REFINERIES IN PAKISTAN

An effort to replicate Singapore success story

SHABBIR H. KAZMI
Oct 22 - 28, 2007

The economic policies, particularly those governing Pakistan's energy sector have made the country a focal point for the overseas investors. Huge foreign direct investment has been received in all the sub-sectors i.e. exploration, production distribution and marketing. The thrust of all the policies put together is to develop Pakistan as energy corridor.

Pakistan itself is deficient in energy products and also surrounded by the energy-starved countries. This include some of the largest economies like China and India, land locked and war-torn Afghanistan, Iran suffering from acute shortage of fuel refineries, Bangladesh and Sri Lanka,

Pakistan also enjoys proximity to energy rich Central Asian states, countries located in Arabian Peninsula, including some of the largest crude oil exporters like Saudi Arabia, Iraq, Kuwait and Iran.

A closer look at these countries shows that these countries are the top crude oil producers but have very limited refining capacities. As against this Singapore, a country producing not a drop of oil has huge refining complexes.

For more than three decades oil refining business had remained under the state control and capacity expansions were also undertake. However, the country achieved self sufficiency in most of the products after commencement of refining by Pak Arab Refinery. At present the country imports furnace oil and high speed diesel, but the two products are costing a fortune to the country.

Two mega size refineries are being established in the country. The cumulative refining capacity of these refineries is estimated at 400,000 barrels per day. This would yield products much above the domestic requirement. In fact the objective behind establishment of these refineries seems to be catering to the needs of neighboring countries like Iran, Afghanistan, China, India, Bangladesh and Sri Lanka.

One may wonder about inclusion of Iran in the list, despite being one of the leading producers of crude oil and the fact that till recently petrol was being smuggled from Iran into Pakistan. However, with the curb not only that the influx of smuggled petrol has reduced but Pakistan also has to import larger quantity. Petrol was smuggled into Pakistan mainly due to heavy subsidy provided by the Iranian government. However, the fact is that Iran faces acute shortage of refining capacity and also not in a position to expand the capacity in the near future. One of the reasons is the US opposition.

It is understood that some of the smaller refineries operating in Europe and North America were closed down because of being a little high on environmental pollution. Such units are being relocated into developing countries where environment protection laws are not very stringent, this includes Pakistan. However, some of the sponsors try to relocate the plants after proper refurbishing and adding some pollution control gadgetries.

Pakistan has been successful in attracting foreign investment in refining industry. The story began with the establishment of Pak Arab Refinery and now two more are coming up having substantial foreign investment. At this juncture the interest of foreign investors seems to be replicating Singapore success story.

The history of oil refineries in Pakistan started with the establishment of Attock Refinery in 1922 with a small capacity of 119 thousand ton per annum, now touching 1.82 million per annum. The refinery situated in Morgah, Rawalpindi, was incorporated as a private limited company in November 1978 to take over the business of the Attock Oil Company Limited relating to refining of crude and supplying of refined products. ARL was then converted into a public limited company in June 1979 and is currently listed on all three stock exchanges. ARL's configuration enables it to process the lightest to the heaviest indigenous crude and produce a complete range of both energy and non-energy products.

Pakistan Refinery was incorporated as public limited company in May 1960 and is listed at the Karachi and Lahore stock exchanges. The company is situated in Karachi and mainly engaged in the production and sales of petroleum energy products. Its present design capacity is 2.1 million tons per annum. The majority of PRL's shares are held by PSO, Shell, Chevron, Central Insurance and Dawood Corporation, with an aggregate shareholding of about 70%. Balance stake is held by financial institutions, public sector companies and corporations, individuals and joint stock companies, banks, development financial institutions, Modarabas, insurance companies etc.

National Refinery (NRL) was incorporated as a public limited company in 1963. Government of Pakistan took over the management of NRL under the Economic Reforms Order, 1972. NRL is a petroleum refining and petrochemical complex producing a wide range of fuels, lubes, BTX, asphalts and specialty products for domestic consumption and export. In June 2003 the Government of Pakistan decided to include NRL in its privatization program. Sale of 51% shares and transfer of management control to Attock Oil Group was completed in July 2005. The construction work of first Lube Refinery started in May 1964. The Refinery came into production in June 1966, with crude oil refining capacity of 600,000 tons per annum and production of 76,000 tons of various grades of Lube Base Oils and 100,000 tons of Asphalt per annum. The growth in demand of fuel products in the subsequent years, after installation of first Lube Refinery, impelled the need for further increase in refining capacity. In 1974 NRL signed an agreement with Industrial Export and Import of Romania to construct a fuel refinery having crude refining capacity of 1.5 million tons per year. It was commissioned in 1977 for producing LPG, motor gasoline, HOBC, naphtha, kerosene, jet fuels, high speed diesel and furnace Oil. NRL installed its second lube refinery which was commissioned in 1985 for producing 100,000 tons of lube base oils. The feedstock for this refinery was available as surplus furnace oil from fuel refinery, which was upgraded to lubes. NRL implemented its fuel refinery revamp project in 1990. The revamp project was based on energy conservation, enabling the capacity increase without increasing energy consumption. Total crude processing capacity was enhanced to about 3 million tons per year.

Pak Arab Refinery is a joint venture between Pakistan and Abu Dhabi. The share holding in the Company is in the proportion of Government of Pakistan (60%) and Abu Dhabi Petroleum Investment (40%). It was incorporated as a public limited company in 1974 and has been in existence for more than 30 years. Its corporate voyage through these years has been full of important milestones. Over the years it has grown in size and strength and can look with confidence to a much brighter future. It is a fully integrated energy company with an asset base of approximately Rs. 100 billion. For many years after the completion of the pipeline, the dream was to construct a mid-country refinery at Mahmood Kot, near Multan. In September 2000, the dream became reality with the start-up of the country's largest capacity refinery of 100,000 barrels per day, costing US$ 886 million. It was commissioned well within budget and a month ahead of the schedule. The state-of-the-art refinery is based on the latest equipment and process technology and also serves as a training resource for technologists from the region.

The refined petroleum products transport logistics is based on road and rail and the existing pipeline network. The surface transport mode is potentially hazardous to other traffic, human lives and the environment besides wear and tear of road surfaces. PARCO's pipeline network is a safer and more cost effective alternative for both crude and product transportation. With the completion of the white oil pipeline a more comprehensive, safer, cost effective, demand responsive and eco-friendly pipeline network has become available to meet the country's growing needs for energy. The close proximity to high consumption centres of the country's middle and northern region, the location mitigates security concerns that arise from concentration of refining capacity at one location. The refinery and its construction, besides being the focal point for technology transfer, has created thousands of job opportunities in an under developed area and acted as a catalyst for economic activity that is contributing to the well being and a better quality of life of the people. The White Oil Pipeline is also a major strategic significance to the country. The half-a-billion dollar, 817 kilometer, 26 inch diameter dedicated refined product pipeline is capable of transporting up to 12 million tons refined petroleum products to up-country destinations being more efficient, cost effective and environmentally friendly. Within a 30 km radius of the refinery, there are two thermal power complexes one at Kot Addu and other at Muzaffargarh having a combined capacity of nearly 3,000MW, while 762 MW AES thermal power complex is located at Lalpir, 5 kilometers away from the refinery.

Indus Refinery Limited (IRL) a joint venture project between US, UK and Middle East based investors and Pakistani sponsors. The sponsors have taken the initiative to relocate, reconstruct and operate a state-of-the-art refinery to become the sixth petroleum refinery of Pakistan. It will produce the deficit products requirements of Pakistan and also export the surplus. This will help in saving foreign exchange through import substitution and also earn foreign exchange. The refinery will produce propane, butane, LPG, high quality unleaded gasoline, kerosene, aviation fuels, low sylph high speed diesel. This is 100,000 barrel per day refinery located on the main National Highway near Karachi. It is located near Port Qasim approximately 21 kilometers from FOTCO oil terminal and jetty near the PARCO oil terminal, PSO's Zulfikarabad oil terminal, and PSO's marshalling yard. FOTCO and IRL have already signed a Memorandum of Understanding on 1st September 2006 for the provision of jetty infrastructure and access for the refinery. Fotco and IRL will enter into a formal agreement whereby Fotco will construct a second jetty and pipeline system capable of handling IRL's crude supply and refined products export requirements.

Abu Dhabi's International Petroleum Investment Company has agreed to set up an oil refinery with an installed capacity to refine 100 million barrels annually in Hub, Balochistan. It will be named as Khalifa Dossal Refinery. The investment company will keep 74% shares while government of Pakistan will hold 26% shares.

OUTLOOK

According to a BMA Capital report crude oil prices are hovering around all time high levels. Arab light price has also increased during the first three months of the current fiscal year. Historically, gross refinery margins (GRMs) had a trend of improving with rising oil prices. However this has not happened this time. The difference between historical oil price rallies and the current upsurge is that this time product prices, which drive oil demand have not increased with oil prices. Hence GRMs have remained stable or increased only marginally.

Even though there has been a spike in oil prices since September this year, GRMs have increased only marginally for most products. This is because: 1) Refineries have increased their output which has led to higher crude oil demand resulting in recent oil price hike. 2) However, because of increased output, prices of refined output have not increased at a higher rate which is the reason why margins have not improved significantly. The recent rally seen in oil prices is based on speculation with no real buying, thus explaining the rise in oil prices but no improvement in GRMs.