Pakistan to add another refinery

Pakistan suffering from limited production of crude oil as well as concentration of refinery on coastal belt aims at setting up a refinery Khyber Pakhtunkhwa province. It will use crude oil produced in the province and will also enjoy the potential of exporting some of its products to landlocked Afghanistan.

In this regard, country’s largest oil marketing company, Pakistan State oil Company (PSO) has signed a Memorandum of Understanding (MoU) with the provincial government of Khyber Pakhtunkhwa (KP) for establishing an oil refinery of 40,000 barrels per day (BPD) capacity in district Kohat. The project will be set up on public-private partnership and would utilize crude oil produced in the adjoining areas. The project is expected to be fully operational by 2016-17.

PSO believes that the refinery will help in improving overall availability of POL products across the country as well as result in sizeable foreign exchange savings. It would also increase PSO`s operational base through diversification in the midstream segment and lower distribution cost. The refinery will create job opportunities for the local populace. It is also expected that substantial foreign direct investment will also inflow into Pakistan. The cost of proposed refinery is estimated around US$700 million.

The project will be financed by mix of debt and equity in the ratio of 80:20. Managing Director of PSO has expressed confidence that the debt portion would be raised as several large banks had expressed interest in the refinery. He believes that the bank enjoy ample liquidity and are looking for viable projects for investment. He also stated that PSO was financially strong to subscribe to its portion of equity. He pointed out that the company, which has aound 60 per cent market share, generates net cash of Rs8 billion daily.

While one must welcome such proposals, it is necessary to highlight some of the inherent threats which are likely to mar the prospects. These include: 1) overall security threats prevailing in Kohat district, 2) cash crunch faced by PSO due to circular debt issue, 3) proposed size of the refinery and 4) dismal capacity utilization of the existing refineries. It is on record that while huge quantities of POL products are being imported; local refineries are experiencing dismal capacity utilization.

To begin with one does not dispute cash flow of PSO but it is also a fact that lately on five occasions at least oil marketing company has committed technical default and keeps on begging the Government of Pakistan (GoP) for injection of liquidity.

One is completely amazed at MD’s statement that the banking sector would be keen in extending support to such a project. As such banks now operating in the private sector are reluctant in extending any money to companies belonging to ‘energy chain’, PSO itself has been regularly soliciting ‘bailout’ packages from the GoP.

The most import factor is the size of the proposed refinery. Around the world refineries of such a size are being closed because of outdated technology and are available at the cost of ‘junk’.

As such after commencement of operations by mid-country refinery, PARCO, there is no need to establish another refinery in the northern part of the country. If any refinery has to be established it must be located on the coastal line to facilitate export of surplus products.

A lot of ground work has been done and even financial commitments were made for the refinery being sponsored at Khalifa point in Balochistan. This refinery is being established by the sponsored by PARCO and it is almost ten times the size of refinery.

 PSO intends to locate the refinery in Khyber Pakhtunkhwa for the utilization of crude oil produced in the province, which is too small for the time being. In fact total crude oil produced in the country hovers around 65,000 barrels per day.