Oil crisis in the offing

With the country in the grip of a power crisis, it has been reported that an oil crisis is ready to happen. Pakistan has five major oil refineries, with the following designed capacities: Attock Refinery Limited (ARL), 40,000 BPD, Pakistan Refinery Limited (PRL), 48,000 BPD, National Refinery Limited (NRL), 62,500 BPD, Bosicor Pakistan Limited (BPL), 30,000 BPD and Pak Arab Refinery Limited (Parco) 100,000 BPD.
Combined capacity of the five is 280,500 BPD approximately while demand is over 400,000 BPD. It is evident from the latest balance sheets of the five refineries that with the depressed refining margins in the wake of global economic meltdown and unresolved issue of circular debt, the refineries will not be able to continue their operations for more than a few weeks.
The business environment offered to the local refineries revolves around a pricing formula, which requires the local refineries to sell their products at Middle East marketplace prices, commonly known as Arab Gulf market. The formula, however, does not take into account the price of feedstock, crude oil, which is the most crucial element in the making of gross margin for a refinery (GRM), based on a set of product pricing.
According to oil sector analysts, in normal circumstances, like those prevalent before the onset of economic recession, the movements (upward and downward) of crude oil and products prices remain consistent with each other thus keeping the GRMs all the more constant.
However, this is not presently the case as the dynamics of supply and demand are at odds for crude oil and products. Opec quota reduction has largely impacted the Middle Eastern market where, as a result, crude oil prices are the highest in the world these days. On the contrary, the products in the Arab Gulf are being sold at lower prices due to a glut situation caused by lower demand, again due to economic recession in the main consumption centers.
Another contributing factor in the product glut is the higher production emanating from the regional refineries where the Opec quota is not applied. The resultant inconsistency in the prices of crude oil and products has given rise to highly negative GRMs for the local refineries, which source their crude oil at higher prices from Arab Gulf market and are compelled to set their products' prices at low Arab Gulf prices.
With price of output lower than cost of input, it does not make economic sense for refineries to continue the operations, which result in losses of billions of rupees on a monthly basis. In a nutshell, the pricing formula for the local refineries has failed to protect these strategic assets and thus requires an immediate review to ensure sustainability of the operations for the local refineries, analysts added.
According to them, problems of refineries are further aggravated by the fact that Pakistan State Oil (PSO) continues to default in its payment of product bills to local refineries thus resulting in very high financial charges. Default by PSO on its payment obligation is second major issue confronting the refineries.
One refinery source is concerned that the "amount of overdue payables to refineries is being utilised by PSO to either finance its increasing imports of petroleum products at the expense of local refineries loss of production or these funds are blocked as a bad commercial debt of PSO. This has already been communicated to the Ministry of Petroleum and Natural Resources, however, no action has been taken by the government yet to save precious foreign exchange by providing a conducive environment to increase production from the refineries and lowering imports via PSO.
The refineries in a letter, sent jointly by the CEOs of ARL, NRL, PRL, BPL and Parco, to the Minister for Petroleum and Natural Resources have already highlighted that the non-resolution of issues of revision in pricing formula and PSO defaulting on its payments to the refineries, leaves refineries with no cash to operate and very soon they will be shutting down completely.
In addition to the issue of non-payment of overdue payables by PSO and negative GRMs, refineries' profitability has also been affected by the negative impact of depreciation of Pak rupee versus the US dollar. The oil industry sources said in determining oil prices in Pak rupee, Ogra uses historical average of exchange rate prevailing in the previous months; while refineries make payment to the crude oil suppliers based on spot exchange rate prevailing at the date of payment.
Thus the burden of any deprecation of PKR due to the time lag is unjustifiably borne by the refineries. "If these issues of refinery sector are not resolved on an immediate basis, the refineries would be shutting down their operations very soon, which would result in drying up of fuel at filling stations and will leave the nation stranded," said one of the officials of a refinery on condition of anonymity.