'PRODUCTION ANALYSIS' OF OIL REFINING SECTOR IN PAKISTAN

MULAZIM ALI KHOKHAR
Research Analyst
, PAGE
Mar 31 - Apr 06, 2008

SECTOR OVERVIEW

The oil refining production in Pakistan has been growing at a 5 year CAGR of 2.87% and its capacities are higher by 14% when compared to FY03. There are 7 refineries operating in Pakistan with a total production capacity of 12.87 million tons however the confirmed refining productions estimated at 11.64 million tons per annum. The major chunk of refining production comes from PARCO, National Refinery, Pakistan Refinery and then Attock Refinery with production share of 33%, 25%, 18% and 16% respectively. The refining efficiencies of the sector stand at 90% of the crude oil processed (38% local crude and 61% imported crude).

The refining products are divided into two main groups of energy and non-energy products, which have been growing at 5 year CAGR of 2.57% and 3.61% respectively.

We import about 43% of gross oil supplies (final oil products) in the country while produce remaining domestically. Out of the total crude oil processed to produce the remaining 57% of oil supplies we use about 70% imported crude oil and 30% locally produced one.

7-MONTH PERFORMANCE (JULY-JAN 08)

POL REFINING PRODUCTIONS

ENERGY PRODUCTS

FY07

FY08-F

7M-FY08

YOY GROWTH-F

POL Energy Products

9,206,231

9,546,276

5,568,661

3.69%

Total NE Productions

1,780,305

1,833,696

1,069,656

3.00%

Grand Total

10,986,536

11,379,972

6,638,317

3.58%

The last 7M-Annualised refining productions growth has been 3.5% while the energy sectors productions have grown at 3.7% while the non-energy ones at 3%. The slower pace of the oil refining productions for the last 2 years is the cause of hiking international crude oil prices being the raw material in refining productions. International Crude oil prices have all time high of $106/barrel which has been a record in the history of oil prices.

5 YEAR PRODUCTIONS PERFORMANCE

Our annual gross supplies in the country are increasing at a 5 year CAGR of 1.25% and we still import about 43% of the supplies while the imports are decreasing at a 5 year CAGR of -0.26%. The decline in imports is the result of increasing crude oil productions in Pakistan and hiking investments in this regards are paving the way to make Pakistan immune & self sufficient in crude oil productions. The imports witnessed major decline in the FY04 & FY05 while these oil products' import increased by 37% during the FY07.

Our energy products are increasing at a 5Y-CAGR of 2.57% while 5Y-Average Growth rate stands at 3%. The annual energy productions have marked 10.3 million tons in the FY07 as compared to 9 million tons for the FY03. The last year saw a negative growth of 1.76% where its productions declined from 10.5 to 10.3 million tons.

On the other hand the non-energy products have seen impressive growth where its 5Y-CAGR witnessed a rate of 3.61% and average growth rate of 8%. The total annual non-energy productions stand at 0.55 million tons in FY07 as compared to 0.22 million tons in the FY03. Last year non-energy productions also witnessed negative growth of 0.07% where its productions declined by 356 ton for the year.

CAPACITIES AND EFFICIENCIES

Talking about the capacity enhancement and efficiencies we don't feel that much pleasure as the capacities have increased by only 1.54 million tons for the last five years. This capacity enhancement is due to establishment of two new refineries one is Bosicor Refinery (FY04) with 1.5 million tons of capacity and ENAR Refinery (FY07) with 0.12 million tons of capacity. On the other hand efficiencies in the productions have dwindled around 90% of the crude oil processed over the last 5 years.

Capacity utilizations on average stand at 90% of the capacities while Attock refinery and National refinery go beyond their capacities to produce 102% and 101% of their capacities on average, while Bosicor is under utilizing its capacities at around 36% on average.

MARKET COMPETITIVENESS

With the advent of new refineries and the availability of imported products in the market, the competitiveness has increased. The major oil refineries have shaded their market shares oil to this increasing competitive phenomenon but even in this situation PARCO is the one who has retained its market share intact. Whilst, all the major refineries like National, Attock and Pakistan Refineries have lost their market share by 1.61%, 1% and 5% respectively.

PRICING MECHANISM

The Oil Refineries' profitability is governed by the Import Parity Pricing Formula as modified with effect from July 1, 2002. According to the formula minimum 10% on paid-up capital should be dispensed to the shareholders & remaining net profit after tax from refinery operations (if any) above 50% of paid-up capital as at July 1, 2002 is required to be diverted to a special reserve fund to offset any future losses and/or make investment for expansion or up gradation of the Refinery.

According to the Petroleum Product Pricing formula the government levied 10 per cent customs duty on the import of diesel and six per cent on light diesel oil (LDO) and kerosene. Refineries were allowed to collect these duties as part of their revenue after the previous regime of fixed rate of return was discarded.

FUTURE OUTLOOK

Though the LDO and Kerosene duties have been abolished, but this does not represent much of refinery productions. Recently caretaker Government was considering reviewing and revoking the facility available for the refineries. This stand may impact negatively on the existing refining activities, capacity enhancements and total productions in future.

Otherwise, Refining industry will prosper in near future as Pakistan's crude oil production is increasing, oil imports are decreasing, and the existence of oil giants like British Petroleum, Shell, Chevron and others and with the advent of oil extraction and increasing success rates, will increase refineries establishment in Pakistan like Indus Refinery. This growth pace will pave a way in Pakistan's oil refining sector growth and prosperity.