KARACHI: Reluctant to adopt environment-friendly diesel as transport fuel, the country’s oil industry has asked the government to delay accepting Kuwait’s demand to phase out low quality high-speed diesel — Euro-II — by Dec 2020.

State-run Kuwait Petroleum Company (KPC) — Pakistan’s largest fuel supplier — had asked Islamabad in July to upgrade its market and fuel supply network for higher grade gas oil, commonly known as High Speed Diesel (HSD), to remain its long-term client.

Pakistan generally imports half of the country’s diesel requirement from Kuwait under a long-term arrangement between their respective state-run companies — Pakistan State Oil (PSO) and KPC.

PSO imports about 0.4-0.5 million tonnes of diesel per month from KPC against country’s total monthly consumption of about 0.8m tonnes. About 220,000 tonnes per month production comes from domestic refineries. As a result, the PSO has asked the petroleum division to take note of the situation and review pricing mechanism.

PSO is currently procuring gas oil of 500ppm under a long-term contract with KPC that has already been extended till December 2020, but KPC would not be able to provide that poor quality fuel beyond early 2020 because of its upgradation.

KPC had told PSO that Euro-II diesel containing 500ppm (sulphur particles per million), which is currently in Pakistan’s use, would not be available for imports from 2020 onwards because it would start producing Euro-V diesel containing 10ppm after the completion of its Clean Fuel Project.

The PSO has reported that existing pricing based on 500ppm sulphur (Euro-II) will not be commercially feasible for it because 10ppm sulphur (Euro-V) is almost $1 per barrel more expensive. The government last month sought feedback from the oil industry on non-availability of HSD grade Euro-II from KPC with effect from early 2020.

The Oil Companies Advisory Council (OCAC) responded that the issue needed to be examined on techno-economic and commercial viability. It said the prevailing HSD specification notified by the petroleum division would need to be reviewed since KPC has indicated that lubricity improvers will be added for Euro-V.

The OCAC said ultra-low sulphur diesel such as Euro-V is achieved through desulfurisation. As a diesel’s sulfur level (500ppm) is reduced, the fuel’s inherent lubricity characteristics are also reduced. Diesel fuels with poor lubricity characteristics can lead pump wear and eventually vehicle failure. Therefore, lubrication properties have become a key parameter of low-sulfur diesel-fuel specifications.

Also, it will potentially translate into a scenario of Euro-II and Euro-IV both being replaced with Euro-V. Almost 50 per cent of the diesel in the market will still be Euro-II as produced by the local refineries which need to be involved in the assessment of impact on both refinery pricing and product specification as they will continue to produce 500ppm diesel, the OCAC said.

On top of that, since vehicle manufacturers and assemblers were also important stakeholders, they should also be involved before finalising industry switchover from Euro-II to Euro-V. The OCAC said that Euro-II was primarily used by transportation sector; hence a study needs to be conducted on the impact of conversion from Euro-II to Euro-V.

Moreover, Euro-V specification will create additional burden as consumers will be required to pay a higher price. Therefore, a study should be conducted to facilitate an informed decision keeping in view the long-term impact, the OCAC pleaded.

The PSO had explained that discrepancy in imports with regard to specifications and pricing issues would occur if it imports 10ppm diesel and other oil marketing companies import 500ppm diesel, unless the government makes it mandatory for all diesel imports from 2020 to shift to a uniform 10ppm sulphur Euro-V level to ensure better quality and environmental friendly fuel in the country.

The government had earlier announced a policy to improve fuel grades and KPC’s specifications were generally in line with measures highlighted in the policy but local refineries had some issues with the upgradation timeline because of the additional investments required.

He said all the stakeholders – oil marketing companies and refineries, the Oil and Gas Regulatory Authority and Hydrocarbon Development Institute of Pakistan – had been requested to give their technical and professional input on the situation.

Pakistan’s total demand for petroleum, oil and lubricants products is estimated to increase by 17.5pc from 27m tonnes this year to about 32m tonnes in five years, according to OCAC – an umbrella organisation of oil companies.

The cost of existing oil imports generally lies between $12-14 billion per year. HSD would be a key driver for growth in consumption of petroleum products. Its consumption is estimated to increase by 46.4pc to 13.7m tonnes in five years from current level of 9.3m tonnes. The demand for motor gasoline, commonly known as petrol, currently stands at about 7.97m tonnes that would jump to 14.17m tonnes in 2021-22, showing an increase of about 78pc.

The imports of diesel in the country shifted to Euro-II specifications or 500ppm in January 2017. The OMCs and refineries declined to introduce Euro-III & Euro-IV compliant HSD, claiming that it was not feasible to sell the higher grade product in the Pakistani market when the petroleum division proposed better grades in a deregulated environment, and subsequently upgrade local refineries capable of matching the quality of the imported product.

Higher grade fuels are considered more efficient and eco-friendly, but are relatively expensive. Pakistan used to have 0.5pc sulphur content HSD, which produced 5,000ppm until December 2016. This was switched to 0.05ppm Euro-II having 500ppm. Euro-III should have 0.035pc (350ppm), Euro-IV 0.005ppm (50ppm) and Euro-V 0.001ppm (10ppm).

Published in Dawn, September 21st, 2018