ISLAMABAD: With its receivables in excess of Rs215 billion leading to cut back on oil imports, the Pakistan State Oil (PSO) is contemplating setting up a refinery of 36,000 barrels per day of refining capacity in Khyber Pakhtunkhwa at an estimated cost range of $500-750 million (Rs45-65 billion).

The government of KP, PSO and a private investor would form a joint venture company to share 20 per cent equity while the remaining 80 per cent funds would be arranged through commercial banks, according to PSO’s managing director Naeem Yahya Mir.

The country’s largest oil supplier will operate and manage the new refinery, he said.

But some quarters in the federal government disagree with the economic viability of the new refining venture to be called “Northern Refinery.”

They argue that a region that produces less than 8,000 barrels per day and that too with existing long-term contracts could not make commercially viable a new refinery with 36,000 barrels per day of capacity.

An official at the Ministry of Petroleum and Natural Resources said it was interesting to note that the state-run oil company was participating in a Rs45 billion plus refinery at a time when it was finding difficult to ensure smooth supplies of furnace oil and other petroleum products.

Similarly, it was also strange that refinery has been proposed to be set up in area where total crude production was more than four times lower than the capacity planned for a new refinery.

The total oil production in KP stood at 7,843 barrels per day during financial year 2010-11 while PSO is planning a refinery with a total capacity of 36,000 barrels per day.

He said the Attock Refinery Limited in Rawalpindi already has a long-term contract for about 7,000 barrels per day.

But Mr Mir who completes his six-month probation this week questions such critics.

“They (critics) are wrong. KP has a potential to produce 30,000-40,000 of crude very soon and the refinery would take two-three years to come into production. Therefore, the planned refinery is not only commercially feasible but very profitable too,” he told Dawn, adding those questioning the refinery are non-technical people.

Mr Naeem said the refinery seemed profitable in view of the fact that entire range of refined products would be marketed by PSO itself. He said while it would be premature to accurately estimate the cost of refinery at this stage but it would range somewhere between $500 million and $750 million.

He explained that the exact costing would become clear when quality of the crude was known that would determine the number of refining units to be installed.

Nonetheless, he said the company was now entering into the analytical phase after having finalised a business strategy that a refinery was required to meet local product supplies in the north and secure a market even in across the border (Afghanistan).

The PSO chief said the government was currently in the process of issuing Term Finance Certificates to ease circular debt that would resolve major problems for the PSO.

Even otherwise it was not an issue for the country’s only trillion rupee company to spare about $40 million (Rs3.7 billion) for a strategic venture.

The joint venture of KP, PSO and a private investment firm would have to put together at least $100 million (about Rs10 billion) equity while the remaining funds would be raised through commercial banks.

Official data suggests KP has remaining recoverable crude reserves of about 82 million barrels, against country’s total estimated reserves of about 264 million barrels.

Sindh has remaining crude reserves of about 102 million barrels while Punjab has 78 million barrels, according to estimates of Directorate General of Petroleum Concessions (DGPC).

Against total estimated reserves of about 964 million barrels, the country is reported to have already consumed 680 million barrels.

The existing refineries in Pakistan have two major draw backs. Firstly, they are not of economy of scale size and secondly produce 25-35 per cent of furnace oil that has remained $400-850 per ton more expensive than input that is crude oil ($350-700 per ton).

This is the reason these refineries resort to getting higher than international price at the cost of consumers.

Pakistan has currently five refineries with a total crude oil processing capacity of around 13.15 million tons per annum.

The refineries currently process 9.77 million tons crude oil, of which approximately 30 per cent is produced locally, while the rest is imported.

Out of these refineries, one is located at Morgah near Rawalpindi, one at Multan (mid-country) while the other three are located at Karachi.

The government had approved establishment of five new refineries way back in 2005, to come into production in 2010, 2011 and FY2014. These could not materialise due to financial instability arising out of geopolitical situation and political unrest.

PSO’s previous attempts to buy out major stakes in Pakistan Refinery Limited were thwarted by competing forces.