PARCO Refinery scheduled to be commissioned by Sept 2000 while Karachi-Multan white oil pipeline project contract awarded only last week

Mar 08 - 14, 1999

After a gap of 30 years, country's 5th refinery, i.e. PARCO, having an installed capacity of 4.5 million tonnes, is scheduled to be commissioned in September 2000.

Pakistan's refining capacity has remained static at around 6 million tonnes against the consumption requirement of 18 million tonnes during all these years. By the time, the forthcoming PARCO Refinery comes into production in 2000, the total POL requirement of the country will also increase to 20 million tonnes leaving a deficit of 10 million tonnes. This means that the country will continue to depend on import to meet its 50 per cent oil requirements. Despite an addition of 4.5 million tonnes to country's refining capacity, the petroleum experts have their own reservations regarding pros and cons of the PARCO's feasibility.

The immediate risk, the analysts feel, is the possible penalty of Rs2.1 billion to be paid to Japan Gas Company, which has been awarded the contract for installation of the refinery, as under the agreement, the government has guaranteed that pipeline for transportation of white oil from Multan to Karachi will be ready simultaneously with the commissioning of the refinery. In case the white oil pipeline is not completed within the stipulated time, the Japan Gas Company will be entitled to claim for the penalty of Rs2.1 billion. Similarly the Japan Gas Company will be liable to pay the penalty of 10 per cent of the contract value per month if it fails to meet the deadline set for commissioning of the refinery project.

The analysts are of the view that since the contract for laying the pipeline has been awarded to PARCO quite recently while a period of 18 month is left to meet the deadline, it is apparently hard to complete the task within time frame.


The Cabinet Committee on Investment (CCOI) has awarded the contract of laying while oil pipeline to Pak Arab Refinery (PARCO). The decision of awarding the contract was taken at a meeting, presided over by Minister for Finance Ishaq Dar who has allowed the PARCO to undertake the project on Build, Own and Operate (BOO) basis on the revised terms and conditions based on the lowest tariff.

PARCO had given an unconditional offer which is stated to be the lowest amongst the three bidders and also lower than the original conditional offer of Asia Petroleum Ltd (APL)

The savings in freight cost over a period of 25 years of PARCO's offer without import duty versus 100 per cent Railway Tariff was committed in the MoU, by the earlier government, which will be $2.2 billion. The savings over APLs revised conditional offer was $748 million. As the pipeline was expected to serve for more than 25 years, actual savings would exceed these estimates, it is expected.

According to Ishaq Dar, the PML government had decided to invite Expression of Interest through an international tender for the construction of the pipeline from Karachi to Mehmood Kot, Multan, on BOT basis. Only four bids were received and these offers had a number of conditions as part of their bids, most of which were common in nature. As these were not in line with the tender's conditions, it was decided that all the four bidders be given an opportunity to offer revised tariff by providing a level playing field to keep with the requirement of transparency and fairness. PARCO has now emerged as the lowest and unconditional bidder for the contract. The government's decision to go for fresh bidding has resulted in a saving, amounted to $748million, it is said.


The analysts in the petroleum sector have, however, expressed a different view about the savings worth $748 million as projected, as a result of government's decision to go for fresh bidding for construction of white oil pipeline. They expressed apprehensions that the incentives given to PARCO may consequently prove another, IPPs-like, disastrous issue for the national economy.

They said that inland freight upto Multan for the products HOBC, MS, JP-1 and FO, calculated on prevalent road tanker freight at $29 per tonne has been allowed, while in the case of HSD pipeline freight is $7.5 per tonne. As per agreement PARCO pipeline has been treated as a separate project and allowed to charge $7.5 per tonne for crude oil transportation. This is clear double accounting as PARCO refinery has already charged this on products in form of inland freight. Apparently it is shown as the cost of project but the project will charge government of Pakistan in form of invisible payments. This is a direct incentive to PARCO.

The experts said that 100 per cent uplift guarantee, given to PARCO, will cost the government heavily especially in the case of JP-1, gasoline and HOBC or any other product to be marketed.

The government would have already paid freight upto Multan in ex-factory price mechanism. For example JP-1 has 70 per cent demand in Karachi and this will cost the government another $29 per tonne to transport it back to Karachi.

Another grey area they pointed out is the ex-refinery and import parity price differential. The PARCO project has been allowed this differential in the mechanism for calculation of what they called as mum payments. Import parity means the cost of finished product if imported from Arabian Gulf inclusive of FOB Arabian Gulf, freight , insurance, L/C charge, Ocean loss, handling charges, duties and the importer commission. This differential allowance will benefit PARCO to the tune of $13.208 million yearly throughout the life of the project.


The PARCO refinery has planned to use the present pipeline to transport crude oil from Karachi to Multan. This existing pipeline from Karachi to Multan covers a distance of over 1200km. This pipeline, however, is almost 25-year-old and could hardly sustain the continuous transportation pressures as it is reaching to its life span. This suggests for laying another pipeline to ensure safe and sound pumping of crude. This aspect is also needed to be taken into consideration before the refinery goes into production.


The originating point of proposed white oil pipeline is from Port Qasim and Iran Pak Refinery project, situated at Hub, is required to pump their products to Port Qasim for onward transportation by the white oil pipeline. The Iran Pak Refinery would produce 3.6 million tonnes of HSD with 72 per cent of the initial pipeline capacity. It is strongly felt that the white oil pipeline should originate from Khalifo Point, Hub, as it would reduce congestion, it would reduce the total distance of pipeline, it would be cost effective to import deficit products at single point mooring facilities plan to be set up at Khalifo point and 72 per cent of the pipeline capacity would be available at Khalifo Point.

PARCO, a joint venture between Pakistan and Abu Dubai is being set up at a cost of $886 million. This refinery project will have an installed capacity of 100,000 barrels and it is destined to enhance country's total refining capacity from existing 128,000 barrels to 228,000 barrels.

Currently Pakistan is producing 59,000 barrels of oil per day as against the demand of 3,50,000 barrel a day.

The government, it may be mentioned has guaranteed a 25 per cent rate of return to the PARCO refinery and the same comforts were allowed to the Iran-Pak Refinery. However, the government has now changed its policy of offering 25 per cent guaranteed rate of return on refinery investment allowed in the petroleum policy of 1994. The government feels that this rate of return is not feasible as it could cause a great financial loss to the country. The government has now decided that if anyone is willing to bring a refinery on commercial basis, the project will be given the price which the government is actually to bear on import including the service charges. The guaranteed 25 per cent rate of return was a very regressive formula under which if a few refineries had come, the country would have faced the same situation as was faced in the matter of IPPs. The government, however, claims that there is no restriction on installation of a refinery in this country.


The analysts, however, while comparing the changes in petroleum policies of 1994 and 1997, have pointed out that in the 1994 policy, the ex-refinery prices were based on FOB Arabian Gulf quoted prices including prevalent freight from Gulf, insurance and duty element for the products. In the crude oil price build-up, only freight and insurance elements were to be borne by refiner, rest of charges like port charges etc by the government. While in the 1997 policy it is assumed that C&F Karachi equivalent to Singapore FOB and therefore freight element on product was not allowed. Insurance element was increased to 0.11 of C&F and other incidentals L/C charge 0.25 per cent C&F, Ocean Loss 0.5 per cent CIF, inland handling charges 0.15 per cent CIF were allowed while product price buildup. Duty element $9 per tonne, allowed under 1994 policy, is not there in 1997 policy. On the input side i.e crude price in addition to freight, insurance, ocean loss, inland handling charges are now to be paid by the refiner. These are what they described as manoeuverings have led to net erosion of profits of refinery under 1997 policy as compared to 1994 policy. In 1994 policy there were no lead or RON penalties on gasoline prices. In 1997 policy these were introduced for example the refinery working under 1994 policy will get $21.42 per tonne more than the refinery working under 1997 policy.

The 25 per cent guaranteed rate of return on paid up capital for first 8 years was allowed under 1994 policy which has been taken away in the existing policy. It was also stated in 1997 policy that no uplift guarantee shall be given.

All the above changes in a regulated regime will prove to be major reasons for foreign investors not to invest in petroleum refining sector as government has bound itself in the case of PARCO vide agreement dated Oct.10,1997 under the 1994 policy regime with incentives over and above 1994 policy.


An Iranian delegation is due in Islamabad this week to hold talks with the authorities on various issues including appointment of the financial advisor for this $1.1 billion project to be set up at Gaddani beach at Khalifo Point. The meeting will also review various proposals offered by foreign investors in this huge project with an installed capacity of producing 6 million tonnes of POL products. The most important point of this meeting, according to informed sources, would be formal inclusion of the clause of 25 per cent rate of return in the joint venture agreement between the two partners. Although this joint venture agreement was signed on Aug.16, 1996 and the ECC of the Cabinet had approved the same comforts allowed to PARCO, yet the project is still in the initial stages and a lot of ground has yet to be covered.

Although Pakistan's insufficient energy supplies is a major constraint on its economic growth, yet the Iran Pak Refinery project which would certainly enhance oil supplies situation to a great extent continuously suffering delays.


The issue of energy supply needs to be addressed on priority basis in order to meet the needs of population which is increasing rapidly by accelerating through export led industrial growth.

Currently, Pakistan's energy supply, including non-commercial fuels, is estimated 43.14 per cent oil, 37.7 per cent natural gas, 0.4 per cent liquid petroleum gas (LPG), 5.6 per cent coal, 2.6 per cent hydroelectric, 0.2 per cent nuclear electricity. The energy consumption in the country is 48 per cent oil, 29.4 per cent natural gas, 6.3 per cent coal, electricity 15.4 per cent, LPG 0.9 per cent, energy consumed by industrial sector 39 per cent, transport 32 per cent, households 23 per cent, agriculture 3 per cent, and commercial sector 3 per cent.

According to an estimate, country is producing around 60,000 barrels per day of oil, consumes about 350,000 barrel per day leaving a net deficit of about 290,000 barrel per day which is met through imports, adding $2.5 billion to import bill on account of oil imports.

Although, policies have been announced to encourage the private sector, both local and foreign investors, to develop its indigenous oil and natural gas resources, especially offshore and to boost its refining capacity, oil fields discovered to date are, however, of small size i.e. 50 million barrels or less and total proven reserves are currently estimated at only 208 million barrels.

During the year 1997-98, which was declared as "Oil and Gas year", the government had awarded 22 exploration licences and attracted $1.2 billion investment commitments. According to a study report, more than 200,000 sq km has been granted by the federal government to multinationals and Pakistani companies for carrying out oil and gas exploration in Pakistan. Despite low rate of exploratory activity in Balochistan, 14 trillion cubic feet of gas reserves have been discovered. The multi-national companies, operating in Balochistan, have, however, sought full security for the staff and machinery engaged in oil and gas exploration as according to a report, 50 per cent area of concessions allowed in Marri, Bugti and Kharan areas in Balochistan is under force majeure. The government will have to ensure smooth working of these companies to achieve the desired results.


On the gas side, it is producing around 0.7 trillion cubic feet (TCF) of natural gas per year and a large amount of that produce is used by domestic consumers except a restricted amount which goes into manufacturing sector especially the fertilizer sector. Although efforts are underway to switch over power generation from oil to gas to reduce the import bill as emphasized in the five-year plan yet it is still on the papers. The development of recently discovered gas field for use in power generation is a priority. Those gas fields which have been identified to be used in power generation including Qadirpur field which estimated reserves of 3 trillion cubic feet and Bhit, Dhodak, Loti and Tando Adam which have to be developed for the purpose. The gas pipeline project from Turkmenistan to Pakistan has gone into doldrums following the ouster of Unocol from the consortium sponsoring this $2 billion project. This project is delayed mainly on account of political turmoil in Afghanistan which is the corridor from where the pipeline has to pass through.


Despite all economic crisis through which the country has recently passed, the interest of the foreign investors in energy sector, specially the oil and gas sector has not been vanished.

Recently the Mobil Corp of the United States has expressed its keen interest in acquiring the state owned Pakistan State Oil if it is placed for privatization.

Currently Mobil is operating in the lubricants since 1997 in collaboration with the Army Welfare Trust (AWT). PSO, it may be mentioned here, enjoys 76 per cent share of the petroleum distribution market in Pakistan with over 3,000 outlets all over the country.

The Mobil had expressed its willingness to acquire the PSO following the reports that the government has an intention to off-load 26 per cent stake in the PSO. The Mobil which is increasing its interest in Pakistan market has already invested $10 million in the lubricant business and has a plan to invest another $5 million during the current year. Foreign investment is likely to come at a massive scale if the government deregulates the petroleum sector.

Sources in Privatization Commission while acknowledging the privatization of the PSO was on their card, yet have no definite deadline for putting it on sale.

According to official version, during the period of 1997-98 to 1998-99, some 36 exploration agreements were signed and 16 new discoveries were made which are expected to increase production of gas reserves at least by 35 per cent.

The existing refining strength includes: National Refinery having an installed capacity of 2.9 million tonnes, Pakistan Refinery 2.3 million tonne and Attock Refinery 1.1 million tonnes. In the year 2000 it is expected to grow up to 10 million tonnes with the commissioning of PARCO. Although a number of new refinery projects were announced, time and again, yet not a single project of refinery could come up on the ground. The glaring example is the scrapping of the Badin Refinery for which entire homework was done and even foreign investors were willing to invest in this projects. It seems that vested interests would never like to loose their booty they are pocketing owing to country's dependence on imports.


The extremely slow growth rate of country's refining capacity has deprived the economy of its actual potential. Pakistan has to export 5,000 barrel of its finest crude oil to India mainly due to non-availability of refining capacity of such type of crude within the country.

Foster Wheeler, UK-based world's renowned petroleum experts were assigned by the government to conduct a study for growth of petroleum sector of Pakistan in 1986. It had recommended upgradation of the refining sector by setting up a hydrocracker project for PRL and NRL and to give a boost to the economy by opening various petrochemical avenues in the country. The recommendations remained on papers only and no hydrocracker project could be established in the country as against 160 hydrocracker projects operating the world over. The capacity of Jinnah Terminal, which is of course an outstanding airport in this region, is hardly utilized by 30 per cent. The international airlines avoid fueling from Karachi airport due to excessive cost of JP-1. The price is higher due to low production. Situation demand that efforts for acceleration of refining sector so that we could avail at least the available resources within the country.