analysts say there is still the possibility of tighter restrictions, which would add to the costs of those investing in them.

 

Situation in Pakistan

Oil Refinery Companies in Pakistan have been under stress in Pakistan mainly due to certain actions taken by the state and a few overlooks on the part of producers. With the Government of Pakistan (GoP) making continuous changes in the petroleum policy, vulnerability of the oil refining has intensified drastically.

According to some reports refinery sector has been allowed to hold all proceeds from exports in foreign currency accounts. In this regard, a report by JS Global states that the impact of this development on the sector wouldn’t’ be significant, as the usual proceeds from exports by the refineries are around USD$ 250 million.

Secondly, the request by the state to revise the prices of all petroleum products on a fortnightly basis, rather than a monthly basis, may definitely have a radical impact on the sector. The report by the brokerage house suggests that this change in pricing policy will result in ex-refinery prices being calculated on the basis of PSO’s previous month’s cost of supply, which in turn will give enough time to refineries to compute the ex-refinery prices that would be applicable in the coming months. This policy might prove to be beneficial, as it will result in reduced volatility in the earnings of the oil marketing companies (OMCs).

Another major element of the revised policy is that the 7.5% deemed duty currently available on High-Speed Diesel shall be replaced with absolute refinery margins for both HSD and Motor Spirit. This is going to have adverse repercussions for the sector, as the proposed duty of Rs1.41 per litre is far lesser than the Rs6.1 per litre of duty being collected in CY19. As a result of this change, the sector is expected to suffer losses amounting to Rs25 billion per year.

Besides the aforesaid changes, the refineries in Pakistan have also been suffering slightly at the hands of crude oil that is being obtained from Saudi Arabia, as part of the deferred oil facility agreement between the two countries. The reason for this is that Arab Light Crude Oil contains a high level of sulphur, which makes it unattractive for many refineries.

Recently, Prime Minister Imran Khan demanded all oil refineries to produce Euro-4 Grade fuels within a span of three years, failure of which will result in closures. Given the current state of oil refineries in Pakistan, and the huge amount of investment that will be needed to put this plan into action, it can be said that the refineries may witness a difficult time.

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