REFINERIES ENDURING THE MOST OF BAD POLICIES
Oct 18 - 24, 2010
Not at all oil refineries in Pakistan can be termed efficient. The two serious issues relating to their poor performances are 1) inter-corporate debt and 2) low capacity utilisation.
Only government could be held responsible for their woes. However, the refineries are partly responsible for the prevailing situation also because they failed in upgrading the facilities. Production of a few products and inability to establish naphtha cracker have become the biggest stumbling blocks. The delay in execution of three proposed refineries is because of lack of supporting policies. Since these refineries were based on exports rather than catering to the local needs absence of incentives, political instability and precarious law and order situation forced the sponsors to opt for taking an exit rather than becoming hostage to the policy planners.
At present five refineries are operating in the country. These are Attock Refinery, Byco, National Refinery, Pak Arab Refinery, and Pakistan Refiner. Attock Refinery enjoys various distinctions 1) the oldest one, 2) using mainly locally produced crude oil, 3) having an associate oil marketing company and 4) having an associate undertaking National Refinery.
Parco not only is the largest refinery of the country but also operates two pipelines one for black oil and other for white oil products. Pakistan Refinery has the biggest lubricating oil business, which is not regulated by the government.
Pakistan has achieved self-sufficiency in some of the refined products but remains heavily dependent on import of furnace oil and some other products.
Over the last couple of years, gas supply to fertiliser plants has to be curtailed and diverted to power plants. Weekly closure of CNG stations not only increases motor gasoline consumption but also increases POL import bill, a constant and significant drain on country's foreign exchange reserves.
The limited indigenous production of crude oil and rather outdated refineries often render import of POL products economically viable. Another reason that makes imported POL products more attractive is the refining margins fixed by the government. The policy anomaly is the key reasons for raising import of furnace oil. Lately average capacity utilisation of refineries dropped to less than 70 per cent and mounting inter corporate debt has also added to the woes of refineries.
Pakistan's strategic location makes it the perfect choice to become refining hub and the energy corridor. On one side are located oil and gas rich Middle Eastern countries and Iran and on the other side are energy deficient countries like Afghanistan, India, Bangladesh, and Sri Lanka. The supply line could also be extended to Nepal and China. More than 1,200 kilometer long coastal line and presence of three ports also make Pakistan an ideal site for establishing mega size and state of the art refineries. The country can follow the Singaporean experience; a country which does not produce a drop of crude oil but has some of the largest refining complexes of the world. However, this dream can only be realised if Pakistan offers the right incentives to investors and security situation improves substantially.
One wonders if the sponsors of refineries in Pakistan include governments of Pakistan and UAE and conglomerates like Attock Group why others are reluctant to enter Pakistan. Some of the experts say that unless Pakistani refineries learn to mobilise funds from the international markets at competitive rates they could not overcome the liquidity crunch.
Financial institutions offering Shariah compliant are in desperate search for investment option. Refineries can float Sukuk for mobilising funds for BMR, upgrading of facilities and even expansion. However, drastic changes have to be incorporated in the existing business models of refineries and even before that circular debt issue has to be resolved and refining margins to be rationalised.
Pakistan also has an option of locating closed refineries. Though these may not be very efficient but are still capable of delivering most of the products commonly used in Pakistan. However, not much success can be achieved without naphtha cracker or hydrocarbon cracker. If companies can join Parco in establishing pipelines why can't they dovetail to setting up the cracking unit? The existing refineries have reasonably strong balance sheet, demand for the products exists, and financiers are also available. Some of the financial experts have to work out the details of the transaction, prove that cash flow will be strong, and present it before the global investors.
The time is ripe because multilateral financial institutions and many of the governments are ready to extend a helping hand to Pakistan to overcome its woes. The government should announce duty free import of machinery and allow 10-year tax holiday. The government can also become a stakeholder by acquiring shares of the proposed company in lieu of the cost of land. The influx of foreign funds in Pakistan's capital market and interest of investors in energy companies will also make the job easier. However, success would only be possible when projects are executed on expeditiously and according to the stipulated timeline.
It is known to all and sundry that Pakistan is deficient in energy products, which also hampers boosting GDP growth rate. The country must aim at achieving double-digit growth and ensuring uninterrupted supply of energy products at affordable cost is the first step towards achieving this target. SK