Make haste slowly!

Two women CEOs signing a memorandum of understanding was just not the only highlight of teaming up of Punjab Board of Investment and Trade (PBIT) and Grace Refinery; it was also presented as the biggest investment in the history of Punjab.

The MoU was signed between the two for a $5-billion refinery in Kot Addu area of Punjab with a refining capacity of 220,000 barrels of oil per day (bpd), it surely is a big project; the existing refining capacity in the country is around 400,000 bpd, which includes players like Parco, PRL, ATRL, NRL, and Byco. Everything seemed good on the MoU table: under the MoU, PBIT will act as one-window facilitator for the quick completion and orderly commissioning of the project. The CEO of Grace Refinery, Uzma Bashir highlighted that the capacity addition will substitute oil imports into the country and will result in 50,000-70,000 direct and indirect jobs in south Punjab.

Also, the CEO appraised the fact that the company will introduce the latest Euro-VI refinery in the country with significantly positive results on carbon emissions. Now thats a leap; existing refineries have still not gone beyond Euro I while trying to upgrade to Euro II fuel specifications, and the pricing and viability of the products with Euro VI specifications is something worth considering. Besides, there are some other lacunas that make one question the billion-dollar deal.

First, what is Grace Refinery? What is its origin? News reports reveal that it is an international petrochemical company, and sources at PBIT say that it is major interest of a US-based venture capitalist consortium that includes German, Saudi, and US companies, among others. The source of concern here, however, is the absence of any online record of the refinery, the consortium, or its operations. The local website shows that it is a venture capital project of Grace Investment LLC, which is apparently in Dubai. With no available public information about the firm's investments, hopefully betting on foreign investment worth $5 billion isn't too optimistic. Whether it will be FDI or will have debt and equity mode of financing is also not clear right now.

Second, the size of the investment is also raising eyebrows. A ballpark estimate for refining one barrel of crude oil is around $10,000-15,000, which brings the cost of setting up a 220,000 bpd refinery to around $2-3 billion. However, this argument loses some steam as the cost of another refinery that is still under construction with similar size (250,000 bpd) by the name of Khalifa Coastal Refinery in Balochistan has also been estimated at an overwhelming $5 billion. The issue eventually is the materialization of such a big project, especially with precedence of a similar refinery that has been abandoned for over ten years now.

It seems that Punjab Government is continuing with its tradition of picking big projects in haste. Oil refining is a serious technical business, and requires leadership that understands the complexities in setting up such a modern facility (Euro VI compliant). While not much has been shared about Grace Refinerys team, it is only known that the CEO, Uzma Bashir, has past experiences in PIA and NBP- nothing to do with refining industry.

The federal government has also just planned to revive the Khalifa Coastal Refinery, and has tasked Parco to complete it by the year end to address rising fuel imports. This might be governments intention, but it must also be known that refining is a lucrative in low oil price era; sources close to BR Research highlighted earlier that refining margins expand massively if oil prices are below $60 a barrel, making refining a profitable business when the upstream segment is losing money. It is also possible that the government is trying to benefit from this scenario.

Additions of 470,000 bpd (220,000 plus 250,000) to the existing capacity will more than double the existing capacity of 412,000 bpd. That will only happen if these projects materialize. For now, lets wait for November when the ground-breaking ceremony of the Grace Refinery will be held.