'Refineries - Do or Die'

This is apropos an analysis "Refineries - Do or Die" carried by Business Recorder in its Analyses and Comments section on 12 December 2019 stating in its very first line: "Local refineries are habitual rent seekers". In the case of Byco Petroleum, this statement cannot be further from the truth. Byco receives no guaranteed rate of return or any other such privileges from the government of Pakistan. Byco is a publicly-traded company that is 100% owned by private individuals and entities. It is neither a state-owned enterprise nor backed by any government-owned company. Pakistan's oil refining industry has been suffering an onslaught of challenges, including the Rupee's devaluation, economic slowdown, an evolving fuel mix, and a massive over-regulation of the sector. The sector has received more than its fair share of criticism, some of which is unfounded. Pakistani refineries make an invaluable contribution to the economy, meeting the nation's energy demand, being one of the largest payers of duties and taxes to the exchequer and providing employment opportunities to hundreds of thousands directly and indirectly. Therefore, to paint the entire industry with the same broad brush of being "rent seeker" is patently unfair, unwarranted, and in the case of Byco Petroleum, it is simply false.

The article goes on to state: "The worst refinery is Byco... seeing [its] weak financial position, it might be the first to shut." This is again an unfounded logical leap. Byco managed to turn a very respectable profit in the first quarter of the current fiscal year. This is despite the very challenging economic climate that Pakistan and the petroleum sector finds itself in due to the devaluation and slowdown. Additionally, Byco is about to celebrate its 25th anniversary of being in operation on 9 January 2020. In the past quarter-century, the firm has become the largest oil refining company in Pakistan by nameplate capacity. It has become one of the top ten oil marketing companies in terms of the number of retail outlets spread across the nation. It has heavily invested in upgrading its plant by installing the largest Catalytic Reformer as well as an Isomerisation Unit. Furthermore, Byco's Single Point Mooring is the first of its kind energy asset in the nation as well.

Currently, there are six major oil refineries in Pakistan, including Byco Petroleum's two refineries, and those owned by Pakistan Refinery, National Refinery, Parco, and Attock Refinery, whose combined capacity is about 420,000 bpd. Byco is the largest with 156,000 bpd design capacity. These refineries produce a variety of petroleum products for all consumers from motorcyclists to the Pakistan Air Force. Refiners reduce Pakistan's reliance on petroleum product imports by importing one raw material, i.e., crude oil in place of multiple types of finished products, which saves the country precious foreign exchange.

Petroleum refiners strengthen Pakistan's energy security, making the country self-reliant in meeting its energy needs. Refiners' strategic assets play a crucial role in Pakistan's energy landscape including having retail outlets supplying fuel nationwide. Byco has installed Pakistan's first and only Single Point Mooring facility which alone imported over 11 million metric tons of crude oil since inception in 2012, a significant percentage of the nation's crude oil demand.

Pakistan's refineries do not always operate at full capacity, but under-utilization does not necessarily mean under-performance. Worldwide, refineries adjust their utilization for profit maximization as required. Major factors for throughput decisions include market demand for refined products. Pakistan's oil refineries have been running plants at low capacity utilization rates, but despite this many have continued to produce strong levels of profits. For example, Byco managed to more than double its profits to Rs 871 million in the first quarter of the current fiscal year as compared to the corresponding period last year despite serious challenges faced by the industry.

The entire nation's economy has been in hot water for the past couple of years leading to a tough business environment, though this is even more pronounced for the refining industry. This has forced refineries in Pakistan to reduce throughputs. During the three months ended September 30, 2019, one of the major refineries reduced its throughput rates to 62.39% as compared to 81.19% in the same period of 2018. The dip in utilization can be attributed to the plunge in furnace oil consumption.

When an oil refinery runs, it produces a range of fuels. Most of the refineries in Pakistan were developed to produce motor gasoline, high-speed diesel, furnace oil, and other products. The country's hydro-skimming refineries typically produce between 30% and 40% furnace oil. This means a 100,000 barrels per day facility running at full capacity will always produce between 30,000 to 40,000 barrels of furnace oil in a day or more than 1.5 million metric tons of furnace oil in a year. Unlike gasoline and diesel, furnace oil had one primary buyer - the power generation companies which used the fuel to produce electricity. But the demand for furnace oil plunged in 2017 when the government ordered the utilities to start using natural gas as a feedstock instead of furnace oil. In only one year Pakistan's furnace oil consumption fell from 7.4 million metric tonnes (MMT) in FY18 (of which 58% was imported) to 3.5 MMT in FY19 (23% of which was imported). Such a significant reduction and that too in a matter of a year or so has put incredible stress on the country's refining industry and nearly brought some sectors to a standstill. Since furnace oil stockpiles built up, every refinery ran out of storage capacity for the surplus fuel. This forced refiners to curtail operations.

In the last couple of years, the situation has only gotten worse. In 2019, the refiners not only faced the threat of persistent weakness in furnace oil demand, but the consumption of other key products also started to decline as Pakistan's economic growth drastically slowed down. The country's GDP growth is forecasted to drop to 2.8% this year, as per the Asian Development Bank's estimate. Byco's latest quarterly report stated petroleum products' demand declined during the three months ended September 2019, except for Motor Spirit where demand remained stable. Despite these tough market conditions, Byco and others have shown profits in their first quarter of FY20.

Refiners know that plant upgrades are essential for the nation's evolving fuel mix to phase out furnace oil production and replace it with higher-value products. But the industry desperately needs support from the government to achieve this.

Converting Pakistan's refineries from hydro-skimming to deep-conversion is a tall order both in terms of capital requirements and the time needed. It is estimated that a refinery producing around 50,000 barrels of refined products a day may need to invest around $1 - 1.5 billion for a full revamp. Larger refineries may require even more capital. For some smaller facilities, an upgrade or installing a cracker may not be even possible due to economic limitations. On top of this, the entire process can take three to four years or more from financial closure. Under the current macroeconomic backdrop and following the Rupee's devaluation, it will clearly not be feasible for some companies to undertake such a major project.

Policy planners should meet the genuine concerns of Pakistan's refining sector, and revise policy for the benefit of all. One possible suggestion in this regard would be to remove the duty for the export of furnace oil. This would reduce the losses refiners are facing in the sale of furnace oil currently. Only if refineries are allowed to run their operations on a commercial and profitable basis will they be in a position to afford the capital intensive upgrades required for modernization.