Oct 22 - 28, 2007

Last week, a great development took place when international petroleum company and PARCO announced the installation of a refinery at Khalifa point with an investment of $5bn. The oil refinery will have the refining capacity of three hundred thousand barrels and will thus become the largest refinery of Pakistan. The refinery will be strategically located which is one of the key considerations for a huge refinery project of this magnitude.

The government is fully supporting these new refining ventures and has promised to give excellent infrastructure in these areas. The tax holidays have also been announced so that more and more investment can be attracted. The size of refinery project at Khalifa point will ensure economies of scale. Domestic demand is a very important aspect for the projects of this size. However, these refineries are very strategic in nature considering regional demand. Pakistan's strategic location allows access to markets like Iraq, Oman, Iran and Far East. If Gwadar port is developed then access to china and central Asia will enable Pakistan play a key role in order to meet the energy demand of these major energy consuming countries. This will be possible after the Gwadar port becomes fully operational as Karachi port is unable to handle the rising marine activity as lacks bulk handling capacity and the required facilities.

There are five oil refineries in Pakistan with a refining capacity of 12.63 Metric toms per annum. Indus refinery started its operations during FY07. Its installed capacity is 4.6 metric tons thus has overtaken PARCO as the largest operator. The other five refineries are also planning to expand their capacity. The earnings of the refinery sector in Pakistan and also worldwide have remained very volatile. Pakistan's refinery sector experienced a shock last year where margins had squeezed and profitability had gone down due to fluctuations in the international oil prices. The situation has changed now and refineries have again started showing good profitability numbers. The profitability of the regional refineries particularly in Singapore and Dubai has remained upbeat in the last six months. The refinery margins stood at $1.57/bbl in December 2006 and soared up to $8.11/bbl as of June 2007, indicating the reason why profitability of the refineries has remained very volatile since last year.

Pakistan has a very old set up of refineries when the technology was hydro skimming in nature. In present scenario the technology has completely changed and entire world has adopted new technologies for the installation of new ones and by the up gradation of the older ones. No investment, whatsoever was done in the Pakistani refineries for up gradation. One of the reasons for this was Government's decision of not allowing refineries to distribute more than 50% of their face value as dividends which comes out to be five rupees as all refineries have a face value of rupees ten. An especial reserves fund was established where all the earnings after paying rupees five as dividends were transferred so that future expansion and up gradation by the refineries or for offsetting any future losses incurred. However, these reserves were not accessible by the management for any of the refinery expansion and up gradation. Since most of the big refineries are state owned, that decision is one of the reasons of the present disappointing state of Pakistan's refinery set up.

The global environmental standards have become very strict now which does not allow the emission of sulfur and other environmentally hazardous chemicals. The old refining technology was not designed in accordance with the present requirements and hence has become obsolete. Though, no new big refineries were set up internationally after 1970 but huge investments were done internationally in the up gradation of refineries. In Pakistan, state owned refineries have been allowed by the Government to invest in their up gradation.

According to Mr. Aftab Hussain, General Manager, Pakistan Refinery, "this investment is need of the hour now. The margins have squeezed up to the extent that it is not possible to remain profitable with the present set up" he further added Hydro skimming refineries have no future. The technology has completely changed now". In such a situation, it is very disappointing that when Hydro skimming refineries were being relocated from the developed world, they were imported in Pakistan in the recent past. The result is heavy losses as evident by one of the private refinery in Pakistan.

Private sector should learn lessons from the reliance group in India. When all the state owned refineries in India suffered huge losses due to the fact that their margins had shrunk due to high international prices, it was reliance group that remained profitable. The reason for this is the technology that enables reliance to import very high sulfur oil from Venezuela and refine it thus earning better margins.

Another very important factor is integration. Forward and backward integration has become a practice by the international oil giants. This integration is also observable in Pakistan where Attock group has integrated itself as oil exploration, refining and oil marketing group. It provides a cushion to the declining profitability if there is any volatility in the international oil prices. India is another example where private sector has come up and integrated itself.

Apart from geopolitical situation, limited Refining capacity is also one of the reasons of high international oil price. Over the years, the world investment on one end exponentially increased in oil and gas exploration and on the end investment in the refineries was completely ignored after 1970. Even Iran, which is the 4th largest oil producer in OPEC, lacks refining capacity. It exports crude oil and imports Gasoline. There came time when limited refining capacity forced Iranian Government to introduce concept of rationing in order to curtail the rising demand of Gasoline. USA, the biggest energy consumer of the world has relied on the same refining capacity in the Gulf of Mexico over the years.

The global foreign inflows are in access of $1.5tn. Countries are competing for FDI and most of the developing countries in the region have remained a focal point for the international investors. China, India, Singapore and Honk Kong have been forecasted to remain the biggest recipients in the coming years. Pakistan has seen increasing record inflows in last five years. Government has really marketed Pakistan well and it has also paid well. Further efforts should be made in order to attract a reasonable chunk in the global pie of these inflows. Strategic location is some thing that every Government has tried to market in last fifty years but there has not been any practical outcome. Regional energy shortage is one area where Pakistan can truly utilize its strategic location and can attract foreign direct investment.