Furnace oil used to be the first choice for running power plants in Pakistan. In October 2017, however, by the Prime Minister’s proclamation, power plants were forced to switch to RLNG, which is generally considered cheaper to run.
Subsequently, the demand for furnace oil fell off a cliff and Pakistan’s refineries faced a stiff challenge. Some refiners even had to shut down their plants as they could not find buyers for their furnace oil.
The sudden change in Pakistan’s fuel mix proved devastating for oil refineries are all using hydro-skimming technology, which produces 30 to 40 per cent furnace oil for every barrel of refined crude oil. The situation sent alarm bells ringing across the oil refining sector.
At one point, it was realised that the growing levels of leftover furnace oil inventory could even break down the refining industry.
Since the slowdown, and in some cases closure, of oil refineries was limiting the production of jet fuel, which is used by the Air Force and Civil Aviation, the government began to see the light of listening to the refiners’ genuine concerns. Therefore, when it was proposed by the oil refiners that the government facilitate the utilisation of at least some furnace oil volumes, the crisis got somewhat resolved. As a result, the viability of oil refineries was preserved for the time being.
There are six oil refineries in the country, including two refineries run by Byco Petroleum, Attock Refinery Limited, National Refinery Limited, Pak Arab Refinery and Pakistan Refinery. These refineries produce a variety of petroleum products for all categories of consumers. Refiners convert the relatively cheaper crude oil into various higher-value products such as gasoline and aviation fuel, thereby saving the country precious foreign exchange.
From the start of 2020, however, another major source of furnace oil demand, which comes from the international shipping industry, has also dried up due to the implementation of the International Maritime Organisation (IMO)’s new regulation that forbids the use of High Sulfur Furnace Oil (HSFO). As a result, most oil refining companies have reduced their production levels and are now working at low capacity. It is becoming difficult for them to reduce their furnace oil stockpiles. It is feared that if the off-take of furnace oil does not increase, it could damage Pakistan’s petroleum supply chain network and even force the refineries to shut down.
Oil refining sector faces a very real prospect of shutdown if furnace oil is not lifted from refineries
This scenario will make it difficult for oil refineries to continue playing their crucial role in ensuring the smooth operations of the country’s logistics and security infrastructure. Such a situation could lead to an alarming development: a nationwide shortage of motor gasoline and other critical petroleum products.
Several industry experts have also warned that if such a situation develops, it will lead to the closure of oil refineries. They are of the view that the oil refining sector faces a very real prospect of shutdown if furnace oil is not lifted from refineries. The resulting chain reaction could crash the supply chain network of several other key industries; causing an economic crisis in the country.
As things stand, Pakistan’s oil refining industry is already facing numerous challenges, including the devaluation of the rupee and a general economic slowdown. The country’s oil refineries make an invaluable contribution to the country’s economy by meeting the nation’s rising energy demand. Refiners employ hundreds of thousands of people directly and indirectly and pay hundreds of billions to the government in the form of duties, levies and taxes. Pakistan also saves billions in precious foreign exchange of import costs by refining petroleum in the country.
There is a need to resolve the situation faced by the oil refineries on an urgent basis. The government should devise a plan, which increases the purchase of locally refined furnace oil to avoid a fuel crisis that could seriously disrupt civil and military aviation and cause a nationwide logistics and transport crisis.
The authorities should also facilitate exports of furnace oil by removing duties on such exports. This would provide some relief to the embattled refineries that have been losing money on their furnace oil production for years.
Pakistan’s economy is already going through a challenging period. Oil is a very critical input in the nation’s infrastructure and, thus, this current crisis in the refining industry can easily further aggravate the country’s economic conditions. Businesses, the common man and the government have all been going through a very difficult period economically. People are hopeful of better times prevailing with the macroeconomic stabilisation that the current government has managed to achieve. We cannot afford to be burdened by another man-made economic crisis that could be averted with intelligent policy decisions. Therefore, purposeful solutions must be devised to find a path out of the roads that are currently headed towards refinery closures.
The writer is a freelance columnist and PR practitioner