The reopening of the global economy after pandemic-induced lockdowns and travel restrictions increased crude oil consumption. The surge in fuel demand has pushed oil prices through the roof. That’s weighing heavily on Pakistan, an oil-importing country. To make matters worse, the country’s oil refineries have been running well below their installed capacities forcing Pakistan to import expensive fuels. To soften the blow policymakers should take measures that can help push refinery utilisation higher.
The world’s crude oil consumption was more than 101 million barrels per day (bpd) in 2019, according to the US Energy Information Administration (EIA), but dropped to 92.42m bpd in 2020. The fall in demand pushed oil prices to historic lows. But from this year, oil demand started to recover after restrictions eased. The global oil consumption could increase to 97.73m bpd in 2021, as per the EIA’s estimate, and seems well on its way to climbing back to pre-pandemic levels soon.
Pakistan is also seeing an increase in crude oil consumption. In the first three months of the current financial year (Jul-Sep), the oil marketing companies sold 6.08m metric tonnes of petroleum products like petrol, kerosene, and diesel, up from 5.13m mt in the same period last year, according to data compiled by Oil Companies Advisory Council (OCAC).
The demand for fuels, particularly petrol and diesel, could improve further in the coming quarters amid an increase in business activities, rising automobile sales and an uptick in transportation activity. But even if consumption remains similar to the first quarter levels in the subsequent nine months, then we can estimate more than 24m mt of fuel offtake for the full fiscal year ending June 2022. This will be higher than the pre-pandemic consumption of around 18m mt seen in 2018-19. The estimate includes petrol and diesel sales of 9.49m mt and 8.48m mt for 2021-22 respectively, up from 7.35m mt (petrol) and 7.19m mt (diesel) in 2018-19.
Ideally, at this time, all of Pakistan’s refineries should be up and running at maximum capacity to meet the rising demand and ease pressure on our imports
On the global stage, the increase in crude oil consumption is not being accompanied by a commensurate rise in supplies. While demand is rapidly growing, the Organisation of Petroleum, Exporting Countries members, their allies, and the US shale drillers are increasing oil production slowly. The mismatch in supply and demand has pushed Brent oil price to more than $80 a barrel from $52 at the start of this year. That’s made things difficult for Pakistan which had to spend $2.89 billion in the Jul-Oct period to import petroleum products, up from $1.5bn last year, as per data from the Pakistan Bureau of Statistics. This hurt the country’s trade balance.
Ideally, at this time, all of Pakistan’s refineries should be up and running at maximum capacity to meet the rising demand and ease pressure on our imports. Pakistan has five major oil refineries that can process up to 19.4m metric tonnes of crude oil each year to produce petrol, diesel, and other fuels. They reduce the country’s need to purchase expensive refined products and instead import lower-valued crude oil.
Sadly, the refinery utilisation rates have remained quite low in the past few years. In 2020-21, the average refinery utilisation rate was just around 60 per cent and remained at this level in the first three months of the ongoing fiscal year, OCAC data shows.
On the other hand, the oil refiners in several countries have cranked up volumes to satisfy the growing demand for transportation fuels. In India, which is one of the world’s largest producers and exporters of refined petroleum products, the biggest state-owned refiner India Oil Corp. operated its nine plants at 90pc of their installed capacity in October, up from 82pc in the previous month. Meanwhile, the four state-owned oil refining companies in China, the world’s second-biggest crude oil consumer, ran their plants at an average utilisation rate of 81pc in the first 10 months of this year, up from 78pc in the same period last year, data from S&P Global shows.
The low utilisation rates in Pakistan are due to the fact that nearly all of the local refineries are based on hydro skimming technology and therefore produce approximately 30pc furnace oil whenever they process crude. The furnace oil demand fell sharply in Pakistan after the power generation companies — the primary consumers of this fuel — modified their plant operations under a government directive and started using natural gas. Although furnace oil consumption picked up this year due to the global shortage and high prices of LNG, this might be a temporary phenomenon. The long-term outlook is still looking uncertain.
Moreover, refineries can’t export the fuel since the international demand for high sulphur furnace oil, which our refineries produce, has also plunged after the International Maritime Organisation introduced strict environmental regulations. This has forced Pakistani refineries to cut utilisation rates.
Refineries need to upgrade plants that will take their petrol and diesel yields higher while pushing their furnace oil output lower. The upgrades, however, are expensive and can cost anything between $200m to $1bn, as per various industry estimates.
The good news is that all of the publically traded oil refineries have chalked up their upgradation plans and some have started construction work. One major refinery expects upgrades to increase its combined yield for petrol and diesel to 80pc and reduce furnace oil yield to just 10pc. The oil companies have been waiting for the government to introduce a new policy framework that will give them the support and incentives required to complete the capital intensive modernisation projects.
There seems to be a lack of consensus among policymakers. Whatever the reason, the delay is putting strain on the country’s finances amid rising oil prices. If the government had introduced the oil refinery policy last year, the refineries might have already done a large chunk of work on their upgradation projects and could be getting closer to increasing their petrol and diesel production.
Their utilisation rates could shoot up to 90pc or higher once they finish work. Average capacity utilisation of 85pc for the Pakistani industry could translate into more than 100,000 barrels per day of additional domestic production of value-added refined products. That’s like installing a major new oil refinery. This might have eased pressure on our import requirements.
Sarfaraz Ahmed Khan can be reached at email@example.com
Published in Dawn, The Business and Finance Weekly, November 22nd, 2021