KARACHI: This is high time for local refineries to execute ‘Deep Conversion Project’ which will increase capacity utilization after converting Furnace Oil (FO) into high margin fuels like Petrol (MS) and High Speed Diesel (HSD) which are currently being imported, experts said.
Interestingly, based on existing gross refining margins (GRMs) of record $25 per barrel (against historic average of $5-7 per barrel), refineries can easily finance the up-gradation project without any additional support (duty protection, etc) from Government of Pakistan (GoP) under new refinery policy during construction phase, they added.
This will be a ‘win-win’ situation for both refineries and GoP, Farhan Mahmood, senior analyst at Sherman Securities said. For refineries, the ‘Deep Conversion Project’ will enhance future earnings even if GRMs normalize to historical average while country will also save precious foreign exchange reserves of $0.4-0.5 billion per annum, he added.
“Based on existing GRM of $25 per barrel, we estimate local listed refineries (including NRL, PRL, CNERGY and ATRL) may cumulatively generate earnings of Rs 180 billion or $0.9 billion during FY23 (assuming combined production of 60mn barrels),” he said adding that the earnings are adjusted for taxes, processing and other costs.
“Based on industry sources, it is estimated that the ‘Deep-Conversion’ project roughly costs around $60-65 per bpd of refining capacity. Thus, our estimates suggest that listed refineries need to install catalytic cracking unit of 40k bpd to convert FO into higher margin products like HSD and MS which will cost around $1.0 billion for listed refining industry.”
Currently, out of combined operational capacity of 240,000 bpd (excluding PARCO), listed refineries are operating at 70 percent (160,000 bpd) capacity despite record margins. Lower production is due to FO – constitutes 22 percent of overall production is a dying product, globally as well as in Pakistan. Thus due to lower demand from power sector (due to government policy of reliance on cheaper fuel), local refineries are forced to reduce overall production of FO which also affected production of high distillates like MS and HSD.
“After the project, refineries can produce additional 25-30 million barrels of oil products per annum which according to our estimates will save foreign exchange reserves of around $0.4 billion in long run”, Farhan Mahmood said. However, considering current margin of $30 per barrel on high-end products, short-term savings would be around $0.8 billion, he added.
Based on existing GRMs of $25 per barrel, local refineries are earning $7-9 on net basis which is in line with global trend. This is due to the fact that refineries are earning better pricing of oil products versus the crude oil due to capacity constraints in global product market and rising price of alternative transportation fuels including LNG and LPG due to Russia-Ukrainian war.
“However, we believe that this is ideal opportunity for local refineries to initiate the project to protect future earnings once GRMs normalize in long term. Assuming GRMs reduce to historic average of $5-7 per barrel, refineries will still be earnings 30-35 percent better margins after adjusting for additional processing and depreciation cost post plant upgradation.”
Copyright Business Recorder, 2022