Pakistan imported 146K tons of furnace oil (FO) last month, while the FO consumption is declining and the CPPA forecasted FO based power generation at 2 percent of total generation in FY19. The local refineries have the capacity of producing roughly 2.5-3 million tons of FO a year (much more than forecasted consumption) which they have to produce invariably, unless the refineries are shut down
There was a crisis created last year when local refineries were on the verge of shutdown as PSO kept on importing FO without any coordination of demand and inventories the local refineries were maintaining. All that while, the policymakers, almost on cue, were clueless of the repercussions.
It was a classic case of poor coordination and lack of capacity in key government offices. When the problem was realized, a senior officer of power ministry in a meeting headed by then PM Abbasi naively said that he did not know that importing FO can result in shutdown of domestic refineries. (Read “Dumping furnace oil”, “Curtailing furnace oil” and “FO story; get it cracking”).
The importance coordination of petroleum and power ministries cannot be overemphasized. These were merged into one ministry of energy in the last government tenure and teams are sitting a floor apart in the same building; yet the officers in both divisions do not coordinate on such important issues.
The lesson learned was that, there would be no imports without prior decision in monthly meeting. The question is why the FO is being imported in October 2018 when the refineries in or near Karachi are already crying for less uplift of inventories.
Although, there is no crisis in making yet, a firm policy on FO import is missing. Furnace oil used to be main oil component in Pakistan power generation a couple of years back when the consumption used to hover around 8-9 million tons, with around two third imported.
Now the fuel mix has significantly changed. The new RLNG plants are more efficient and even those old plants that have the duel operation option are running on gas rather than FO. And FO is the least priority fuel that is why CPPA has forecasted its use at 2700 GWH out of total forecasted consumption of 131,000 GWH in FY19.
However, to date, already over 4000 GWH of electricity is produced on FO which is higher than full year forecast. This is causing an unnecessary stress on imports and is inflating the electricity tariffs. The policymakers have to take stern notice of such exception and should enforce zero import policy of FO, unless absolutely necessary.
The buzz is that a couple of big OMCs imported FO because it is less costly for them to import and they can make quick buck by importing at low cost. However, the cost is going to be paid by country at large in terms of having both fiscal and current account stresses.
The situation might be gloomier, if nothing is done, in coming years. With new plants coming on coal and other fuel recourse, the FO use will be phased out in 2-3 years. This is a warning for refineries to put their act together. The refineries have to produce FO as a by-product for intent production of HSD and Mogas (commonly known as diesel and petrol).
All the existing refineries in Pakistan are hydro-skimming in which FO has to be produced. It cannot be stored for long and the global demand of FO is falling which makes no or less sense to export. Plus, it is not feasible to export FO from up country refineries.
The need is to convert existing refiners into deep conversion or by installing hydro cracker. The solutions are cost heavy and not feasible for every refinery. The refineries in Pakistan are small and there is no economy of scale for having number of green field projects.
One possible solution is to have a unit to convert all the FO produced in the country to other refined products which can either be consumed in Pakistan or can create exporting surplus.
The idea is to have one unit in mid country, where all the refineries have the share in accordance to their FO production capacity. It’s high time for government to form a new policy for downstream oil and gas sector.
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