Daily Times

Pakistan’s industrial development and economic prosperity are linked closely with the strength of the country’s oil refining industry. The nation’s ability to produce fuel products – like petrol and diesel – is underpinned by the ability of oil refiners to process crude oil and convert it into high-value products. The refineries have struggled in the past but the recent rise in Gross Refining Margins has signaled a turn in fortunes. This bodes well for Pakistan since the refining sector will likely increase investments and drive economic growth in the country.

The devaluation of the local currency, decline in furnace oil consumption, deterioration of fuel demand during the pandemic, and unusually high volatility in oil prices are some of the big-ticket items that have badly hurt the oil refining industry’s performance.

On top of this, the petroleum sector has not been reportedly getting a lot of support from commercial banks. The oil industry’s working capital requirements have shot up due to the drop in Pakistani Rupee’s value against the US Dollars and the surge in oil prices in the international markets to the range of $90 – $110 a barrel. But the banking sector hasn’t increased the size of financing facilities, which has put a lot of pressure on the cash flows of refiners.

Although the business environment for oil refiners remains challenging, there has been one noticeable improvement. The Gross Refining Margins, or GRM, have risen significantly in the international markets, mainly due to the supply disruptions caused by the conflict between Russia and Ukraine and the gradual increase in global demand in the post-COVID world.

The Gross Refining Margin is the difference between the price of one barrel of crude oil and the average price of refined products. If, for instance, one barrel of Brent crude costs $100 a barrel which a refiner can process to produce various kinds of fuels like petrol, diesel, and furnace oil with an average price of $104 per barrel, then, in this case, the GRM will be $4 per barrel ($104 minus $100). In simple terms, it means a refiner can make a gross margin of $4 per barrel by processing one barrel of crude oil.

Typically, refiners need GRM of at least $4 to $5 a barrel to generate profits from their operations. The GRM has touched $3.40 per barrel and lower in the last couple of years, making it difficult for many refiners to turn net profits. But now, the GRM has climbed to historic highs of nearly $30 per barrel, which puts refiners all over the world on track to report a rise in earnings.

Some industry observers, however, have started discussions on capping GRM to bring down pump prices. Although this might sound good on paper, in reality, it can have a devastating impact on Pakistan’s oil refining industry.

Unlike many developed countries, the petroleum companies in Pakistan already operate in a tightly regulated market where key aspects of the business are dictated by the government. The industry faces numerous issues, as discussed earlier, and has incurred massive losses in the past. Just a few months ago, some oil refineries were forced to temporarily shut down operations due to weakness in furnace oil consumption. To cap margins at this point will be unfair and will severely dent the industry’s confidence since it would take away the industry’s sole chance of recovery.

Besides, it is also important to remember that firstly, despite high GRM, the final pump price is still determined mainly by international oil prices. Secondly, GRM moves up and down, like commodity prices, in response to the supply and demand situation. Although they are currently high, the GRM will move down once supply gets better and demand eases in response to high prices. So there might not be any need to cap GRM since the market forces will push it down anyway.

More importantly, by fully capturing GRM, the oil refining sector will be in a good position to make heavy investments to expand their plants and enhance their oil refining capabilities. The country’s refineries have been planning to upgrade their plants to deep-conversion technology while some like Cnergyico also seek to expand their production capacity. To do this, the sector needs to make investments of billions of dollars, and they can do this only if their profits grow.

Instead of capping margins, if the government concentrates on creating an environment where refiners can invest and expand their operations, then the positive impact on Pakistan’s economy and future generations will be remarkable.

It is easy to see how the large size and scale of investments planned by oil refining companies can create substantial employment opportunities for skilled, semi-skilled, and unskilled labor. Once the refiners upgrade their plants, the country’s oil refineries will be able to produce substantially higher levels of Euro-V compliant petrol and diesel as well as other high-value products like jet fuel. That’s going to help reduce carbon emissions and improve the environment as the Euro-V fuels are far more environmentally friendly than the fuels that are currently in circulation.

More importantly, by increasing the production of petrol and diesel, the oil refiners can make Pakistan self-sufficient in energy production. Petrol and diesel are the two main fuels that Pakistan consumes but the local companies can only meet 30pc of petrol and 60pc of diesel demand. The rest has to be imported. But as refiners ramp up output, the country’s reliance on imports will fall. That’s going to lower our import bill and improve the country’s current account deficit in a big way. Additionally, the oil refiners will also enhance Pakistan’s energy security by cutting down our dependence on other countries to meet our fuel demand.

For decades, the oil refiners have been supplying fuel to the nation. Now, they can make an even bigger impact on the economy. It is high time policymakers realize this and introduce business-friendly policies so that the refining industry accelerates development work and pushes Pakistan towards economic prosperity.