Refineries warn of closures amid rising stocks, low fuel off-take from OMCs

Published October 10, 2020
Smuggling of Iranian oil into the country, that had stopped amid Covid-19 border closure, has resumed with full vigour after normal border operations.
Smuggling of Iranian oil into the country, that had stopped amid Covid-19 border closure, has resumed with full vigour after normal border operations.

ISLAMABAD: Months after severe country-wide oil shortages, the country’s oil refineries are raising red flags over lower uplifting of their refined products by oil marketing companies (OMCs), resulting in curtailment of capacity utilisation and crude production from oilfields.

A senior government official said the OMCs had scaled down their upliftment of petroleum products following government’s decision to shift oil pricing to quarterly basis from monthly while substantial quantities of smuggled products had also made their way into the market. The refineries have been warning the government that continuation of the situation may force their closures and resultant product shortages later.

He said the smuggling of Iranian oil products into the country, that had been controlled amid Covid-19 border closures leading to country-wide oil crisis, had resumed with full vigour after normal border operations. The products from Iran were penetrating as far as areas close to Karachi, market sources said adding some unscrupulous dealers and oil companies were also benefiting from illegal imports.

The official said the Petroleum Division had been directing the OMCs to increase lifting products from refineries but could hardly push them beyond a limit even though they were not honouring their commitments. As a result, the storage of refineries both in terms of crude and products had been topped up.

“It has been noted with concerns that upliftment of petroleum products from refineries are not being improved despite clear directives issued by the Petroleum Division from time to time. Consequently, smooth operations of the oil refineries are being compromised,” the Petroleum Division wrote to the Oil Companies’ Advisory Council (OCAC) – an umbrella organisation of more than two dozen OMCs and refineries.

Sources say crisis being created to shift pricing from fortnightly to monthly basis

The Petroleum Division also directed the OCAC to prevail upon its members to address the situation. “In order to ensure smooth operations of the refineries and exploration and production fields, all OMCs are once again strictly advised to start upliftment of the finished products from local refineries as per committed and agreed volumes immediately.”

Separately, the refineries particularly Attock Refinery (ARL) in the north and Pak-Arab Refinery (Parco) in the mid-country have been operating at sub-optimal capacity while the Byco Refinery in the south had remained shut down for quite some time owing to the controversy regarding the origin of crude on ship. Byco is now gradually getting back in production. Howeve, the product gap during its closure is reported to have been bridged by racketeers using smuggled crude.

Sources said the ARL had been warning the Petroleum Division since third week of September that heavy high-speed diesel stocks had piled up at its storage. This week again it reported deteriorating situation saying low upliftment of products especially HSD from the ARL continued despite earlier requests.

“As of today, we have only two days of storage cover left for managing our HSD production. Accordingly, we are reducing our refinery throughput by shutting down one crude distillation unit of 5,000 barrels per day”, ARL Chief Executive Adil Khattak wrote to the Petroleum Division on Tuesday.

He warned the government that the refinery would further curtail crude receipts from exploration and production companies to manage high crude and product stocks.

Likewise, Parco had conveyed its concerns to the about a dozen OMCs and the Petroleum Division on Wednesday that it was “holding very high stocks of HSD and motor gasoline” and only two days of ullage remains for both products.

“For October, we have allocated 196,000 tonnes of HSD and 91,000 tonnes of Mogas due to high stocks carried forward from September. We regret to inform that as of today HSD and Mogas upliftment are minus 34 per cent and minus 20pc on prorate basis”, Parco said adding it was urgently required to uplift maximum quantities of both products to enable the company to sustain refinery operations.

Sources said there appeared to be conflicting business interests between refineries and OMCs. Both OMCs and refineries had pressured the government to change oil pricing formula to minimise their inventory losses as the international prices started to drop. However, it was key demand of the refineries to switch pricing from monthly to fortnightly basis to enable them to recuperate inventory losses.

However, the new arrangement did not generally go well with OMCs who used to uplift products in first three weeks and offload stocks in last week of the month under the previous pricing mechanism. Because of the changed mechanism, the OMCs have the liberty to adjust their supplies in line with international price published in the Platt’s Oilgram instead of previous pricing under the Pakistan State Oil import prices.

Sources said this conflict of business interest was now driving the demand supply plans of OMCs and refineries. This also appeared from the stock position of refineries which did not show emergency situation of the level advocated by them as crude oil stocks of ARL at 74pc of its storage capacity were the highest on Thursday compared to 65pc of Parco, 62pc of National Refinery, 43pc of Pakistan Refinery and 27pc of Byco.

On the other hand, the total stocks of motor gasoline (petrol) in the country stood at just 15 days of demand cover against mandatory stocks of at least 21 days while HSD stocks stood were reported at 29 days equivalent.

Published in Dawn, October 10th, 2020

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