S.KAMAL HAYDER KAZMI,
Research Analyst, PAGE
Feb 27 - Mar 4, 2012
Pakistan meets majority of its crude oil requirements by importing it from Middle East. The main suppliers include Saudi Arabia, UAE, and Iran.
Total supplies of crude oil available to refineries from imports and local production increased to 10.1 million metric tons (mmt) in FY11. Imports depicted an increase due to improvement in refining margins and marginal increase in processing capacity.
Historically, local production has contributed 30 to 35 per cent of total crude processed domestically, and stood at 3.3 million mmt in FY11.
The domestic production is inelastic to changes in demand, and largely depends on the available reserve base as well as exploration and production activity in the upstream sector. The gap between domestic demand and production is therefore met via imports, which increased by 3.8 per cent year on year (YoY) in FY11 to 6.8 million mmt.
The demand for crude is capped to the extent of installed processing capacity, which stood at 14.3 mmt in FY11.
The domestic market for petroleum, oil and lubricant (POL) products is characterized by overconsumption and underproduction, and Pakistan depends heavily on imports to bridge the deficit. In the five-year period extending till FY11, consumption of POL products grew at an average rate of 4.8 per cent whereas domestic production sufficient to meet only 50 per cent of the domestic requirement actually declined by 3.8 per cent on average.
To bridge the demand supply gap, imports increased sharply to 12.4 million tons as of FY11 from a level of 8.3 million tons in FY07.
The import bill for POL products increased to $8.3 billion in FY11 from $6.6 billion in the previous year, due to adverse movements in both volume and prices. The volume of imports increased to 12.4 mmt, regional oil prices crossed US$120/barrel as unrest in the Middle East intensified during April 2011.
More worrisome is the fact that the increase in POL demand is concentrated in the power sector and has led to a permanent increase in domestic furnace oil requirements.
Since domestic production of furnace oil was sufficient to meet only 27 per cent of consumption in FY10, the remainder was imported.
Substitutes of furnace oil are urgently required to generate electricity. The second product in deficit supply is high-speed diesel (HSD).
In FY10, total consumption of HSD stood at 6.8 mmt, of which 90 per cent was concentrated in the transportation sector. Consumption of HSD remains structurally high since road transport has historically received stronger patronage as compared to railroads.
If Pakistan Railways were to operate efficiently, HSD consumption could be reduced significantly, which would also result in substantial foreign exchange savings for the country.
Consumption is more difficult to check. Domestic production of HSD has long been incentivized by providing a fixed percentage margin to refineries on sales of the product.
However, profits accruing from deemed duty protection have not been invested towards technology up-gradation in the past, and have instead been accumulated as a buffer against volatility in refining margins resulting from massive oil price fluctuations.
POL CONSUMPTION IN FY11
OVERVIEW OF POL IMPORTS (MILLION METRIC TONS)
. FY07 FY08 FY09 FY10 FY11 Imports 8.33 9.03 9.97 11.18 12.41 HSD 3.97 4.51 4.40 4.39 3.76 Furnace Oil 4.31 4.27 5.08 5.60 6.79 Motor Gasoline - 0.13 0.25 0.58 1.06 Others 0.05 0.12 0.25 0.61 0.80
In Pakistan, the consumption of POL energy products declined by 2.4 per cent in FY11 as compared to an increase of 9.4 per cent in the same period last year. The decline in annual consumption during FY11 was largely due to lower sales of furnace oil, which accounts for 45 per cent of the energy product consumption mix.
Consumption of furnace oil witnessed the greatest decline in August 2010 in particular, since widespread flooding affected product availability at the time. A second substantial reduction in sales was witnessed in April 2011, due to inventory management problems experienced by oil marketing companies (OMCs), resulting from circular debt. Sales of non-energy products were declined by 22.6 per cent in FY11 as compared to an increase of 3.9 per cent during FY10. The overall decline in this group is primarily attributable to weaker consumption of asphalt, which is used in road construction and accounts for about 65 per cent of the non-energy product group. Meanwhile, lubricant sales increased marginally in FY11 as compared to sales growth of 11.1 per cent in FY10.
POL PRODUCTION FY11
Refinery production in FY11 saw a decline of 2.3 per cent to 9.3 million tons. The decline in production was less than that in FY10 largely due to improvement in refining margins especially during H2-FY11 in response to rising international oil prices. Estimated gross margins for Attock Refinery and National Refinery crossed $50/bbl mark in April 2011, and were positive even for refineries with a higher percentage of furnace oil in the product mix.
The consumer impact of rising oil prices has been proactively managed during FY11 with some adverse implications for indirect tax revenues. Specifically, OMC margins on various POL products were fixed at lower levels, whereas the petroleum development levy (PDL) built into the ex-depot pricing formula was reduced across the board. Calculation of ex-refinery prices was also adjusted by OGRA to exclude the impact of shipping and incidental costs in deriving POL prices.