The letter says that slowdown/shutdown of any refinery in the country has serious ramifications including product shortages / dry outs, port constraints and heavy strain on country's foreign exchange reserves due to import substitution. This is also essential for maintaining energy security and to cater to defence energy needs indigenously.
This business environment of the country during the last two years has remained very challenging and disturbing for oil refining sector in Pakistan.
The unprecedented devaluation of Pak Rupee against US dollar, overall decline in sales of petroleum products especially furnace oil sales and its pricing due to change in its specification by International Maritime Organization 2020 (IMO-2020) for shipping lines, low demand of fuel oil in power sector and weak international prices have been the major contributors adding to the financial difficulties for the refineries thus putting survival of the entire Pakistan's refining industry at stake.
All these issues have been brought to the knowledge of Petroleum Division and their intervention for resolution of these issues has been requested time and again. Despite all the serious challenges, the refineries are committed to undertake and upgrade their respective refineries for which they require a comprehensive policy framework of incentives of refinery expansion and up-gradation from the Ministry of Energy (Petroleum Division) as this involves $ 5-6 billion investment in Pakistan refining sector and cannot materialize without GoP active support.
Unfortunately due to Corona pandemic, which has seriously affected the entire world including Pakistan, the refineries have requested for deferring these projects for sometime.
According to the refineries, the spread of Covid-19 has meltdown effect on global crude and product prices and severely impacted the refinery sector in Pakistan and worldwide resulting in shape of reduced sales and steep decline of petroleum product prices.
Pakistan refineries were carrying huge inventories acquired at higher cost prior to Covid-19 and then prices fell unexpectedly resulting in massive inventory losses to the local refineries during the last two months.
The figures shared with the Petroleum Division show that in March 2020, inventory losses recorded Rs 16.120 billion of which the losses of ARL were Rs3.010 billion, NRL, Rs 2.524 billion, PRL, Rs 2.053 billion, Byco,Rs 2.013 billion and Parco, Rs 6.520 billion. In April 2020, total inventory losses stood at Rs 15.222 billion, of which ARL loss were recorded at Rs 3.736 billion, NRL, Rs 2.001 billion, PRL, Rs 644 billion, Byco, Rs 2.341 billion and Parco, Rs 6.5 billion.
The accumulated inventory losses in two months i.e. March and April 2020 recorded Rs 31.342 billion, of which ARL faced losses of Rs 6.746 billion, NRL, Rs 4.525 billion, PRL, Rs 2.697 billion, Byco, Rs 4.354 billion and Parco, Rs 13.020 billion.
Similarly as the price trend continues downward, further losses are also expected in May and June, 2020. In addition to the massive inventory losses, currently all the major petroleum products vis-à-vis current crude oil prices have huge negative spreads and it is not financially viable for the refineries to process crude oil at the negative refinery margins.
For instance the price of 92 Ron Motor Gasoline in Arab Gulf is $ 19.56 per barrel whereas crude oil price in Arab Gulf is $ 26.99 per barrel showing a negative margin of $ 7.43 per barrel. The price of High Speed Diesel (HSD) 0.05 per cent in Arab Gulf is $ 24.12 per barrel, kerosene oil $ 13.98 per barrel and HSFO $ 20.15 barrel against crude oil price of $ 26.99 per barrel, indicating negative margin of $ 2.87 per barrel in HSD, $ 13.01 per barrel in kerosene and $ 6.84 per barrel in HSFO.
After explaining the entire scenario, refineries have conveyed to the government that the economic operations of refineries in Pakistan is not sustainable. Thus refining sector is facing existential threat which needs to be addressed through urgent pragmatic measures. Refineries have already shared interim proposal with the Ministry for short-term relief to which response is awaited.
"An urgent relief package is required from the government for an interim period to ensure sustainability of refinery operations failing which it may cause some irreversible damage or financial collapse of refineries resulting in massive unemployment in refining and allied industry in addition to compromise on energy security of the country," cautioned the refineries in the letter.