Petroleum products and petrochemicals over the last 25-30 years have continued to play a vital role in building a stronger and prosperous economy across the globe. Despite its importance, Pakistan regretfully has inadequate refining capacity. Besides, the country lacks any naphtha cracker for producing petrochemicals thus rely entirely on imports for meeting domestic demand. Pakistan’s import bill on petroleum products and petrochemicals runs into $12-14 billion annually as about 75% of country’s demand is met through imports. This is the largest component in Pakistan’s import bill that would continue to rise in coming years due to the demand growth and likely outage of some refining capacity amid safety issues.
After Prime Minister Imran Khan’s visit to Saudi Arabia in October, official announcements in various sections of Pakistan media were made that Saudi Arabia has agreed in principle to make a multi-billion dollar investment to build a refinery complex at Gwadar. Since then, no tangible progress has been made in this direction nor there seems to be any clarity from the Government on developing the project framework. This situation has created some sort of uncertainty and confusion not only for the foreign investor but also for the domestic players who may be eager to capitalise on opportunities from this mega project.
Despite project importance and Government’s drive to curb imports, an implicit campaign against investments in refineries was made recently arguing that such huge investments are not only detrimental to the country’s limited resources but are also not economically viable. To substantiate, it was added that refining business has poor profitability, does not create large employment and hardly saves foreign exchange. As a result, the country should continue importing high-quality petroleum products including petrochemicals rather than manufacturing them locally. These concerns against refinery investments may have been raised by certain elements who could have a vested interest in seeing a continuation of imports into Pakistan. Accordingly, it was suggested that investments and resources should be diverted to other industries simply because oil refineries are not great investments to be strived for. This contention is naïve and incorrect not only from the economic standpoint but also from the strategic viewpoint.
One can convincingly counter-argue that building a large and modern refinery complex is in Pakistan’s own interest as it would provide a solid industrial base and necessary infrastructure that will trigger economic activity and help in developing other allied industries and small businesses. We have seen this happening in China, India, Malaysia, South Korea, Thailand, and Vietnam were huge investments in refining and petrochemicals supported these countries in attaining prosperity and impressive economic growth. The need for making such investments in Pakistan is apparent from following facts:
All existing refineries in the country are simple hydro-skimming plants churning out 35-40% fuel oil which virtually has zero demand growth after fuel replacement program launched in favour of LNG for power plants. Most of these refineries (built 1960s) have become old, outdated and have limitations in adopting new technologies; as such are grossly handicapped to produce high quality finished products. One of them, which is the largest, was dismantled from overseas and refurbished here to make it operable. This plant has serious safety issues and remains mostly redundant. The precarious safety conditions of these old refineries (with the exception of PARCO) compounded by the fact that stringent sulfur specs for fuel oil bunkers starting 2020 would eventually force refiners to reduce their crude runs which means lower production of transportation fuels, hence more imports in future of finished products.
The combined production of the country’s five refineries currently meets only 44% of domestic demand, which means that a major chunk, about 56% is imported to keep the supply/demand in balance. At a conservative demand growth of 5% annually for transportation fuels, the import share would spike to 62% by the year 2022. In later years, imports would escalate to 75% by the year 2030 if no new refineries are built on the pretext that existing refineries would continue to maintain their operating capacities safe and sound which is certainly questionable. Considering demand growth of about 18 million metric tons over the next decade, new refining capacity of about 400,000 barrels per day would be mandatorily required to offset the rising imports. Even if this new capacity is added, the country would still be importing 25-30% of its fuel demand. To eliminate imports completely, a second refinery of 300,000 barrels per day would be required to align supply with demand.
Pakistan regretfully has no single steam cracker for producing petrochemicals and thus relies 100% on imports. The importance of having a steam cracker in the country can be realised from the fact that India built its first naphtha cracker in 1992, today it has eight. Iran, despite sanctions, has been able to build four, Singapore has five, Saudi Arabia twelve. Petrochemical demand in the country would increase from 1.2 million metric tons in 2017 to about 1.5 million metric tons by the year 2022 at and later to about 2.0 million metric tons by 2030. Considering that Pakistan has no naphtha cracker to produce basic petrochemicals, this situation is worrying given the strategic and economic needs of the country. Building an integrated refining and petrochemical complex is highly desirable to keep pace with other emerging economies. Contrarily, Pakistan will be heavily exposed to imports in meeting its own domestic demand for both petroleum products and petrochemicals. It is highly recommended that any new refinery if ever built, should be designed as an integrated complex with petrochemicals to create synergies for yielding better-operating margins. Integrated plants take the advantage of the economies of scale and can produce a more diverse range of products with varying specifications and grades to meet niche market demand. The naphtha cracker will produce ethylene and propylene, which will act as feed for producing other downstream polymers being imported.
Recognising that refining business yield relatively lower margins, still any new refinery if built in Pakistan would generate healthy profits in a de-regulated market to justify its existence for sustainable operations. However, as refinery margins are cyclical in trend depending largely on crude oil price volatility, there would be times where it may dip to breakeven while there would be times where it can make fortune. This trend is quite typical for refineries regardless of its location in Asia, Europe or North America. As such, there should be no apprehension for potential investors or policy makers that new refinery would be compromising on profitability.
The argument that refining investment would hardly save any foreign exchange is grossly misleading and deceptive. For a country highly dependent on imported petroleum products, the refining operations for local manufacturing could save $4 to $5 on each barrel of imports. On arms’ length basis, this typically includes capturing $3 to $4/bbl refining margin plus $0.60/bbl trader’s profits plus $0.40/bbl freight differential on transporting crude oil versus fuel products. Thus a new refinery of 400,000 barrels per day installed capacity along with 1.5 million metric tons of naphtha cracker could easily save about $1 billion annually.
The integrated refinery, if built, would be a game-changer to the country’s economy saving substantial foreign exchange, creating boom for employment and providing a solid base for developing other cluster of industries that are generally associated with a large petroleum complex. It would provide about 1,500 permanent jobs in different categories of manufacturing, engineering, finance and commercial and about 8,000 construction jobs for 4-5 years during project development and commissioning. Other allied facilities, such as: utilities, off-sites, terminals, ports and a housing township associated with the complex would stimulate local economy and other small businesses. The new refinery complex would also add value to Pakistan’s surplus naphtha and condensate volumes which are currently exported below to its intrinsic value. These streams can be diverted to naphtha cracker as a feedstock for value addition.
Building a new refinery and petrochemical complex would put Pakistan on the road map of major industrialisation that would encourage further investments in chemical industry and will open up new opportunities to develop other projects. It would provide a commercial base for marketing, supply and trading for both crude oil and petroleum products that will help in price discovery and transparency for protecting country’s interest. This is certainly a risky situation to attain sustainable supply given the dynamics of geo-political situation in the Middle East and South Asia. Even if a new refining capacity of 400,000 barrels/day is built, it will not make Pakistan self-sufficient as the country would still need to import fairly large volumes annually to meet its domestic demand.
The Author is a US based consultant in international
oil market, refining and supply/trading.
ssh.hasnain@hotmail.com
