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Invest in oil refineries of Pakistan

There have been articles, statements and interviews that oil and gas is history and Renewable energy such as Solar, Wind are IN. Unsubstantiated and off the cuff articles and statements are detrimental to the economy and society. Once upon a time (2000) there was power MW surplus and unwarranted hue and cry against new power plants lead to load shedding from 2006 to 2018.

Similarly, nowadays over capacity MW statements has made the government shy off from new capacity additions. A few Google hits are no alternate to experience and detail studies. Similar is the case with the refinery business now in Pakistan pseudo experts are pouring in unsubstantiated and off the cuff statements without any homework or expertise. Countries around the globe are spending billions of dollars to upgrade and expand existing refineries and building new grassroot refineries. These countries have done professional homework and then have embarked on establishing new refineries.

Pakistan like all countries needs oil and gas till 2050 for sure, perhaps beyond. Therefore, we cannot pull back from aggressive oil and gas exploration, installation of an equivalent to 200,000 barrels per day refining capacity every 3 years, expanding storage capacity and terminals and pipeline transmission and distribution network footprint needs to be expanded commensurate with supply and demand in an optimal manner so as to avoid low pressure gas syndrome. Also, we still need to build Oil/Gas based base-load mega-power plants (IPPs) in super ultra critical category. We have to do lot of catch up and cannot afford to couch gossip away valuable time and mislead the political leadership.

The Planning Commission needs to play its role and take the lead in national energy planning by developing the Perspective Plan, 5-Years Plans and short term Plans and educate the Policy makers and political leadership to strengthen Pakistan’s energy security and make conducive investment environment by make enabling environment.

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The bankers, financial institutions and stock brokerage houses need to understand the dynamics of oil refinery business by way of interacting with experts nationally and internationally. DG Oil & OGRA need to play positive role by holding public hearings to educate the general public and media.

Furthermore, OCAC and the refiners need to hold learning conferences and workshops to inform the investors, policy makers, political leadership, regulators and media the business dynamics of oil refineries.

There are noises that time for Oil refineries is up; then the following information will dazzle you to invest in refineries:

Oil Refineries 24 Month Investment US$ Billion
Investments Categories Grass root Expansion Unit Addition Other in-plant Maintenance Total Investment
South Asia 14.40 20.30 6.30 0.35 0.33 $41.68 B
Southeast Asia 39.30 19.80 6.00 1.00 0.21 $66.31 B
Western Asia 40.00 6.30 7.23 0.73 0,73 $54.26 B
East Asia 36.60 19.10 15.00 0.26 0.70 $71.66B
Europe 14.60 0.05 7.40 1.25 0.77 $24.07B
North America 27.50 2.50 7.50 2.50 2.50 $42.50 B
Total Investment $172 B $68 B $49 B $6 B $4.5 B $ 300 B

Current worldwide refining capacity is 98,079,969 barrels by day which will increase by 27% by 2027 due to three facts; a) emerging markets b) reduce imports – save FEX & c) strategic/jobs/growth enablers. We are no different from rest of the world; we need to invest, as well in refineries and not discourage investments. Some market regions are going to double their refining capacity in 7 years. Pakistan needs investment friendly policy and policy makers.

Some people say that the Pakistani refineries are obsolete, unfortunately these people have not done their due diligence and homework. ARL spent Rs 37.2 billion ($240 million) and NRL spent Rs 52.7 billion ($340 million) in last two years, so they are brand new now. PRL is poised to spend some Rs 600 million very soon. So, it is naive to say that the three refineries are obsolete. FID (Final Investment Decisions) and project implementation takes time for mega projects, therefore policies cannot be changed frequently every 3 years. Investments in local refineries will bring great returns to the investors.

Some people even say that the refineries should be closed; in case of a war or escalation are we going to bring Diesel and Jet Fuel from the East?

 

FFO is Lifeline & Price:

Locally produced Furnace Fuel oil (FFO) sales needs to be resolved through a strategic cum economic policy decision by the Government and institutions incharge of national security. Worldwide FFO production will still be 7.5 million barrels per day in 2040; therefore FFO is here to stay we need to understand. Pakistan produces 0.08 million barrels per day only. It’s not that the refineries are producing FFO by choice but it is produced by default. Every barrel of oil has certain amount of inherent FFO.

People who say that the refineries are producing FFO needs to learn fractionation. Yes it’s value addition can be done but why should we spend precious foreign exchange unnecessary only to be sorry one-day. Every sensible country produces FFO as strategic fuel for war times. Back in late 1990s and early 2000s the matter was debated and its strategic need was shared with certain quarters. In case of a war, the natural gas supply nerve centers are vulnerable and so is the import of LNG because blockade will be one of the early choking strategies of enemies. FFO is used as distributed storage and supply to strategic power plants to keep the war time machinery alive. One day we opine crack FFO, the next day we are importing ship loads of FFO.

The matter should be put to rest by using FFO produced by present refinery in Power Plants on ‘Must Run’ basis in the power dispatch merit order. We replaced FFO with expensive LNG causing not only drain of precious FEX but also causing reduced local production of Petrol, Diesel and Jet Fuel; which caused expensive imports of these products. In January 2020, LNG is priced at $ 10.4822/million BTU (excl GST) at consumer gate by OGRA, therefore FFO from local refineries may be priced at RLNG parity price i.e. $10.4822 – 5% Heat rate adjustment=$9.9581/MBTU x 51.51 MBTU/Ton=$512.9417/Ton x Rs 154.70/$=Rs 79,352/Ton. This algorithm will save the precious FEX and increase income tax receipts.

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