There are two major issues that would be affecting the oil market in Pakistan. One is the emergence of Electrical Vehicles in mid-term to long-term future. This would be in common with world market and technology trend. However, there is an issue that is peculiar to Pakistan.
Pakistan is on the way to total LNG conversion from Furnace Oil, which would altogether eliminate Furnace Oil demand leaving our oil refineries high and dry. We will in this space examine the market and the market issues created by the ensuing developments. There are three major products in the list: gasoline, diesel and furnace oil.
Gasoline Gasoline consumption in Pakistan has been growing at a phenomenal rate of 20.7 percent over the reporting period of 2011-2016. It increased from 2.4 million TOE in 2011 to 6.15 million TOE in 2016, more than doubled, about 2.5 times. This means, if it continues at the same rate, gasoline consumption would rise to a level of 15 million TOE by 2021 and 38 million TOE by 2026. At about 600 USD per ton, the import bill of gasoline in 2016 would have been around 3.7 billion USD, which would mount to 9 billion USD in 2021 and 21 billion USD by 2026.
The reason for such exponential growth rate in consumption of gasoline is due to equally exponential growth in automotive vehicles demand and induction on the roads. Only in the year 2004, the number of car sold was 112,500, which now (2017) stands at 285,248 registering a growth rate in annual sales of 8%, and in population of 5.19%. In the case of motorcycles, sales increased from 303,383 in the year 2004 to 1.6 million units in the year 2017, registering a growth in sales of 15% and in population of 12% per year.
This would create both problems of congestion and pollution and very high demand and imports of oil products that may not be sustainable and impose a heavy demand on country’s foreign exchange. It is high time that we give attention to creating public transport infrastructure in adequate quantities.
Electrical vehicles, however, may be solving the problem in mid to long-term. Due to similar problems of pollution, congestion and green house gases, EVs are being developed and are getting quiet some attention. By 2040, it is being projected that no new automotive would be based on petroleum.
This would reverse the problem of heavy demand of automotive fuels. The demand of oil products would go down tremendously. This creates a planning problem; if we start investing in oil infrastructure keeping in view the demand in the intervening period, we may be left with stranded oil infrastructure and if we don’t, we will have logistical issues. Although, petroleum automotive would not disappear altogether, it would certainly diminish oil demand in a very substantial manner. We are facing a similar issue right now, in case of furnace oil as we shall see in the following table.
HSD However, HSD demand has not been growing that fast. Its growth rate has been an average of 2.9% per year in the same period. It means that Gasoline demand has been growing 7 times faster. As a result, Gasoline market share has reached as 25.78 % as compared to 34.11 percent market share of HSD. The market share of HSD in 2011 was 3 times that of gasoline; the gap closed down to mere 1 to 1.3 only. In a few years, the two would become equal and then gasoline would reverse the trend of HSD dominance in Pakistan’s fuel market. HSD market share used to be 10 times than that of gasoline in 2009. HSD is consumed in commercial transport and in industry as a fuel and for small captive and emergency power generation. It is not a good omen. It means slower growth of industrial and commercial sector.
Earlier, CNG was introduced which considerably reduced gasoline demand. CNG was discontinued in the recent past due to gas crisis. However, supply to CNG sector has been resumed with the recent influx of LNG. CNG may not be as competitive as it used to be once, yet it would remain attractive enough. A public advantage of CNG is its lower pollution footprint. In India, they have made CNG mandatory for public transport in the central region of Delhi which suffers heavily due to pollution and smog.
Furnace oil Furnace oil had a market share of 36.52 percent among petroleum products in 2016 and has remained constant over the last 5 years. Furnace oil bill will go down and may be eliminated altogether, and would be replaced by imported LNG, which is on average 20 percent cheaper. Power Division issued an order earlier to stop production in all FO power plants. The order had to be withdrawn under protestations of the oil refineries. Recently, Power Division has announced that the FO power plants would be shut down by 2019.
While Gencos may be closed down with ease, IPPs may have PPA expiring much later by and some by 2030. Capacity charges may have to be paid without actually getting electricity from some power plants. On the other hand, if this is not done, LNG facilities would remain underutilised, wherein there is Take or Pay obligation which not only includes capacity payments but LNG payments as well. Thus there is a Catch-22 situation.
We would like to elaborate in the following the market risks in oil refining sector created by the prospects of closing down the furnace oil-based power plants. Presently, existing refining capacity is underutilised at about 67 percent of the total installed capacity; 250,000 barrels per day of refining output as opposed to 400,000 barrels per day. There is another crisis looming over the refinery sector. GoP wants to retire the oil-fired power plants, as 20 percent cheaper LNG is now available and that existing plants have efficiencies in the range of 30 percent. About 9 million tonnes of furnace oil is consumed by the power plants, out of which 3 million tonnes is produced by local refineries and the rest is imported. If refineries stop producing furnace Oil, these will also stop producing a proportional amount of gasoline and HSD. FO, HSD and gasoline are produced together. One cannot be substituted by the other. GoP has withdrawn its hasty decision of stopping FO procurement. GOP has agreed to continue buying, otherwise not needed, furnace oil from the local refineries but has issued orders to stop FO imports. The situation has not developed accidentally.
LNG projects are in the pipeline for the last many years and several NGCC power plants (3600 MW and even more) are at an advanced stage of construction. MPNR, OCAC and the refinery companies should have started taking the corrective action and a government policy should have been there. Nothing has been done by otherwise quite wise men in the oil industry. There are technical solutions available of splitting heavier FO molecules, (Coker segment) which would require time and money. Refineries and stakeholders should get together and do the needful.
Only large refineries like Byco and PARCO may be able to make the investments which may take care of other refineries as well. The government should also announce a D-day (a notice period of 2-3 years) and policy of, after which power plants would not be able to buy furnace oil. Although Power Division has announced its deadline of 2019, it should coordinate it with Petroleum Division for investments in refining sector as outlined earlier. This also indicates a need for accurate LNG demand forecasting and long-term contracting, flexible LNG supply contracts which are increasingly getting fashionable and increased role of spot purchasing.
Concluding, the outlook for oil market does not appear to be bright which trend has already started showing up in case of furnace oil. Investment decision may have to be made keeping in this perspective while managing the transition. However, gas and LNG prospects appear to be rather bright seeing the world trend replacing coal by gas. E&P activities and Refinery investments in Pakistan may accordingly be guided by these considerations.
(The writer is former Member Energy Planning Commission)
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Table: Automotive Sales and Population
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Automobles Motor Cycles Total Petrol
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Sales (2017) 285,248 1,632,965
Sales ROG (%) 8.03 14.99
Population 2,473,203 10,998,032
Population ROG (%) 5.19 11.84
Petrol Consumption/yr-MT 4,410,027 1,961,085 6,371,112
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Basis: Consumption Automobiles 10 L/d and of M>cycles 1L/d;66%day utilisation per yr Estimated Petrol consumption matches with actual of 6 Million MT main conclusion ration of Petrol consumption of Automobiles to M.Cycles equals 2.249
Source: Compiled by the Author-basic data PAMA
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Table: Petroleum Market data(2016): million TOE per year
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Imports Production Consumption M.S.Consumption
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1 Gasoline 4454669 1699062 6153731 25.78
RoG-2011-16(%) 20.7 5.2 20.7
2 HSD 3533524 4609703 8143227 34.11
RoG-2011-16(%) -4.1 6.2 2.9
3 Furnace Oil 5887224 2830814 8718038 36.52
RoG-2011-16(%) -1.4 3.6 0.1
4 Others -1395671 2253905 858234 3.59
5 Total Petroleum Products 12479746 11393484 23873230 100
RoG-2011-16(%) 1.8 4.3 4.3
6 Crude Oil 8969025 4246335 13215360
RoG-2011-16(%) 5.4 5.7
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Source: HDIP Energy Yearbook 2016
Published in Business Recorder, March 4th, 2018.
