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Investment climate is extremely conducive for investors.

Economic Review: Do you think investment climate is conducive for foreign private investment in Refining Sector and are you satisfied with the Government's policy in order to attract private investment in this sector?

Shahid K. Hak: The investment climate in Pakistan has improved significantly and is now extremely conducive for investors. Previously a host of permissions were required for setting up refineries in the country. Now there are no restrictions, NRL was set up in 1967 and since then no new refinery could come up due to pricing mechanism and the sector was highly regulated. The new Petroleum Policy has introduced a number of measures in deregulating the up-stream and the downstream activities of the Oil and Gas Sector. Pakistan has thus opened its refining sector for the first time in more than 2 decades. Thus it is hoped will create interest and encourage the Foreign Investor who is always more comfortable in a deregulated environment. I feel that Government policies are reflective of its desire of having a free, deregulated, market oriented economy.

The onus is now on the investor to drive maximum benefit of the opportunity provided by the Government. Pakistan now provides an excellent economic framework for a creative and an innovative investor to take part in all areas of the Oil, Gas and Energy Sector.

ER: Are you satisfied with the debt; equity ratio (i.e. 80:20 instead of 70:30) set by the Government for investment in refining sector and pricing formula for refineries?

SKH: i) Keeping in view that refinery projects are highly capital intensive, the change in the debt; equity ratio from 70:30 to 80:20 was essential and a step in the right direction. This would substantially ease the financial burden of the investor and thus greatly help in promoting investment in this sector.

ii) For pricing formula Pak-Arab Refinery (PARCO), recommendations have always been that it should be equitable and should provide adequate economic and financial incentives to the investor to recover the heavy investment and cover the risks involved. Refineries have, therefore, to be treated as a strategic infrastructure to be efficiently run and if need be sustained through a minimum guaranteed return to combat the vagaries of the international oil scene.

ER: What is the gap between the current refining capacity and demand of oil?

SKH: The gap between current refining capacity and demand of oil is about 6 million tons/annum 150,000 bbl/day). The major deficit products are HSD, Furnace Oil and HOBC. This gap is increasing at a rate of about 5% per annum. And if refining capacity is expanded, by 1997-98, it could increase to 10 million tons/annum (250,000 bbl/day).

ER: The estimated demand of oil was 260,000 BPD in 1992. After the planned expansion of 4 upcoming refineries, Pakistan will have a capacity of 442,000 BPD. This capacity may be commissioned in 1995-96. During this period the demand may increase to 354,000 BPD leaving a surplus of 88,000. Your comment?

SKH: After deregulation of refining sectors many investors have indicated interest in putting up refineries. However, at present two organisations can be considered as having taken-up basic ground work for setting up fully balanced refineries i.e. heaving primary and secondary facilities. In the case of PARCO's Mid-country refinery the feasibility study for a 4.0 million tons refinery has already been completed, and EDS is to commence shortly, while in the case of Pak-Iran Refinery, the study for a 6.0 million tons refinery is in progress.

The prime objective of PARCO's Mid-Country Refinery is to develop a central Refining centre to complement the Southern (NRL/PRL) and Northern (ARL) Refining centres of the country in order to provide refined products near the consumption centres of central Pakistan since 60% of the demand for problem products is in upcountry areas. The other refineries including Pak-Iran being coastal, could export the surplus, if any. Further more, an inherent feature of Projects in Pakistan is that they do not come up on time. Hence this natural staggering of projects will automatically take care of surpluses.

ER: What are your plans to meet the future demand of oil refining and transportation of oil in the country?

SKH: To meet the future demand of oil refining and transportation in the country, PARCO has chalked out a comprehensive twenty year plan which is based on a systematic growth and development, to make PARCO a fully integrated oil organisation in the country. Some of the milestones of our corporate plans are!

1) To expand the existing capacity of the Pipeline System, we have already created extra transportation capacity and operational flexibility by building additional 50,000 tons of tankages, increasing the flow rate through the use of flow improvers and installation of intermediate pumping stations at Bubak and Fazilpur. These measures and upgradation of our facilities at Rs. 1000 million have increased our pipeline capacity by about 2.0 million tons over and above the design capacity.

2) To extend and diversify the present Pipeline System, PARCO has already embarked upon a Rs. 4000 million project aimed at extending the present Karachi to Mehmood Kot Pipeline upto Faisalabad and Sheikhupura. As the demand increases we have plans to develop pipeline network for Faisalabad to Kharian and from Kot-Bahadur Shah to Sahiwal. Similarly PARCO envisages development of a parallel pipeline from Karachi to up country by the end of the century.

3) Development of Refining and Petrochemical base in the country, PARCO has already completed a Feasibility study of a 4.0 million tons/year refinery project. This study was carried out by an International consultant of repute and has been reviewed by the World Bank. The Engineering Design Specification (EDS) of the refinery is to commence shortly. Project financing proposals are being evaluated.

PARCO's Mid-country Refinery will have the capacity and flexibility to develop a naphtha based petrochemical complex as a downstream unit.

ER: Is your pipeline system more successful than the transportation of oil through tankers?

SKH: Over the past twelve years PARCO has operated very successfully. It has transported without any disruption, delay or loss over 25 million tons of HSD and SK to meet up country energy needs in the most efficient manner. The energy consumption by PARCO Pipeline system when compared with rail and road is amazingly low, and constitutes only 41% of rail and 7% of road to perform the same function.

Thus during its twelve year of its pipeline operation, apart from many very significant logistical and environmental advantages to the country, PARCO has saved more than 25 trillion BTU of energy which would have been consumed by rail/road transportation. This is equivalent to 638,000 tons of HSD amounting to a foreign exchange savings of around 2,800 million rupees. PARCO Pipeline system can thus be considered as the backbone of country's oil logistics.

ER: When will Pak-Arab Refinery will come on stream?

SKH: As indicated earlier, the refinery feasibility study has already been conducted by an International Consultant. It was reviewed by World Bank and has been strongly supported by them for implementation. We are preparing to takeup the Engineering Design Specification (EDS) during this financial year. According to our plans the refinery should be commissioned by 1997-98.

ER: What are the future prospects of refining sector in Pakistan?

SKH: Presently the three refineries in the country meet only 50% of petroleum product demand. Out of this capacity, 50% is more than 25 years old and shall need to be gradually replaced, modified and modernised. Although crude oil supply is rightly regarded as a key element in our calculations, the establishment of economically viable refining capacity in the country is extremely necessary. The world refining industry has gone through a tough period during the 80's and the recovery has been slow and painful, but the refining business is now healthy again. Out of the 5 million bbl/day of refining capacity under construction or planned worldwide, no less than 58% is located in the eastern hemisphere. We must take full advantage of this renewed opportunity.

Future prospects of refining sector in Pakistan are, therefore, very bright. This is mainly due the large and increasing consumer population and the geographical location of Pakistan. The interest shown by investors in setting up refineries is due to the fact that investors feel that in addition to meeting local demand they can export the produc-tion from Pakistan's coastal regions. Furthermore, setting up refineries is expected to greatly encourage investors to explore for oil in the vicinity of the refinery since use of their crude will be available indigenously.

However, being capital intensive projects, since one never has all the answers in a complicated business world of to-day, their is a tendency to be more analytical in the hope of getting a better answer. Unfortunately, more analysis does not necessarily produce a better answer. We should, therefore, be careful not to fall prey to paralysis by analysis. At some point, one needs to make a decision and just do the project.

A Chemical Engineer, an Energy Economist, a Computer Scientist and a Management Analyst, Dr. Shadid K. Hak is the Managing Director of PakArab Refinery Limited. He holds Masters Degree in Science in Petroleum Refinery Engineering, M.Sc. in Petroleum Economics and Ph. D. in Chemical Engineering from UK. Dr. Shahid speaks about the present scenario of refining industry in Pakistan.
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Title Annotation:investment opportunities Pakistan
Author:Raza, Moosi
Publication:Economic Review
Article Type:Cover Story
Date:Nov 1, 1992
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