Curtailing furnace oil

Last time the column talked about the downstream refinery sector when the government’s shut down of furnace oil based power plants sparked a threat of a complete closure of the refinery sector. Recall that the refineries started complaining of high stocks of furnace oil with idle capacities and impending operational difficulties.

The decision to close down furnace oil-run plants was not only opposed by the refineries but also by the downstream oil marketing companies as it instigated the debate of a looming shortage of petroleum products in the country – triggering a domino effect. Oil Companies Advisory Council (OCAC) has had serious reservations on the government closing the furnace oil plants without prior notice to oil refineries, and hence without prior arrangement for uplifting the products.

In a recent development, it looks like the government is trying to contain the chain repercussions. It is eyeing an immediate ban on the imports of furnace oil. This would help ease the stock build-up by the refineries as the remaining oil-based power plants would go for the local stocks.

By all means, curtailing furnace oil imports will not only be beneficial in the current scenario where it would provide temporary relief to the refineries, it would be advantageous to the import bill, and hence to current account deficit.

Moreover, ban on furnace oil imports should mean that the country is ready to shift its power production to alternate fuels. Hopefully that’s the case. With LNG into the system and coal power plants coming online soon, maybe it is time to retire some old oil-based plants.

Will this address the concerns of the refineries? While the refineries can still face underutilization in the short term even with the relief on the furnace oil stocks, the long term effects should be positive; in ideal situation, the local furnace oil production should be enough to cater the local demand as the demand for furnace oil goes down (which is hoped that it would).

Currently, furnace oil imports account for around 67 percent of the total furnace oil consumption, and assuming a decrease in furnace oil consumption by 50 percent still leaves behind around 4.5 million tons of demand against 3 million tons of refinery production. In that case, if the ban on furnace oil is to stay, the refineries will have to increase their refining capacities.