Daily Times

Amid oil refineries’ shutdown fear due to government’s decision to switch to less costly RLNG from furnace oil (FO) for power production, the analysts have suggested that installation of a hydro-cracker unit would convert FO into other POL products.

However, this would require significant CAPEX and a holistic approach is required to lift refineries out of their current crisis, they said.

A hydrocracking unit, or hydrocracker, takes gas oil, which is heavier and has a higher boiling range than distillate fuel oil, and cracks the heavy molecules into distillate and gasoline in the presence of hydrogen and a catalyst. The hydrocracker upgrades low-quality heavy gas oils from the atmospheric or vacuum distillation tower, the fluid catalytic cracker, and the coking units into high-quality, clean-burning jet fuel, diesel, and gasoline.

According to industry analysts, the government’s decision to rely more heavily on gas-based power production would create a burden on the economy and budget as closure of refineries would then lead to import of oil products such as jet fuel, diesel and motor gasoline, currently produced by the refineries.

Already, this decision has resulted in significantly slower off-takes of Furnace Oil (FO) during the month of November-2018. This has resulted in significant build-up of FO inventories with refineries, leading to fears of an imminent shutdown in the near future.

As per the Oil Companies Advisory Council (OCAC), all the major refineries have already slowed down production and currently operating at their lowest utilization levels.

Giving a possible solution for this recurring issue, Arsalan Ahmed, a research analyst, said installation of a hydrocracking unit by the refineries can converts FO into other refined products such as diesel, motor gasoline and jet fuel.

According to Ahmed, another solution could be that the government could arrange a hydrocracking unit on its own and lift the FO supply from local refineries. However, this is easier said than done, as the hydrocracker unit requires significant investment and time.

Moreover, the structural issues of the sector regarding obsolete existing machinery persist and a holistic solution will be required to lift the sector out of its current woes.

Also, lower utilization levels of refineries have led to reduced inventory turnover and hence higher inventory days, while the situation is worsened by build-up of inventory.

Local refineries have been demanding an increase in deemed duty on diesel to 9% from 7.5% at present for some time. As this has not materialized to date, Ahmad said that diesel desulphurization (DHDS) projects completed by some local refineries seem less financially viable.

Additionally, the isomerization plants, which allow conversion of the loss making Naphtha into high margin motor gasoline, have not provided desired results either, given weaker gasoline spreads.

He added that this would keep the sector’s outlook bleak unless the new government increases the deemed duty for local refineries. Recently, the increase in debt levels following an expansionary phase in most of the refineries could lead to higher financing costs amid rising interest rates. If this was not enough, the latest round of rupee depreciation presents yet another challenging moment for the sector.

With RLNG- and coal-based power plants ascending on the merit order list, demand from FO-based plants plummeted, leaving a dent on OMC volumes in November 2018. PSO, being the largest supplier of FO in the industry has been hit the hardest with a 69% YoY decline in sales volumes. This was followed closely by Hascol which posted a 67% YoY decline. On a MoM basis, Attock Petroleum took the hardest hit with a decline of 83% in FO sales.

Published in Daily Times, December 11^th 2018.