National Refinery Limited

National Refinery Limited (PSX: NRL) is the country’s only lube refinery. It was incorporated in 1963 and was privatised in the year 2005. After privatisation, NRL was made part of the Attock group, which has another refinery, Attock Refinery Limited. National Refinery Limited is engaged in the manufacturing, production and sale of a variety of petroleum products and lubricants. Its key fuel products include motor gasoline, kerosene, JP-1, JP-8, Euro II grade HSD, LPG, furnace oil. Other products include Naphtha that is exported, sulphur, base oils, and asphalt and speciality products.

NRL has three refineries - two lube refineries and one fuel refinery. The first lube refinery was commissioned in 1966 with designed capacity of 3,970,500 barrels per annum of crude processing and 533,400 barrels per annum of lube base oils. The second lube refinery was commissioned in 1985 and it started with a designed capacity of 700,000 tons per annum of lube base oils, which was expanded to 805,000 barrels per annum after a revamp in 2008. Two Lube refineries process reduced crude to produce LBO, Bitumen, Wax and other specialty products. Its BTX petrochemical plant was commissioned in 1979 with design capacity of 180,000 barrels per annum.

NRL’s hydro skimming fuel refinery began operating in 1977 with a designed capacity of 11,385,000 barrels per annum of crude processing. The refinery underwent two phases of upgradation which took the capacity to 18,603,000 barrels per annum of crude processing.

NRL started its HSD Desulphurisation unit in 2007 to produce the desired quality diesel. In the same year, NRL also commissioned its Isomerisation Unit (Naphtha Block) with a capacity to process 6,793 BPSD of light Naphtha into petrol.

Shareholding Pattern

As per the shareholding pattern for the year ended June 30, 2018, 51 percent of the shares are held by the associate companies that include Attock Refinery Limited (ATRL) and Pakistan Oilfields Limited (POL). The other significant shareholder is Islamic Development Bank Jeddah, holding around 15 percent of the total shares. Local general public holds around 16 percent. A break up of the shareholding is given in the table.

NRL’s past performance

NRL’s financial performance over the years has fluctuated. Its revenues increased at an impressive rate from FY10-FY14, after which growth eroded due to falling prices of petroleum products amid the supply glut. Where revenues decided to come down post FY14, margins took a flight post FY14, reaching highest in FY15 as compared to the previous three years. The primary reason for the increase in refining margins was the improvement in margins of refined fuel products versus crude oil. Particularly in FY15, the company benefited from lower prices of crude oil as the company invested unutilised funds and gained interest income. At the same time, stable exchange rates helped improve profitability.

NRL saw more reliability in profits coming from the lube segment. The earnings of the segment improved further in FY16. And the fuel segment after four difficult years turned profitable in FY16 versus loss in previous years. Improvement in profitability for NRL came from favourable margins between product prices and cost of crude and improved sales of HSD and Bitumen.

In FY17, NRL saw its revenues climb once again and the fuel segment’s profitability improved due to better margins in the international market as well as higher sales volumes by the firm. The net profit of the fuel segment for FY17 also included investment tax credit against investments in DHDS project. Profitability of the lube segment however, declined in FY17 mainly on account of higher feed cost and irregular increase in product prices. This dragged the overall margins. In FY17, NRL commissioned its Diesel Hydro Desulphurisation Project, to produce low sulphur (EURO II Standard) High Speed Diesel (HSD).

NRL’s earnings fell by 78 percent, year-on-year in FY18 due to losses incurred by the fuel segment versus a profit in FY17. Though the revenues were up by 27 percent, year-on-year, the company’s profitability was affected by higher operating cost including depreciation on new units, exchange loss, custom duty on crude oil, and lower return on bank deposits, according to the Annual Report 2017-18. Increase in crude oil and product prices continued to affect the margins especially in case of fuel products. Also, exchange losses dampened the earnings. On the positive side, some respite came from elimination of price differential on HSD and higher revenue from increased production and sale motor gasoline – though these were not enough to contain the damage from the higher costs. The firm’s performance in the lube segment remained stable. However, decline in production was witnessed due to the turnaround of lube II refinery along with lower demand for lube base oil in the country.

Volatility in the oil prices, increase in product prices and sharp devaluation of currency remained key challenges for NRL in FY19. NRL incurred a loss in FY19 versus a profit in FY18. The fuel segment’s losses increased in FY19 due to huge exchange losses, uneven product margins, custom duty paid on imported crude, and mark-up cost incurred on short term finance as per the annual report. The segment’s revenues came under pressure due to furnace oil sales declined as demand decreased and shifted to RLNG. Sales of HSD also witnessed decreasing trend mainly due to overall decline in consumption across the country. The lube segment managed to earn profit albeit lower than FY18 levels. The margins in lube segment declined due to increase in feed cost and asymmetrical increase in products’ prices – the company highlights in its annual report. Also, the company faced lower demand for Bitumen due to lesser road infrastructure development.

NRL’s performance in FY20 was affected not only by the bottlenecks in the refining industry but also the COVID pandemic. Refinery sector was among the worst hit industries as the operations became highly unviable due to lower upliftement. Overall, NRL’s losses in FY20 were lower than FY19 due to the effects of prior tax years being recognized, which has partially offset the losses during the year. Where the fuel segment remained under pressure, the lube segment’s profits increased due to increase in the sale of Bitumen, although lube base oil sales decreased by 24 percent year-on-year due to lower demand as well as turnaround of Lube-1 refinery. Due to lower sales, NRL witnessed overall hefty inventory losses and hence higher finance cost to finance it.

NRL in FY21

FY21 posted some recovery for the global economy. And Pakistan also saw some sectors recovering in FY21. Oil prices and petroleum products recorded a gradual increase but the GRMs remained thin as the consumption remained below pre pandemic levels. NRL’s posted a profit in FY21 versus losses in the previous couple of years, which was primarily due to the lube segment. The fuel segment posted a loss but significantly lower than FY20 levels due to lower inventory losses and slight improvement in gross refining margins. Margins further improved due to production of Euro-V standard HSD and profitability benefited from exchange gains.

Lube segment’s earnings increased due to better Bitumen sales (up by 19 percent year-on-year) and global lube base oil supply constraints easing during the year. Also the Lube-1 refinery upgradation and revamp resulted in increased capacity to 70,000 barrels per day from 65,050 barrels per day and enhanced production capacity of lube base oil by 5000 - 6000 MT per year. Also, export sales of Bitumen improved significantly as NRL exported three times more in FY21 versus FY20.

FY22 and beyond

The refinery segment is not out of the woods. Rather, the sector has been in trouble for a long time primarily due to the inability of the refining sector to upgrade the refining process. NRL in 1QFY22 earned a profit after tax versus a loss in 1QFY21. The fuels segment’s loss however increased further by 36 percent year-on-year in 1QFY22 due to high exchange losses from the currency depreciation even though the company saw the demand for crude oil and petroleum products improving along with increasing petroleum product prices and slight improvement in GRMs.

The lube segment earned a profit after tax in 1QFY22 versus a loss in 1QFY21 due to improvement in sales as economic activity rebounded during the period. Also the resumption of the Lube-1 refinery after revamp increased production and hence sales.