Work on Indus Refinery stopped on security fears
20 October, 2009
KARACHI: Work on 93,000 barrels per day Indus Refinery Limited (IRL) has been put on hold after the project’s sponsors completely backed out in the wake of deteriorating security situation in the country, company chairman told Our Sources.
“Original partners are no longer with us and now I am in search of new investors,” Sohail Shamsi said, adding the refinery had been left half built. “First, it were the riots after the assassination of Benazir Bhutto that forced contractors to stop work and then terrorist attacks which have scared away our partners.”
IRL was expected to be operational by mid-2009, but political turmoil, which caused a downgrading of the country’s credit rating after Benazir Bhutto’s assassination in December 2007, left Shamsi running after banks for seeking finance for the project.
Located 48km from Karachi on the National Highway in Thatta district, IRL was supposed to be the first crude oil refinery since Bosicor Refinery began production in 2004. Shamsi said more than half of the plant and machinery had already been imported. “If I am able to find investors, the refinery will be up and running in three years. About 65 per cent of the plant is already here.”
IRL is the plant and equipment of what earlier was Petro Canada’s Oakville refinery, which was shut down a couple of years ago and subsequently sold. The cost of the refinery, which has 79 per cent foreign shareholding, has already scaled up far beyond the $750 million set in 2007. An ambitious plan to take up production capacity to 133,000 barrels per day has already been shelved.
Refineries meet less than half of the total consumption of petroleum products in the country. In fiscal year 2008-09, refineries produced 8.866 million tons against demand of 18.719m tons. But last fiscal year’s output of refineries was down from a high of 9.5m tons recorded in 2007-08, according to figures of the Oil Companies Advisory Committee (OCAC).
Industry people attribute that drop in part to government’s indifference to the refineries, which have been battered by financial losses in the past two years. The government changed the petroleum product pricing regime last year which brought down earnings on a key product.
A steep depreciation of the rupee and bar on forward booking of dollar exacerbated the losses. Never ending inter-corporate circular debt has made matters worst. “At deemed duty of 7.5 per cent, refineries make $6 per barrel,” says Farhan Mahmood, analyst at JS Research. “Earnings would have been around $9 per barrel at 10pc duty. That is a lot of money to forgo.”
Deemed duty was part of the protectionist oil pricing regime introduced back in 2002 whereby the government imposed 10pc customs duty on import of diesel and allowed the same to refineries as part of their revenues. It was unilaterally reduced to 7.5pc last year.
Mahmood said refineries incurred a loss of Rs4 to Rs5bn in 2008-09 because of rupee depreciation alone. Aftab Hussain, General Manager Commercial of Pakistan Refinery Limited (PRL), warned that domestic petroleum production could remain subdued this year. “Refining margins are depressed as crude oil price has gone up but prices of petroleum products have not increased because of little demand in China and elsewhere.”
Moreover, Pakistani refineries are hydroskimming in structure, which means they produce more of furnace oil than high-margin products like petrol and jet fuel. “Price of furnace oil is even less than crude oil and we process 40pc of fuel oil out of every barrel of crude.”
He said PRL was still waiting to receive Rs11bn from the Pakistan State Oil (PSO). “Circular debt has not been settled. We got Rs1bn two months back from PSO and since then Rs2bn more liability has piled up on PSO.”
About a proposed petroleum pricing regime sought by refineries, he said it was imperative. “PRL had accumulated Rs6bn in the last few years as part of a plan to upgrade its plant to produce low-carbon products. Of that, Rs4.5bn were wiped off last year. Now we have the project on hand but no money.”