Pakistan Refinery expresses inability to process Russian crude

Pakistan Refinery (PRL) has reportedly raised concerns about its capacity to process more quantities of Russian crude oil, a setback for the Shehbaz Sharif government’s attempts to increase reliance on cheaper Russian crude to cut domestic fuel prices.

Analysts say the processing of Russian crude oil — available at a discount after it was banned from European markets due to Russia’s war on Ukraine — has been hampered by a shortage of foreign currency and limitations at Pakistan’s refineries and ports.

Another obstacle is that local refineries cannot extract as much petrol and diesel out of Urals crude — a type of crude oil from Russia — as they produce from Middle Eastern crudes.

Pakistan’s first crude cargo from Russia arrived in June and the payment was made in yuans. The target was to import 100,000 barrels per day (bpd) from Russia, nearly two-thirds of Pakistan’s total 154,000 bpd of crude imports in 2022.

The first shipment did not immediately lead to any significant savings for consumers. Instead, just over a week before the National Assembly’s dissolution, the outgoing coalition government raised petrol and diesel prices by up to Rs20 per litre.

According to sector experts, PRL failed in gaining any notable financial gains from processing the Russian crude, adding that the move to increase imports was allegedly a political stunt by the PDM government to appease consumers.

Musadik Malik, the minister of state for petroleum in the previous cabinet, told Dawn that PRL had not refused to further process Russian crude imports as long as he was in charge. The National Assembly was dissolved at midnight on Wednesday.

Some sources estimate the financial benefit to the PRL from this import was too paltry.

According to informed sources, PRL had taken the stance that other refineries should also bear the responsibility and challenges of processing Russian crude oil, which had not resulted in any significant financial benefit for the PRL.

Given the minimal benefits in terms of reducing local fuel prices, experts believe the interim government may shy away from importing more Russian crude until after the general elections.

Annually, local refineries process about 3 million tons of locally extracted crude oil. Besides, the country imports up to 8 million tons crude from Saudi Arabia and the United Arab Emirates.

Zahid Mir, Chief Executive Officer PRL last month told Reuters that the refinery would need around two months to fully process its first batch of 100,000 tons equivalent to 730,000 barrels of Urals crude.

This oil needs to be mixed with Middle Eastern crude to balance the high fuel oil output from the Russian variant. “Our optimum processing solution is to blend Urals with Middle Eastern imported crude while not exceeding 50% Ural in the blend,” Mir told the news agency.

 

Pakistan faces furnace oil glut of 632,000 tons

Pakistan faces furnace oil (FO) glut of 632,000 tons following refusal of power plants to stockpile the fuel and poor export feasibility due to its low price in the global market.

The FO stocks have been accumulating since the start of last winter when power demand shrunk. Power plants are still not lifting furnace oil as electricity generation is mainly coming from hydel and nuclear sources, which have cut the demand of fuel oil for power generation.

The attempts by refineries to export furnace oil did not prove lucrative because of low price. Refineries determined it was financially unviable to export FO, as it could eat up their profits if the fuel was exported in the international market at a low price.

According to the sources in the oil sector, total 632,000 FO stocks include 539,080 tons of useable stocks and 93,147 tons of dead stocks.

Pakistan’s oil marketing companies (OMCS) currently hold 203,879 tons of furnace oil stocks, which is 32% of total stocks. The country’s power sector holds 202,280 tons of the fuel oil stocks with it, which is 33%, while local refineries have 220,068 tons, which is 35% of the total stocks.

The breakup of FO with the local refineries shows that PARCO holds 116,004 tons, National Refinery Limited has 32,327 tons and Pakistan Refinery 44,455 tons, Attock Refinery 16,826 tons, and Cnergyico has 10,457 tons of FO stocks.

The present FO stock is huge and is making the operations of local refineries vulnerable because it has been interrupting their operational capacity. They said that if the FO stocks were not lifting, it could further lead towards a shutdown of refineries’ operations.

On exporting the FO, industry people said that PARCO exported 60,000 tons and PRL exported 25,000 tons but the export price was not lucrative. The price in the global market is on the lower side and it can cause financial issues for the refineries if the stocks are exported at this price.

The situation is not attractive for the local refineries as power generation from FO in the month of February slumped by 80% compared to the same month of last year and in the first eight months of the current fiscal. Electricity production from FO also decreased by 50% compared to the same period of the last financial year.

 

Pakistan Refinery: Corporate Briefing

To recall during FY22, sales of Pakistan refinery (PRL) grew to its highest ever level of PKR 191 billion. Gross profit increased to PKR20 billion due to high cracking margins globally. Despite a provision of PKR1.6 billion related to super tax, profit after tax and EPS increased to PKR 12.6 billion and PKR 19.96, respectively.

During 1QFY23, sales grew to PKR73 billion. Moreover, gross profit increased to PKR1.6 billion as cracking margins are on a decline globally. This led to an increase in net profit to PKR1.00 billion and EPS of PKR 1.63. 

PRL is a subsidiary of PSO with 63.6% holding. Plant’s annual capacity is 50,000bpd which is run on hydro skimming technology with Crude distillation, Hydrotreating, Platformer and Isomerisation units.

PRL product mix and margins: mainly comprises of HSD and MS, constitute 70% of the refined products and have higher margins than the rest. However, negative margins in FO has made it unviable for exports.

Wood plc was awarded to conduct a FEED study for the upgrade of the plant. Further, JS Global and UBL are hired as financial advisors for the arrangement of financing for the project. This deep conversion refinery upgrade project will allow the Company to produce Euro-V compliant fuel at the same time enhancing capacity to 100,000 bpd. 

The Company has altered its sources to lighter crudes which has resulted in higher profitability. It was mainly due to less reliance on ADNOC due to its lower grade and increasing the share of ARAMCO and KPC. In turn FO proportion in the production mix has declined to 22% which was more than 30% in FY19.

Higher of ACT (based in higher of accounting income and taxable income), normal corporate tax or the minimum turnover tax (0.5% on local and 1% on exports) is applicable on the Company.

During 1QFY23, taxation was provided on turnover tax which included PKR100 million deferred tax.

After the Sindh High Court decision on super tax, the Company is hopeful that its reversal would augment profitability going forward.

 Future outlook

Despite delays in the issuance of the new refinery policy, the Company remains committed to upgrade project as the country is reducing its reliance on FO for power generation and better margins are offered by HSD and MS.

The Company also changed its logo to reflect its contribution for the sustainable development of the country.

Key challenges include subdued refinery margin which is currently declining from its peak. Also, high interest rate and PKR depreciation will continue to dampen profitability. Lastly, low FO upliftment may hamper cash flows in the coming months.