ISLAMABAD: Amid demands by refineries for additional incentives and subsidies to upgrade, the government on Wednesday allowed export of about 90,000 tonnes of furnace oil and transfer of 60,000 tonnes to power plants to vacate storage at refineries as a short-term measure.

The decision was taken at a meeting of the Cabinet Committee on Energy (CCOE) presided by Petroleum Minister Ghulam Sarwar Khan and attended by Minister for Railways Sh. Rasheed Ahmad, Finance Minister Asad Umar, Power Minister Umar Ayub Khan, Planning Minister Khusro Bakhtiar and Prime Minister’s Adviser Abdul Razak Dawood.

The meeting was informed that that total furnace oil storage capacity of all refineries stood at 164,000 tonnes while total furnace oil stocks were more than 150,000 tonnes compelling refineries to reduce throughput. This has had serious imminent implications in the shape of disruption in entire supply chain of petroleum products and shortage of refined products to defense and aviation sectors particularly jet fuel.

The meeting was informed that six refineries were producing 10,000 tonnes of furnace oil a day while power division was seeking only 3,600 tonnes to buildup stocks at power plants despite their storage capacity of 1.2 million tonnes.

Pakistan State Oil (PSO) holds a storage capacity of more than 400,000 tonnes but they were unable to meet power sectors’ demand due to choked credit lines.

The total receivables of PSO alone were now in excess of Rs340 billion including Rs261bn due from the power sector. The petroleum division proposed that the power division should arrange at least some furnace oil based plants to account for 10,000 tonnes per day of local production throughout the year, especially Hub Power Company and Attock Generation to take care of production from Karachi and Rawalpindi based refineries respectively.

The suggestion, however, was not supported by CCOE members in view of the resultant expensive power generation, except for some peak seasonal requirements for which stock buildup should start immediately. On the other hand, a demand for release of default payment of Rs38bn to PSO on account of seven-day credit supply arrangement was taken up without an outcome, the sources said.

The only solution in the medium to long term was to continue exports of 200,000 tonnes of furnace oil per month and gradually shift all refineries to hydrocracker units to produce higher quality products instead of furnace oil. The problem, however, was an estimated investment requirement of $2-3bn over a period of 3-5 years to upgrade all refineries who seek subsidies and incentives from the government including through product prices.

On top of that, the refineries are also reluctant to export such large quantity of furnace oil – 210,000 tonnes per month – on a continuous basis in view of potential financial losses amid declining Furnace Oil prices in the international market. There was a negligible cost difference between crude import and furnace oil after including processing and transportation charges, said an official adding that the refineries also wanted compensation on this account.

Informed sources said the power division officials reported that Hub Power Plant had come into power generation but this was challenged the petroleum division saying the plant’s only one out of four units was operational even when the CCOE meeting was in progress.

The committee decided that there should be zero furnace oil imports in line with the ECC’s 2017 decision and no exemption should be allowed even if it was required for K Electric plants. It was decided that for short term, oil refineries will work at their full capacity and power sector should help them in storage for next three months on credit.

The committee was led by Chairman Task Force on Energy Sector Reforms Nadeem Babar, a key player of independent power producers, to come up with recommendations on issues of oil refineries and submit a report in next meeting.

Published in Dawn, December 6th, 2018