Pakistan Refinery Ltd (PRL) announced last week its operations were being brought to a halt after the floods following torrential rains in Karachi entered the premises, endangering life and property.

The closure of the refinery was said to be temporary. Operations were to restart after the completion of repair work. The news caused a bit of commotion, but the wear and tear caused by the rainfall in the city was scarcely surprising since the refinery was built back in the early 1960s.

For stock investors, the incident was of little interest. Instead of taking a plunge, the share price rose by 52 paisa to close on Friday at Rs18.86 from Rs18.34 on Wednesday when reports about a possible closure of the company became public knowledge.

There are four listed refineries. Attock Refinery Ltd (ARL) and National Refinery Ltd (NRL) are in better shape financially with their stocks trading close to Rs160-190. The closing price of Byco Petroleum’s share was Rs8.21 on Friday.

PRL on Aug 20 reported a loss of Rs7.59 billion for 2019-20, worsening by more than 30 per cent from the loss of Rs5.82bn in 2018-19. The board of directors did not declare a dividend for shareholders. Revenues from contracts with customers plunged by 21pc to Rs90.5bn, resulting in a gross loss of Rs4.37bn.

PRL ended the year with net negative cash and cash equivalents of Rs10.2bn

Along with the figures, PRL provided “Extracts from the notes to the financial statements for the year ended June 30,” which referred to the basis of preparation of the accounts. It stated that as of June 30, the company had accumulated losses of Rs18.36bn and the current liabilities exceeded current assets by Rs16.84bn.

PRL ended the year with net negative cash and cash equivalents amounting to Rs10.19bn. In order to address the negative equity and liquidity issues, the company had made a right issue of one share for every one share held amounting to Rs3.15bn, which was fully subscribed. But the statutory auditors have issued a “qualified” report on the accounts, which expresses reservations over the preparation of accounts on a “going concern basis”. The management believes that through a series of actions that it has taken, the refinery will continue breathing.

PRL is located in Korangi Creek in Karachi. The area is the first one to submerge whenever it rains a little more than the usual. NRL is also as old as PRL and is located in the same vicinity. But NRL appears to be safe as no damages have been reported.

Sometimes, industrial units located in the area are able to make the proverbial lemonade out of lemons. One recalls a textile mill that earned a profit and paid dividends, but a heavy spell of rain resulted in water entering the mill’s premises back in the early 1980s. The management announced that water had damaged assets that warranted a temporary discontinuation of operations. Its sponsors, however, sold the mill. New buyers continued to run the factory for decades but always came up with losses on the excuse of the “floods that had damaged the mill”.

Investors who lost their money in the company’s shares wondered why the mill continued to operate for so long only to report losses year after year. But we digress.

Now let’s get back to PRL, which has seldom enjoyed the best of times. On Aug 24, the Ministry of Energy (Petroleum Division) sent the Oil Companies Advisory Council (OCAC) a letter titled: “Pricing of Petroleum Products”. It stipulated that the Economic Coordination Committee (ECC) of the cabinet had approved a summary by the ministry regarding the fortnightly prices of petroleum products and the “shifting of PSO’s price benchmark to Platts indexes”. The communiqué directed: “Oil marketing companies (OMCs) and refineries will determine the ex-refinery prices of motor gasoline and high-speed diesel as per the policy parameters and the prices of other petroleum products will be determined under the current price in vogue on a fortnightly basis effective Sept 1.”

The industry has been asked to comply by the eight-point policy parameters given in the letter. An oil market expert said that the ministry has in effect told the refineries to produce POL products on Euro-V specifications or face penalties.

Two days later, a letter to the secretary of the Ministry of Energy’s Petroleum Division signed jointly by Pak-Arab Refinery Ltd (Parco), ARL, NRL, PRL and Byco Petroleum protested against the policy parameters for the pricing of mogas/high-speed diesel (below Euro-V) issued to the Oil and Gas Regulatory Authority (Ogra) and OCAC for compliance and implementation.

The letter stated that the guidelines were issued without consulting the refineries, which were major stakeholders. They referred to the policy guidelines issued by the Ministry of Energy (Petroleum Division) dated June 3, 2020, “which clearly states that the pricing calculation in this regard shall be carried out in consultation with oil refineries and PSO regarding Euro-V (mogas/high-speed diesel)”.

The refineries objected that the “issuance of unilateral guidelines (by the ministry) for the pricing of Euro-V fuels for local refineries without consulting the refineries defeats the very essence and spirit of the cabinet’s energy committee’s decision of June 4, 2020”.

They went on to mention “serious anomalies” in the guidelines, which they said needed to be rectified. The letter lamented that the business environment of the country during the last few years had remained disturbing for the oil refining sector and attributed it to the financial difficulties of the refineries, “thus putting the survival of the entire country’s refining industry at stake”. They concluded with the request to the energy ministry to defer the implementation of penalties “till such time that the anomalies were duly addressed”.

Published in Dawn, The Business and Finance Weekly, September 1st, 2020