Oil refineries seek bailout package

May 12 2020

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Local refiners say the coronavirus pandemic has seriously affected business and are seeking deferment of expansion and upgradation projects.
Local refiners say the coronavirus pandemic has seriously affected business and are seeking deferment of expansion and upgradation projects.

ISLAMABAD: Claiming over Rs31 billion inventory losses in two months and negative processing margins, the country’s five oil refineries have sought a compensation-cum-bailout package from the government to sail through difficult times.

“An urgent relief package is required from the government for an interim period to ensure sustainability of renery operations failing which it may cause some irreversible damage or nancial collapse of reneries,” said a joint letter by all the five refiners to the ministry of petroleum, warning that otherwise it would result in massive unemployment in rening and allied industry in addition to compromise on energy security of the country.

Local reneries currently meet over 60 per cent of petroleum products requirements of the country. These include Byco Petroleum, Attock Refinery, Pak-Arab Refinery, Pakistan Refinery and National Refinery.

They said the slowdown or shutdown of any renery in the country had serious ramications including product shortages, dry outs, port constraints and heavy strains on country’s precious foreign exchange due to import substitution. This is also essential for maintaining energy security of country and catering to defence energy needs indigenously.

The managements of the refineries have reported to the Petroleum Division that business environment of the country during the last two years had remained very challenging and disturbing for refining. The unprecedented devaluation of Pak rupee against the US dollar, overall decline in sales of petroleum products especially furnace oil sales and its pricing due to change in its specication by International Maritime Organisation 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 nancial difficulties for the reneries. All put together these factors have put “survival of the entire Pakistan’s rening industry at stake”.

The refiners claimed all these issued had been taken up with Petroleum Division from time to time with the request for intervention towards resolution of these issues. Despite all the serious challenges, the reneries were committed to undertake and upgrade their respective reneries. However, a comprehensive policy framework of incentives for renery expansion and upgradation from the Ministry of Energy was awaited as this involves $5-6bn investment in rening sector and could not be materialised without active support of the government.

The letter noted that the recent emergence of coronavirus pandemic has seriously affected the entire world including Pakistan. Amid the Covid-9 pandemic, local refineries have requested for deferring expansion and upgradation projects for some time.

The industry said the spread of Covid-l9 had a meltdown effect on global crude oil and product prices and had severely impacted the renery sector in Pakistan and worldwide, resulting in shape of reduced sales and steep decline of petroleum product prices. They said the reneries were carrying huge inventories acquired at higher cost prior to Covid-19 and then prices fell unexpectedly very low resulting in massive inventory losses during the last two months.

As a result, Attock refinery suffered Rs6.75bn losses in March and April, Parco faced Rs15.22bn, followed by Rs4.5 by National Refinery, Rs4.354bn by Byco and Rs2.7bn by Pakistan refinery. On top of that, as the price trend continues downward, further losses were also expected during the months of 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 was not nancially viable for the reneries to process crude oil at these negative renery margins.

The letter noted that refinery margin was negative $7.4 per barrel, $13 per barrel negative on kerosene, $2.87 per barrel negative margin on high speed diesel and $6.84 per barrel negative margin on High sulphur furnace oil.

Based on these negative margins, economic operations of reneries in Pakistan are not sustainable and refining sector is facing an existential threat which needs to be addressed through urgent and pragmatic measures.

Published in Dawn, May 12th, 2020