What to do with furnace oil?

Furnace oil used to be the backbone of both power and oil industry until only a few years ago. There were no LNG or coal power plants. Almost all thermal electricity used to be made out of Furnace Oil (FO). Major power stations, including Hub Power of 900MW capacity, were installed. Furnace Oil consumption used to be 9-10 million tons per annum in 2015-16 which kept coming down since. And now, its consumption is around 3 million tons, which is mostly produced by local oil refineries.

In the meantime, LNG, coal and nuclear power plants have been built with a total of 10,000 MW in the 2014-2019 period. This replaced the demand of Furnace Oil which is mostly consumed by the power sector. FO has become expensive as well with the Brent jumping from 50-60 USD to near 100 USD per barrel. Cheap LNG came in with long-term contracts with Qatar. However, LNG Spot has become expensive in the meantime. It came to be as high as USD 30 per barrel or even double of it. It is now not available at all, largely due to the Russia-Ukraine war. Qatar LT contract LNG prices have, however, remained under 14-15 USD per MMBtu.

Pakistan oil refineries are what is called skimming oil refineries which produce Gasoline, Diesel Furnace Oil in addition to some Kerosene and Jet fuel. FO is an essential part of the product mix. If FO is reduced, other products are reduced proportionally. Thus FO is produced even though its demand has gone down. Modernization of existing older refineries has been on the table for quite some time. Under this programme, FO component would be converted to lighter products like Gasoline and Diesel.

What to do in the transition period which may take another 5 years to implement oil refineries’ modernization. Although, 10,000 MW of power capacity has been added to the system, there is a uniquely difficult situation that has emerged in the aftermath of the Russia-Ukraine war. Coal, Oil and LNG have become expensive.LNG is not available at any price as Europe and Japan have been amassing all LNG that is available in the market.

FO is available but at a price of Rs 120,000 per ton, translating into 12.18 USD per MMBtu. It is cheaper than Spot LNG which is priced at USD 30 per MMBtu, although Qatar LT LNG is available at 14-15 USD/MMBtu. The problem with FO is that it is used by low efficiency 38-40% power plants in a single cycle mode.LNG/Gas is used in high efficiency (60%) combined-cycle power plants. Thus even if FO may be comparably priced, the low efficiency effect reduces its competitiveness.

Nepra (National Electric Power Regulatory Authority) has been constantly reprimanding the power sector not to utilize FO power plants being older and producing expensive electricity. FO electricity fuel component of electricity cost comes out to be Rs.25.15 per kWh. If spot LNG is used in these power plants, fuel cost can be as high as Rs. 58.86 per kWh. In the last summer, FO was used to produce electricity at this exorbitant price. Sometimes, it is cheaper to undergo load-shedding than to produce such expensive electricity. Fortunately, the share of such electricity is not high and the average cost still remains lower. The lesson is that FO-fuelled power plants should never be run on expensive spot LNG. There may be a case for using FO, however, in such power plants. Oil refineries are making this case and trying to convince Power Division to buy and use FO.

The refinery sector’s argument is, as we stated earlier, that Gasoline and Diesel production supplies will go down if FO is not utilized. There are several negative impacts of such a possible situation; capacity loss cost and foreign exchange loss due to imports. Nepra and power sector would not be bothered and increase their cost of generation to solve the oil refineries’ problems. However, at the larger level of the country’s economy, these costs matter. Money lost in whatever sector is the economy’s loss. This is an optimization (Operations Research) problem. How to reduce the combined loss. Do we have the requisite tools, databases and models? Not really. One may have to do simple back-of-the-envelope exercise.

Why don’t oil refineries export the excess FO. There may be extra logistics cost and the export prices may be low. It may be profitable to offload the excess FO onto the local power sector by using GoP muscle and scaring of it of the consequences that have been mentioned earlier. They may have to reduce their asking price. It may be noted that FO is not regulated. Oil refineries are free to set prices. Singapore FO price is 386 USD. Local FO prices is 521 USD. There appears to be a scope for price reduction and reach a settlement for local sales at a discount. We have estimated that if the refineries reduce their FO price by 20%, it may compete with Qatar LNG cost of electricity generation. It is not such a loss when the alternatives may even be costlier.

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Comparative unit fuel cost-USc per kWh of Furnace Oil vs LNG
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               F.O        LNG Spot-    LNG Spot    LNG Qatar    LNG Qatar
                          S cycle      CC          S-Cycle      CC
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Price Rs/t     120000
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USD/t          521.74
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CV             40.7
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USD/MMBtu      12.819     30           30          15                  15
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Thermal 
Efficiency-%   40         40           60          40                  60
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Heat Rate-
Btu/kWh        8530       8530         5687        8530              5687
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USc/kWh        10.93      25.59        17.06       12.795          8.5305
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Rs/kWh         25.15      58.86        39.24       29.43            19.62
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Rs/USD         230
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Source:SAA
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