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Oil refining.

Oil Refining

Pakistan has at present the following oil refining capacity:
Attock Refinery - Rawalpindi 30,000
National Refinery - Karachi 65,000
Pakistan Refinery - Karachi 28,000
 TOTAL: 123,000

Attock Refinery the only refinery in the North, has a capacity to process crude upto 30,000 barrels per day. It is operating at full capacity. Plans are under way to increase the capacity of this refinery by 20,000 bpd. to 50,000 bpd. Following the expansion of National Refinery with an estimated cash of Rs. 200 million its capacity has been increased to 65,000 bpd. Whereas Pakistan Refinery at present refining about 28,000 bpd.

The two Karachi based refineries have been allowed to charge a processing fee for refining the imported crude. On the other hand the refinery in the North is still on a fixed return of 18 per cent on the equity and is completely dependent on local crude. It is believed that the Government is paying around Rs. 24 per barrel as processing fee for imported crude refined by the two Karachi based refineries. Pakistan Refinery Limited and National Refinery Limited, while the return on cost plus formula for refining indigenous crude in the North works around to Rs. 12 per barrel. The processing fee concept is also a better deal as it gives the refiners an incentive to reduce operational cost and thereby earn more. Compared to this under the fixed return formula the Government bears the cost of inefficiency in refining operation.

Private sector has thus far been shy of investing in the refining field because of Government's refusal to allow them to charge on import parity basis for refining crude oil; a practice in vogue in most of the oil importing countries around the globe. The Government's refusal to agree to give a return on import parity basis is perplexing as it has already conceded this to oil exploration activity and is evident from the record number of drilling being undertaken since then. Inordinate delays in expanding the refining capacity in the country and the dallying over the location of a new refinery in Sindh has left Pakistan inadequately short of refining capacity in the wake of Gulf crisis. The country is still importing around 45 per cent of its furnace oil, Kerosene oil and high-speed diesel oil from abroad. The loss incrude oil production from Iraq and Kuwait is being met from boost in oil production from the Saudia Arabia, UAE, Venezuela and other oil exporting countries. The removal of the combined refining capacity of Iraq and Kuwait from the world market, due to the embargo, however, has caused an acute shortage for refined products the world over, which cannot be replaced in matter of days or months.

Among the reasons for delaying the establishment of a refinery at Multan or in upper Sindh was the continuous fall in crude oil prices during the last couple of years and the cheap availability of POL products from the Middle East. Warnings by knowledgeable quarters that the market scenario would not remain the same for ever was continuously ignored by Islamabad, as a result the country is now paying a heavy price. Increasing the capacity of ARL by 20,000 barrels per day is expected to cost 25 million dollars. The foreign investor is reportedly seeking a guarantee from the Government that in case the committed extra crude oil does not become available, the Government would foot the bill for interest payments on the capital investment made in the expansion project. The present Middle Eastern owners took over the ARL, over ten years ago, from the British owners. They have been receiving dwindling return on their investment on account of the continued weakness of the Pak rupee, since 1983; coupled with the cost plus formula of fixed 18 per cent return on equity.

It may be recalled that an ambitious plan to establish a refinery under the name of Pak-Arab Refinery at Multan with financial collaboration and assistance from the UAE was abandoned in 1978 pending an indepth study of the demand for refined products in the country in the years ahead. The proposed project also included laying of a 16 "pipeline from Keamari (Karachi) to Mahmoodkot near Multan covering a distance of 864 km. The pipeline which was completed and commissioned in 1981 was initially designed to supply imported crude oil to a refinery (which was to be established) at Multan. But at present the pipeline is being successfully used for the transmission of petroleum oil products to the northern regions of the country.

The decision of the then Government to shelve the PARCO refinery project in keeping with the expert opinion that a refinery in the North based on imported crude to be supplied from Karachi could never be economical vis-a-vis imported deficit products, was undoubtedly a right one. Instead it was decided to expand the capacity of National Refinery which was indeed an economic proposition. However, in addition to the phased expansion in the capacity of National Refinery at Karachi, the refinery in the North viz Attock Refinery at Morgah near Rawalpindi was expanded as a joint venture between foreign investors with 52 per cent holdings and Government of Pakistan in addition to financial institutions and general investment public. The refinery with most modern facilities, processes locally-produced crude in the northern region around the site of the refinery. For several years after completion of expansion in 1980, the refinery operated with a very low capacity utilization due to non-availability of the locally-produced crude in sufficient quantities. Even the 1989 balance sheet of the company indicated the capacity utilization upto 85 per cent and the reasons for which were given as "in-adequate availability" of local crude. Thus, the important point to be emphasised here is that the imported crude-based refining in the North was never considered as an economically feasible proposition even though the Attock Refinery which involved a heavy amount of capital expenditure, was forced to operate only upto 50 per cent of its actual capacity for several years.

It may be pointed out that the officially-conducted studies for the Sixth and Seventh Plans had favoured expansion in the capacity of the existing refineries in Karachi specially the National Refinery in the public sector. It was generally emphasised that not only a new refinery is a capital-intensive project but also the favourable price differential between the prices of imported crude and POL products was usually very small. In view of this, any proposal previously, for the establishment of a new refinery was given low priority. Moreover, the principle of deriving optimum benefit through investment of scarce resources was also seemingly kept in view and therefore, funds and resources were understandably diverted to more urgent avenues of development like expansion in the power generating capacity and other important projects.

Badin Refinery

Plans to set up Pakistan's fourth refinery at Badin have entered the final stages. The proposed refinery is estimated to cost about 200 million dollars. The Badin refinery will initially have the capacity to refine 35,000 barrels per day (bpd) of Sindh's waxy crude which will further be enhanced to 45,000 bpd. At present Pakistan has no facility to refine Sindh's waxy crude. According to refinery experts, Jamshoro is the ideal location for setting up of such a refinery due to the presence of WAPDA power units in the area which are utilising about 337,000 tonnes of furnace oil annually. If set up at Badin, the refinery will have to supply furnace oil through tankers to Jamshoro about 50 miles away from Badin. This means that the buyer will have to bear the transportation cost also.

At present Sindh is producing about 34,000 bpd. of waxy crude out of the country's total production 60,000 bpd. Both the National Refinery and Pakistan Refinery in Karachi are refining waxy crude after mixing it with Arabian-Gulf crude. The National Refinery is refining about 15,000 bpd. of Sindh crude while Pakistan Refinery does about 12,500 bpd. The remaining portion of about 6,000 bpd. is being exported to Singapore. However, after the setting up of the Badin refinery, both the export of crude to Singapore and its supply to Karachi refineries will be stopped.

A promising project had been offered to Pakistan by Iran, Libya and Bahrain earlier this year in the days when there was still an oil glut in the international market. These countries had offered to help Pakistan set up a Rs. 8 billion coastal refinery with a capacity to refine four million tonnes of crude oil. According to the proposal, Pakistan only had to provide the land and make a negligible financial contribution. The project would have yielded enough petroleum products to enable Pakistan to cut down on its petroleum imports by about 80 per cent.

The Iranians, who are the main financiers of the project, were interested in setting it up in the duty-free export zone. Initially Pakistan agreed to the site. However, as soon as the project got off the ground, the bureaucracy came into action and advised the government that setting up the refinery in the duty free zone would deprive Pakistan of taxes. They proposed a site near Hub. Knowing that the Balochistan government was hostile to projects initiated by the federal government, Iran strongly opposed the idea. It now remains to be seen whether the Iranians' interest in the project will survive the political upheavals both in Pakistan and the Gulf. According to reports Pakistan and Iran have agreed to set up an oil refinery with a capacity of 80,000 barrels per day at Port Qasim.

There was also an agreement in principle of setting up an oil pipeline between the two countries, besides expanding of Mashad-Kermanshah railway link which would enable direct link between Pakistan and Europe by rail.

Iraq-Iran war and the experience of the Gulf crisis has taught us that Pakistan-Iran cooperation in oil export and refining will always be the keynote of economic prosperity of the region. This would free both the countries of future conflicts around the Persian Gulf and the choke point of the Strait of Hormuz.

PHOTO : A view of National Refinery

PHOTO : A View of Attock Refinery
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Publication:Economic Review
Date:Feb 1, 1991
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