ISLAMABAD: The top management of Pakistan Refinery Limited (PRL) has cautioned the Pakistan State Oil (PSO) that volatile and meagre hydro-skimming refining margins has made its business model unsustainable and the refinery is structurally weak and will eventually perish if it is not upgraded, well-informed sources told Business Recorder.

It has been recommended to the PRL Board that subject to necessary regulatory approvals, special right shares under Section 83 (1) (b) of the Companies Act, 2017 be offered to UEG at a price of Rs15 per share, including premium of Rs5 per share.

PRL Managing Director Zahid Mir and Deputy Managing Director/ CFO Imran Ahmed Mirza have shared their thoughts with the Board of Management (BoM) of the PSO.

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The PRL MD shared the company’s overview along with details of the Refinery Expansion and Upgrade Project (REUP). According to him, the current challenges and future prospects without REUP will be as follows; (i) volatile and meagre hydro-skimming refining margins, makes the business model unsustainable; (ii) PRL paid Rs25 billion HSD price differential since 2020; (iii) exports of HSFO, a negative margin product, erode profitability; (iv) losses create liquidity challenges, increase finance cost put pressure on available financing lines; and (v) promulgation of Refining Policy made refineries’ upgrade mandatory.

As per PRL REUP, it has to double refining capacity from current 50,000 bpd to 100,000 bpd, besides upgrading from current hydro-skimming to deep conversion, thereby reducing production of HSFO in addition to make Euro V compliant HSD and MS.

The PRL management highlighted that the refinery is structurally weak and will eventually perish if it is not upgraded. Furthermore, PRL has paid Rs25 billion HSD price-differential in the past three years and the number will keep on increasing till the upgradation takes place. Additionally, there is a dire need to be Euro V compliant.

The policy objectives and incentives of the revised brownfield refining policy 2023 were shared. It was informed that PRL will be the major beneficiary of the refinery policy if production base is increased. The sooner the project is completed, the sooner the benefits maybe reaped in the form of incentives.

The REUP financing challenges were shared along with the need for a strategic investor which will lessen the exposure of equity and project risk of PSO.

The REUP financing requires a reputable strategic foreign investor which will strengthen PRL’s ability to raise CFY debt financing timely financial closure.

The status of engagement with 15 prospective strategic investors was shared. The UEG transaction deliberations in PRL Board were presented.

The UEG can assist in arranging Chinese financing either directly or through EPC-F (a LoI from a Chinese EPC contractor with financing option facilitated by UEG has been received).

There will be availability of surplus condensate post-REUP which is current being exported, besides crude oil from UEG’s Iraqi oil fields as an alternate crude supply source. Procurement of crude oil from UEG’s trading arm on beneficial terms will also be available.

Regarding GOP’s engagement with UEG, it was informed that Post-ADIPEC meeting, Ministry of Energy through a letter emphasized that MOU between PRL and UEG be signed during PM visit to Beijing scheduled in Oct ’23.

Accordingly, MOU signing ceremony was held in Beijing on October 18, 2023.

According to UEG’s LoI of December 29, 2023 to subscribe up to 30 per cent shares in PRL at the offer of Rs15 per share with the following details; (i) shared to be issued by way of special rights to a wholly owned subsidiary of UEG; (ii) parties will execute share subscription agreement including matter relating to UEG’s proportionate board representation; (iii) transaction shall be subject to the execution of the definitive agreement.

Responding to a query, the MD-PRL informed that as per the policy, the cut-off date to find an investor was 90 days; i.e., November 16, 2023. Had the MoU not been signed, there would have been significant losses per day.

The financial advisors from UBL and JS Global joined the meeting and made their presentation.

In conclusion, the PRL’s team informed the BOM that: (i) with the promulgation of Refining Policy, if PRL fails to upgrade and produce Euro-V compliant HSD and MS, it will lose its “licence to operate” and face closure; (ii) REUP is a capital-intensive project with investment of $1.7 billion; (iii) current economic and political situation of Pakistan not conducive for international lenders/ investor(s); (iv) PRL’s own balance sheet is not strong-enough to arrange REUP financing and thus requires shareholders’ support; (v) considering limited market depth, it is impossible to raise project equity (other than from PSO) through PSX; (vi) induction of a strong Strategic Investor is essential to raise required financing for REUP; (vii) UEG, as strategic investor, provides necessary synergies that will facilitate financing as well as execution of REUP; (viii) this initial investment by UEG will lay the foundation for future investment that PRL needs for the REUP; (ix) PRL Board granted necessary approval for the share price offer of Rs15 per share offered to UEG, against which LoI was consequently issued by UEG.

It has been recommended to PRL Board that subject to necessary regulatory approvals, special right shares under Section 83 (1) (b) of the Companies Act, 2017 be offered to UEG at a price of Rs15 per share, including premium of Rs5 per share.

According to sources, given the importance and magnitude of the transaction, BOM unanimously decided to constitute the following committee for further deliberations on the project and conduct due diligence on potential investors/ market sounding, in line with statutory requirements, with necessary approvals in place from relevant authorities while ensuring value creation for PSO.

The committee will then share its recommendations with the Board so that a consensus may be reached regarding the way forward.

The Committee is comprised of Asad Rehman Gilani (Chairman), probably he will be replaced with new Secretary Power, Rashid Mehmood Langrial), Shahbaz Tahir Nadeem, Mushtaq Malik, and Ahmed Jamal Mir. Zahid Mir and Mohsin Ali Mangi will be co-opted members on need basis.

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