Oily matters – I

Pakistan’s oil imports are the biggest drain on foreign exchange. Current year’s oil import bill has been projected to exceed 23 billion USD as against total exports of 34 billion USD. Oil imports figures may double in USD terms, while in volume terms, oil imports have been around 20 billion tons. Oil prices undulations have been causing the rise in imports mostly.

At lower prices, oil imports have hovered around 10-12 billion USD. There is Ukraine war and climate change-based energy transition period which have caused uncertainty in oil prices. One is not sure how oil prices would behave in near to mid-term future.

The mantra of increasing exports as espoused by the international finance institutions has not worked. Import substitution has been discouraged over the last many decades. As a result of which, current account deficit has been widening, which has caused, among other challenges, unbridled inflation. A balance has to be brought about between the two approaches.

There are problems with the availability of other imported fossil fuels as well. Prices of LNG and Coal have increased as well. One could not have predicted the energy price behavior. However, one clear lesson is: “don’t depend on imports, reduce it, as much as you can”. How can this be done in the case of oil, is our subject of discussion in this space.

Falling oil resources

Pakistan’s oil and gas resources have been going down consistently. No major deposits have been found in the last two or three decades. Security-free areas have been exhausted, while political problems have stayed exploration in security-difficult areas. No political breakthrough appears to be in sight. Foreign oil companies have gone away and even national oil companies are trying to find oil resources abroad.

Circular debt has also severely limited the investment capacity and capabilities of the two major local oil companies, OGDC (Oil and Gas Development Company) and PPL (Pakistan Petroleum Limited). Their receivables have reached the level of Rs 1062 billion—OGDC at Rs 654 billion and PPL Rs 408 billion. An associated problem is the receivables of PSO (Pakistan State Oil) of Rs 509 billion.

Many renowned experts are pessimistic about the prospects of new finds. Also, it is said that Pakistan plays are more gas-prone than oil-prone.

While one would not like to recommend of closing the oil exploration efforts, one cannot base the whole country’s energy future on such a dicey oil situation. What to do? The whole transportation system, including railways’, depends on oil. Local oil not there and imports are too expensive, causing economic instability in the form of current account deficit—the dual menace of the circular debt and current account deficit.

Divestment of the shares of PPL and OGDC has been on the cards for a long time now. This may inject some new capital, bring revenues to GoP and cause consequent reduction in circular debt. But more importantly, if sold-off to E&P companies of repute, it may be able to bring in new technologies and management initiatives and remove inertia from these companies.

The issue has been lower prevailing share prices. An open question is whether credible E&P companies would be attracted. A possible approach is to attract companies like ADNOC (Abu Dhabi National Oil Company) and Saudi Aramco which have credibility, continuing and sustaining interest in oil and gas sector. More importantly, they have the required capital. They can always attract E&P companies.

Refinery Policy

Out of 20 billion tons consumption, almost 50% is locally processed by refineries while 50% is imported as finished products. 30% of crude oil requirement is produced from local oil fields. Local crude oil production has decreased from 4.3 MTPA to 3.7MTPA. Oil consumption has decreased over long term by the reduction in furnace oil (FO) consumption. FO’s consumption has come down from 9.5 MTPA to 3.2 MTPA due to the induction of LNG and other fuels. Local refineries continue to produce 3.2 MTPA of FO as it is a co-product with Gasoline and Diesel.

A new oil refinery (OR) policy has been under deliberations for a few years by now. There are two parts of the oil refinery policy; one pertains to the BMR of existing old refineries while the other pertains to new projects. Most of the existing refineries have outdated technologies and product-mix that does not match with the demand portfolio, i.e., FO is produced, which is more of a liability.

Modernization of the existing refineries is required. It is often debated that the smaller refineries may not be viable and being unable to compete with world class refineries. It may be true but only partly. Environmental remediation component in the oil refineries of the advanced countries add a lot of capex which is saved in developing countries like Pakistan where environmental limits are lax and implementation is weaker. This may be taken as a informal societal subsidy.

The issue is of consumer financed capital input in the oil refineries. What does the consumer get in return-only price increase indefinitely or some limits on it? In power sector, the Neelum-Jehlum fund paid through consumer surcharge returned consumer payments through lower tariff. They also demand tax holidays of 10 to 20 years.

Many people have opposed this. They argue that these are no times for protecting what they call inefficient industries requiring protection or support. As per aforementioned environmental cost saving argument, the rational for tax holiday is further diluted. Others want to support even inefficient refinery projects on strategic grounds.

The argument is that oil sector is a major source of revenues for governments worldwide. Where will the GoP get revenues if such lucrative sectors do not pay corporate income taxes? Trade sector in Pakistan does not want to pay taxes and so are some industrial sectors. The IMF (International Monetary Fund) and other global financial institutions would also oppose it. Exemption of import duties on capital equipment and even other inputs may be defendable. Furnace Oil

Existing oil refineries are old, producing unwanted FO along with Petrol and Diesel. Power sector does not want FO any more. Nepra (National Electric Power Regulatory Authority) has been reprimanding CPPA-G (Central Power Purchasing Agency-Guaranteed) and NPCC (National Power Construction Corporation) of using expensive FO. It makes electricity expensive to more than Rs 50.0 per kWh.

Oil refineries keep applying pressure on GoP to use their FO; otherwise, they may have to stop Gasoline and HSD which are the co-products. With expensive LNG and that being not available, there may be some scope for a compromise solution. Refineries bring down the FO price to F.O.B. export level prices. Why don’t they try to export? It may not be sellable at the asking prices. In an unregulated market, the FO prices would have come down automatically.

Oil demand management Unfortunately, no credible demand forecasts of oil and gas are available, although situation is a bit more explored in the power sector due to support and interventions of IFIs. One may have to rely on finger calculations or back-of-the-envelope exercises at best.

In this energy transition period, the war in Ukraine, oil price uncertainties and floods in Pakistan, and economic and political uncertainties, it is very difficult to develop long-term or even short-term forecasts. Perhaps some scenarios can be built.

(To be continued)

Copyright Business Recorder, 2022