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Petroleum refining sector - potential for private investment.

Petroleum Refining Sector - Potential for Private Investment

The present government strongly feels that industrialization cannot be stepped up by setting up the industry in the public sector and it is not function of the government to set up and run industry. The present government is therefore, making all out efforts to speed-up the process of industrialization and to adopt policies which are attractive for the private investments. For this reason during a very short span of time, the present government, has announced numerous incentives both in terms of attracting foreign investments into the country and to create confidence amongst the local investors to set-up industry.

Privatization policies are currently being pursued all over the world. There have been massive privatization programmes in developed as well as developing countries. Pakistan under the present government is also pursuing policies aiming to give private sector a lead role in the country's development. In order to achieve the objective of accelerated industrialization and attract private sector investment government has taken number of measures and announced numerous incentives. All the industrial sectors have been opened up for investment by private sector.

Petroleum refining sector, an important sector of the country as its products are a major source of energy being consumed in the country was previously domain of public sector is now open for investment by private sector both foreign and local investors.

As a part of deregulation programme the government has introduced the refinery pricing system. After instituting the refinery pricing system the refineries have switched from 18 per cent fixed return on paid-up capital to a flexible rate of return. NRL which in 1988 paid a dividend of 18 per cent increased the dividend payment rate in 1989-90 to 30 per cent.

The country's petroleum refining sector presently consists of three refineries i.e. National Refinery Limited (NRL) Pakistan Refinery Limited (PRL) and Attock Refinery Limited (ARL), NRL and PRL are located in Karachi and process both local and imported crude oils whereas ARL located in Rawalpindi, is the oldest refinery in the country and is being operated on indigenous crude oil since its establishment in 1930s. The two Karachi refineries were established in mid 60's in the private sector. In 1972 one of the three refineries in the country namely National Refinery Ltd., was nationalized. With the nationalization the controls of the government on this industry grew stronger and stronger, as a result the growth in the petroleum refining sector from the private sector came to a standstill.

Petroleum products consumption during the last decade increased at an annual growth rate of about 8.5 per cent i.e. almost one and half times more than the growth in GDP. In 1989-90 over 10 million metric tons of petroleum products were consumed. The local supply and imports of petroleum products had equal shares in the total consumption. The demand/ supply pattern of petroleum products consumptions for the year 1989-90 was as follows:-

Despite high growth in petroleum products consumption the petroleum refining sector has not expanded likewise to meet the demand. The only appreciable development in the refining sector during the last Eighteen years has been in National Refinery which is managed by State Petroleum Refining and Petroleum Corporation (PERAC), a corporation under the Ministry of Production. National Refinery when taken over by PERAC was a small refinery with an investment of around Rs. 10 crores and developed it into the largest refining complex in the country with an investment of about Rs. 350 crores. This complex now has the crude oil processing capacity of 2.7 million tonnes per annum.

The country's petroleum products requirements is therefore, met to the extent of only about 50 per cent from the local refineries and the balance demand is all imported. Petroleum refining sector has thus considerable potential for new projects.

PERAC is proud to tap the private foreign investment in one of the biggest refining project of the country i.e. Hydrocracker Project. The project will take about 1.5 million tons of low value residual oil (furnace oil) and other by-products available from the existing two refineries of Karachi as feedstock and produce high value deficit products e.g. HOBC, Kerosene, Jet Fuels/ Diesel Oil etc. This project is estimated to cost about Rs. 6840 million including a foreign currency component of US $ 162 million (Rs. 3240 million) and is expected to save about US $ 80-100 million per year. The Crescent Petroleum Company International Limited a leading private Middle Eastern Oil Company based at Sharjah is contributing 35 per cent equity in foreign exchange and would also arrange all foreign loan on non-recourse project financing basis.

The petroleum products demand in the country is projected to increase from about 10.1 million tons per year in 1989-90 to about 20.3 million tons in the year 2000-01. After accounting for production from existing refineries (after planned and ongoing expansions of the refineries) and the refinery project in hand, it is estimated that the deficit of refined products in the year 2000-01 would be around 15.5 million tons which would have to be met through imports if no new refining capacity is put up in the country. This calls for immediate attention towards increasing our refining capacity. To offset the demand supply there is a need to set-up atleast two World Scale 4 million tons per year each crude oil refineries to be situated on the sea coast line so that large scale imports of a number of products can be replaced by a single product (crude oil). Import of single product can be easily tackled by each refinery as handling of crude oil is much easier compared to various refined products.

In view of the huge capital outlay of the project, PERAC has been prospecting for interested private investors for the project. National Iranian Oil Company (NIOC) showed keen interest in the joint venture in this project. The details of the project and extent of NIOC's interest were discussed with them during various meetings held between PERAC and NIOC. In May 1991, an Iranian delegation headed by the Oil Minister of Iran visited Pakistan. The delegation also consisted of officials of NIOC and besides discussing bilateral economic relations between two countries the Refinery Project and joint venture also came under discussion. At the end of the Iranian Oil Minister's visit a Memorandum of Understanding (MOU) was signed between NIOC and PERAC wherein NIOC undertook to hold 50 per cent of the equity in the project.

It was agreed that project refinery would be of the capacity to process 6 million tons/ annum of Heavy Iranian Crude Oil and NIOC will assure regular supply throughout the life of the project. The project is estimated to cost about US $ 700 million, out of which about 280 million would be required in the foreign currency. A detailed feasibility study for the project would commence shortly and the project completion target is 1995-96. The above, therefore, is a major achievement in attracting foreign investment into a very important industrial sector of the country.

Table : Petroleum Products: Demand/Supply Pattern (1989-90)

(Figures in |000 Metric Tons) Local

Product Demand Supply Import Export

Aviation Fuels
*100 L L 2.121 0.000 1.664 0.000
*JP-1 490.817 315.950 174.867 0.000
*JP-4 176.257 173.738 0.000 0.000
Total:- 669.195 489.688 176.531 0.000
MS 820.942 824.197 0.000 0.000
HOBC 248.720 66.684 186.955 0.000
SKO 1,132.761 410.673 749.140 0.000
HSD 3,982.361 1,280.681 2,759.476 1.654
LDO 297.794 303.118 0.000 1.604
FO 3,132.120 1,730.123 1,595.608 31.441
Total:- 10,283.893 5,105.164 5,467.710 34.699
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Title Annotation:privatization of the petroleum refining industry in Pakistan; Oil and Gas
Author:Chaudhry, M.H.
Publication:Economic Review
Date:Jun 1, 1991
Previous Article:Outline of a transport policy.
Next Article:Lube oil industry.

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