Pakistani OMCs face doom and gloom

Sales of oil marketing companies in March 2023 dipped to 1.1 million tons, a fall of 9%MoM and 39%YoY basis. The decline was led by high speed diesel (HSD) and furnace oil (FO). This is the lowest monthly offtake number since April 2020 (1.068 million tons), when Government of Pakistan (GoP) resorted to lockdowns in a bid to contain the spread of COVID-19.

The decline can be mainly attributed to significant price hikes in motor spirit (MS) and HSD over the previous two months, taking prices during March to PkR272 and PKR293 per liter respectively.

The said fall to 35 month low can also be attributed to demand destruction, as POL sales volumes are correlated with an overall economic slowdown, depicted by falling industrial activity, falling power generation, shock in the auto sector and the unprecedented wave of inflation that has gripped the economy.

Overall, total POL sales remained down by 21%YoY during 9MFY23, to 12.8 million tons as compared to 16.2 million tons during the same period a year ago.

Product wise, HSD sales were down 43%YoY and FO offtake was down 70%YoY), as muted industrial activity and power generation. FO based generation declined 51%YoY during 8MFY23.

Analysts expect increased HSD offtakes in the upcoming Kharif season (April-June), although, with fuel prices on the rise, it is expected to be an expensive affair for farmers, and may even be riddled with fuel shortages like last year where diesel shortage hit sowing/harvesting farmers in Punjab as they queued up at filling stations, being wary in anticipation of monsoon season in May/June. The ongoing wave of inflationary pressures has also gripped the economy and has resulted in consumers choosing to avoid leisurely travel amidst reduced purchasing power.

It is worth mentioning that the prices of both MS and HSD have risen to PKR272 and PKR293 per liter, respectively.

These prices represent an increase, in line with the current government's plan to pass on the full cost of supply and levies to consumers.

Company wise, major players in the sector, PSO/APL/SHEL/GOPL, delivered throughput levels of 535,000/113,000/89,000/58,000 tons, taking total market share to 48.4%/10.2%/8.2%/5.3% for March 20223, respectively.

To note, PSO’s offtakes remained worse off, down 44%YoY, mainly due to dampened FO demand, down 92%YoY as compared to an industry-wide decline of 70%YoY.

More specifically, country’s largest OMC saw its retail volume fall by 12%MoM/36%YoY. Furthermore, HASCOL emerged the most resilient amidst the industry decline as total volumes for the month were reported at 43,000 tons, up by 60%MoM. This comes on the back of HASCOL’s approach to remobilize most of its retail depots by CY22 end, as most closed up due to company’s fallout back in CY20.

On the retail front, PSO and APL ended the 2QFY23 period with market share standing at 49.1%/8.5% as compared to 47.0%/8.3% during SPLY.

With only a quarter left during the year – the demand for petroleum products hasn't looked this bad in years since the Covid’19 pandemic struck. Overall, the broad based economic slowdown continues to haunt the sustainability of the sector as risen prices and dampened industrial/commercial activity have kept offtakes under pressure.

On a forward looking basis, rampant inflationary pressures in the coming quarters alongside a depressed GDP outlook during the year period compels us to assume negative volumetric growth for the industry, by approximately 20-21% for FY23 (previous 15%).

 

Pakistan: Government likely to approve new oil refining policy shortly

The upcoming Cabinet Committee on Energy (CCoE) meeting is likely to approve the Pakistan Oil Refining Policy 2023 as Prime Minister Shehbaz Sharif being In-charge of the Petroleum Division has authorized submission of a summary in this regard to the CCoE.

The petroleum division has prepared the summary for the new oil refining policy 2023 involving upgradation of the existing refineries. 

The summary was circulated to the Finance Fivision, Ministry of Planning, Development and Special Initiative, Federal Board of Revenue (FBR) and Oil and Gas Regulatory Authority (OGRA) for seeking their input. 

This is a positive development for establishing a proposed refinery in the country worth around US$10 billion dollars with the cooperation of Saudi Arabia.

Petroleum products contribute 31% to the energy mix of Pakistan with an overall contribution of  around 11 million tons Per Annum (inclusive of 30% local crude processing) while the remaining 69% of the country’s demand has to be met with imports.

Indigenous and imported crude is refined by five local refineries which have been periodically upgraded to meet local fuel specifications.

The upgradation of refineries included setting up of Diesel HydroDesulfurization (DHDs) to reduce Sulphur from diesel and isomerization plants for enhancing the production of Motor Spirit (Petrol) at a combined cost of around PKR75 billion.

The government has been emphasizing local refineries to further up-grade their plants by producing Euro-V specification fuels and minimizing production of furnace oil, however it requires capital investment of around US$4.5 billion. 

This would require refineries to arrange funding from either their own resources and or borrowing from lenders at commercial terms. To obtain the required funding, refineries will have to improve their balance sheet, according to sources.

The five year profit/loss position of refineries indicates that the sector needs fiscal support from the government to improve the financial position for upgradation purposes.

In case of no intervention by the government, the local refining industry might be at risk of collapsing according to some speculators. 

In such a case the domestic crude oil production of approximately 70,000 barrels per day by the country’s Exploration and Production (E&P) companies would have to be exported and more expensive refined petroleum products would have to be imported. 

Such a scenario might discourage investment in exploration of the oil and gas sector, apart from creating vulnerability in the supply chain of strategic fuels and placing additional burden on the country’s balance of payments.

In October 1997, the government introduced the Petroleum Policy 1997 (amended in 2002), which replaced the minimum 10% guaranteed rate of return for refineries with tariff protection formula/deemed duty (10% on high speed diesel, 6% on Kerosene oil, light diesel oil & JP-4). In 2008 tariff protection was reduced to 7.5% on HSD only. 

Given the tariff protection could not attract investment in the sector, it is therefore required to be improved. Accordingly, an Energy Sub-Group of the Advisory Committee of the Planning Commission was constituted which made recommendations in April of 2021, with regard to investment in the refinery sector through government support including product pricing policies, tax structure etc.

In view of the above, the Petroleum Division prepared a draft Pakistan Oil Refining Policy for new and existing refineries which was discussed in CCoE meetings. The committee through its decision dated 13th September, 2021, provided guidelines to improve the policy document, therefore, the policy has been revised, said the sources.

The establishment of a new refinery requires considerable lead time and huge investment for which a policy along with attractive incentives needs to be in place.

In case of existing refineries, necessary changes have been incorporated in the policy after deliberation with the refineries and government bodies.

The draft Pakistan Oil Refining Policy 2023 for upgradation of existing refineries is submitted for the consideration and approval of the ECC whereby certain tax exemption and tariff protection incentives have been proposed as provided at section-6 of the proposed policy.

 

Pakistan: Refineries asked to raise petrol output

This morning I was shocked to read a news that the government has asked local refineries to overcome the likely shortfall of 8,000 tons of petrol in the country. This clearly indicates that the concerned departments were unaware of the factors responsible for the shortfall: 1) delay in opening of L/Cs due to the limited availability of the foreign exchange and 2) overflowing furnace oil storage tanks of the refineries.

Let me address the second issue first. In the recent past government asked power plants not to use furnace oil. The limited offtake of furnace oil forced the refineries to operate at lower capacity utilization. The decision has no rationale because running of refineries at lower capacity utilization, reduced output of petrol as well as diesel.

The worst has been the decision of the government to stop or delay opening of L/Cs. Though, the government as well as State Bank of Pakistan keeps on denying delay in the opening L/Cs, it emerged to be the harsh reality.

To be prudent, the government must allow: 1) opening of L/Cs for the import of crude oil – available on deferred payment from Saudi Arabia and 2) ensuring operating refineries at optimum capacity utilization.

Lately, PARCO has solicited order for the export of furnace oil, despite the impression that Pakistani refineries are not competitive in the global markets.

Sector experts are of the opinion that the government should immediately allow running of power plants on furnace oil.

Enhanced offtake of furnace oil will allow operating of refineries at optimum capacity utilization and achieve greater synergy and reduction in the cost of production.

Pakistan plans to quadruple domestic coal-fired power generation

Pakistan plans to quadruple its domestic coal-fired capacity to reduce power generation costs and will not build new gas-fired plants in the coming years, its energy minister told Reuters on Monday, as the country seeks to ease a crippling foreign-exchange crisis.

A shortage of natural gas, which accounts for over a third of the country's power output, plunged large areas into hours of darkness last year. A surge in global prices of liquefied natural gas (LNG) after Russia's invasion of Ukraine and an onerous economic crisis had made LNG unaffordable for Pakistan.

"LNG is no longer part of the long-term plan," Pakistan Energy Minister Khurram Dastgir Khan told Reuters, adding that the country plans to increase domestic coal-fired power capacity to 10 gigawatts (GW) in the medium-term, from 2.31 GW currently.

Pakistan's plan to switch to coal to provide its citizens reliable electricity underscores challenges in drafting effective decarburization strategies, at a time when some developing countries are struggling to keep lights on.

Despite power demand increasing in 2022, Pakistan's annual LNG imports fell to the lowest levels in five years as European buyers elbowed out price-sensitive consumers.

"We have some of the world's most efficient degasified LNG-based power plants. But we don't have the gas to run them," Dastgir said in an interview.

The South Asian nation, which is battling a wrenching economic crisis and is in dire need of funds, is seeking to reduce the value of its fuel imports and protect itself from geopolitical shocks, he said.

Pakistan's foreign exchange reserves held by the central bank have fallen to US$2.9 billion, barely enough to cover three weeks of imports.

"It's this question of not just being able to generate energy cheaply, but also with domestic sources that is very important" Dastgir said.

The Shanghai Electric Thar plant, a 1.32 GW capacity plant that runs on domestic coal is funded under the China Pakistan Economic Corridor (CPEC), started producing power last week. The CPEC is a part of Beijing's global Belt and Road Initiative.

In addition to the coal-fired plants, Pakistan also plans to boost its solar, hydro and nuclear power fleet, Dastgir said, without elaborating.

If the proposed plants are constructed, it could also widen the gap between Pakistan's power demand and installed power generation capacity, potentially forcing the country to idle plants.

The maximum power demand met by Pakistan during the year ended June 2022 was 28.25 GW, more than 35% lower than power generation capacity of 43.77 GW.

It was not immediately clear how Pakistan will finance the proposed coal fleet, but Dastgir said setting up new plants will depend on investor interest, which he expects to increase when newly commissioned coal-fired plants are proved viable.

Financial institutions in China and Japan, which are among the biggest financiers of coal units in developing countries, have been backing out of funding fossil-fuel projects in recent years amid pressure from activists and Western governments.