INTERVIEW: MOHAMMAD WASI KHAN, PRESIDENT & CEO BOSICOR PAKISTAN LTD WEAKENING OF US DOLLAR IS THE MAJOR FACTOR FOR OIL PRICE HIKE
Mar 31 - Apr 06, 2008
Mohammad Wasi Khan, President & CEO Bosicor despite an engineer speaks on the highly technical subject like oil production and price hike in such a manner that makes it easy for a lay man to follow the complexities.
While talking to Pakistan & Gulf Economist on the burning issue of oil prices, Wasi Khan makes things easier for the common man to understand the problem. He said that there are some basic factors which usually make the difference in oil prices internationally or in the domestic market.
The major factor for determining oil prices is of course the supply and demand. The supply and demand is not a simple matter; one has to look into complexities of this factor.
The supply-demand situation stems from with the country or the region on the back of pace of developments and economic which obviously lead to enhance consumption and the demand for petroleum products. Since the availability of energy varies region to region it causes immediate effect on supply side and consequently results in price hike.
At present the oil production all over the world has reached a staged where the difference between supply and demand has been reduced to merely 2 million barrels surplus stocks. The margin of two million barrels surplus indicates a vulnerable supply side available to absorb any jolt in wake of sudden surge in demand or any geo political problem or break down in any oil producing region of the world such as Iraq, Iran or for that matter Nigeria etc. In that particular case the demand for oil jumps consequently proves disturbing the buffer stock of 2 million barrels a day. This shortfall on supply side causes panic or future buying and ultimately results in sharp prices increases.
When asked what should be the size of surplus stocks, Wasi Khan was of the view that on the back of high rate of global development and economic growth the oil supplies should have a back up of at least 10-15 percent to ensure price stability.
The United States is the largest energy consumer and its strategic oil reserves play a much greater role on the oil price factor. While the United States goes to make up or maintain its reserve level when its reserve level goes down that disturbs the reserves level of the supply side which leads to increase the price level.
WEAKENING OF DOLLAR AN OVERWHELMING FACTOR FOR PRICE HIKE
Another overwhelming factor disturbing oil prices is the exchange rate following weakening of the US dollar. Those economies selling or buying oil in dollar have to adjust prices in view of the dollar strength of their currencies, hence the major factor for oil price hike is the weakening of the dollar against different currencies. He said in a lighter mood that we should be more concerned for improvement of the dollar than the US itself and pray for the US dollar to regain strength which is a must for oil price stability especially for those currencies pegged with the dollar, he remarked.
It is for the first time that due to economic recession in the US adversely affecting the economies in general and the third world economies in particular when dollar strength will improve the oil price level will also stabilize, he observed.
When his attention was drawn towards the negative role of the US in oil production as despite having huge oil reserves it does not put its oil resources into production instead it is buying from convention oil producing countries. If US also start oil production it may definitely ease the demand-supply situation, Wasi Khan however did not agree. Actually, he said "US has its own strategic approach, they consider it commercially unviable to produce locally as compared to buy from the available market which is commercially viable for them. However they are producing oil to some extent but due to oil price economics they feel it more viable to buy from the Middle Eastern market" he pleaded.
It is important to note that a freeze on the prices of key fuels by government despite a substantial rise in international oil pries helped contain significant part of inflationary pressures in the economy. At the same time, prices of a number of other petroleum products are increasing tandem with international oil prices, which are indirectly impacting pries of a number of commodities.
The demand-supply gap for the domestic petroleum refining has widened in recent years mainly due to requirements from power sector, industrial sector and transport sector. This is evident in an average growth of 39 percent in import of petroleum products in last three years.
The current capacity in petroleum refining industry at end September 2007 could produce 13.2 millions tons of petroleum products whereas the total consumption during financial year 2007 stood at approximately 18 millions tons.
The domestic petroleum products manufacturers have already started looking at ways to meet domestic requirements through product diversification. In specific terms, the first quarter of financial year 2008 data reflects a sharp growth in production of furnace oil on the back of growing electricity requirements and frequent gas interruptions, and motor spirits and high speed diesel products the demand for which grew phenomenally in recent years due outburst of vehicular population in the country.
The setting up of a costal refinery is expected to double the existing refining capacity by 2011. While he product diversification alone can reduce import dependency to a certain extent, the economy requirements more of such projects so as to meet the growing domestic petroleum requirements in the long run.
The impact of persistent strong increase in the prices of food and energy is now increasingly evident in the core inflation as well. The fact that inflation in recent months had been driven by supply-side factors such as food and energy prices has given rise to a debate over the need for monetary tightening on the part of the central bank
With a vision to maximize the synergies in the petroleum sector, the sponsors (BCL) have established a wholly owned subsidiary by the name of Bosicor Chemicals Pakistan Limited, for relocating and setting up a Petrochemical plant, besides BPL and BOPL refineries at a 75 acres leased site in Mouza Khund estate, owned by Bosicor Pakistan Limited at District Hub Lasbela, Balochistan.
This shall be the first Aromatic Complex in Pakistan with an initial capacity of 17,100 barrels per day to produce petrochemical products such as Raffinate, C-9, Benzene, Mixed Xylene, Para Xylene, and Ortho Xylene to meet the country's deficit requirements. Since the consumption of petrochemical products in Pakistan expected to grow in the yeas to come BCPL shall be well placed to capitalize on the growing market demand as such the investment is expected to fetch good returns.
The technical due diligence of the Aromatics Units was carried out by Universal Oil Products Inc(UOP), the world's leading process licensor and engineering consultant.
The project is current in the deconstruction phase. The dismantling contact has been entered into by the Company with Studi Technologie Progretti. The dismantling process of the plants has already commenced and is expected to be completed during 2008. It is envisaged to achieve the implementation timeline of three years and the project is targeted to be on line by 2009.