Refineries' output down three percent in July

Local refineries' oil production declined by 3 percent to 833,000 tons in July 2008 as compared to 855,000 tons of July 2007. According to analysts, lower production was due to 14 percent decline in furnace oil (FO) production. All major refineries, except Bosicor and Parco, showed production decline in July 2008.
"Since FO accounts for 33 percent of total oil production, lower FO production was the sole reason behind fall in overall refinery production", Farhan Mahmood, an analyst at JS Global Capital said, and added that the main reason of decline in FO production was reduction in FO margins (difference between crude oil price less FO price), as FO prices did not move in tandem with crude prices.
Production of FO during July 2008 was down to 275,000 tons whereas diesel (HSD) production rose by 10 percent, to 323,000 tons. These two products were deficit products as local production meets only 43 percent and 44 percent of the local demand for FO and HSD, respectively. Hence, variation in their domestic demand does not have any impact on production.
On the other hand, local demand for petrol (MS) and jet fuels is mainly met through indigenous production. In July 2008, MS production was down by 1 percent against 3 percent decline in demand.
During the month, refineries operated smoothly without any major maintenance shutdowns. Due to major overhauling last year, in FY08, Attock Refinery (ARL) was completely shutdown for repairs to one of its four refining units, Parco underwent 45-47 days of maintenance, National Refinery (NRL) witnessed a complete maintenance shutdown in Sep 2007.
In contrast, production was up by 8 percent against June. This was mainly due to 11 percent rise in local gross refinery margins (GRMs) during July 2008 as compared to June 2008. On MoM basis, all major refineries showed increase in production, except Attock Refinery whose production was down one percent.
Owing to higher international refined oil product prices during July 2008, average global gross refinery margins (GRMs-Singapore Crack) stood at $5 per barrel. However, local refinery gross margins are likely to stand at $11 per barrel (including 10 percent deemed duty) in Jul 2008, higher than global margins. Historically, average global refinery margins used to be higher than local margins. However, this time, lower global margins were due to lower global gasoline output and higher speculation in international oil markets.
With reduced deemed duty going forward (7.5 percent) and inventory losses on crude (due to decline in crude oil prices), refinery earnings would see a dip in FY09, he said.