Singapore — Pakistan has imposed restrictions on fuel oil imports with immediate effect, as domestic consumption declines amid rising LNG imports and the shutdown of several fuel oil power plants.
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A new energy committee, headed by the minister for power, has also been constituted to approve future fuel oil imports and monitor output from domestic refineries, demand from the power sector, and stocks at oil marketing companies, an official with the ministry of energy said.
The decision was taken December 28 at a meeting in Islamabad attended by Prime Minister Shahid Khaqan Abbasi, minister for power Sardar Awais Ahmed Khan Leghari and officials from oil refineries, oil marketing companies and the ministry of energy.
"During the meeting, a decision was made to restrict imports of fuel oil with immediate effect. Only four cargoes, which were booked by Pakistan State Oil, would be received," the official said.
Pakistan State Oil deferred four cargoes in November, one of which is due to arrive in the first days of 2018, and another three by the end of January, the same official added.
FUEL OIL DEMAND TO PLUNGE
Pakistan's fuel oil demand is expected to fall sharply over the next three years as growing LNG imports help the country move to a gas-based energy economy.
Fuel oil demand is likely to drop from 9.6 million mt in fiscal 2016-2017, running from July to June, to 4.5 million mt or less by fiscal 2019-2020, according to most of the companies surveyed by S&P Global Platts earlier this month.
Fuel oil imports could decline by up to 60% by fiscal 2019-2020 as the power sector switches to gas feedstock, Fawad Khan, executive director with Karachi-based BMA Capital, said.
This would result in a drop in imports from 6.6 million mt in fiscal 2016-2017 to 2.64 million mt in fiscal 2019-2020.
Fuel oil consumption has fallen recently, following a government decision on October 27, 2017, to halt power generation from oil-fired units with a combined capacity of more than 4,000 MW per day.
The decision came amid the start-up of Pakistan's second LNG terminal, the beginning of the slow winter demand season versus summer and the government's resolve to reduce power production from aging fuel oil plants -- which cause more pollution and are inefficient and expensive compared to their gas-fired equivalent, Saad Ali, head of research at Karachi-based brokerage house Intermarket Securities, said Friday.
As fuel oil orders from the power plants fell abruptly, stocks rose rapidly at the import terminals and domestic refineries, delaying deliveries of imported cargoes and disrupting operations of domestic producers. No new fuel oil imports have been booked since.
November domestic fuel oil sales were at 402,000 mt, down 29% year on year, and 55% lower month on month, according to latest data by the Oil Companies Advisory Committee.
Port stocks of fuel oil increased to 280,058 mt by late November, worth Rupees 41.9 billion ($39.8 million), resulting in severe import delays and demurrage costs per cargo of $15,000/day, or $105,000/week, according to Pakistan State Oil.
GROWING LNG IMPORTS
The gradual displacement of fuel oil in Pakistan's power sector seems inevitable as more natural gas becomes available through rising LNG imports, allowing the government to shut inefficient fuel oil-fired plants.
One LNG terminal can deliver about 0.6 Bcf/day of gas, sufficient to generate about 3,000 MW of electricity, and almost completely replace Pakistan's fuel oil-based power generation, which reaches about 3,800 MW during the peak summer demand season.
But fuel oil will not be completely displaced. While LNG imports could exceed 1.8 Bcf/d by 2019 -- once the country's third LNG terminal starts operating -- most of the regasified LNG will be used to bridge the country's existing gas deficit.
Pakistan LNG estimates the country's current gas deficit at 2 Bcf/d, despite the infrastructure and policy constraints inhibiting the free flow of gas to residential, industrial and commercial customers. If those constrains were to disappear, the deficit would be as high as 4 Bcf/d, and the gap could widen further looking forward, as domestic gas production -- which is responsible for around 2,500 MW of electricity generation -- falters, pipeline import projects remain uncertain, and energy consumption continues to grow among both domestic and industrial consumers.
Pakistan's LNG imports are forecast to jump over the next five years, with Pakistan LNG estimating unconstrained demand at 30 million mt/year, or 4 Bcf/day of gas equivalent, by 2022, which is half of the country's total gas demand projection of 8 Bcf/d for that year, according to government estimates.
A total of seven FSRUs are expected to service Pakistan's mounting gas demand, according to Pakistan's Ministry of Petroleum and Natural Resources. Two of them are already in operation.
ADDRESSING CIRCULAR DEBT
During the meeting last week, the prime minister said special attention should be directed at finding a permanent solution to the country's chronic circular debt problem. Circular debt in Pakistan's energy sector has been an ongoing issue since 2008.
Debt-burdened power utilities cannot make timely payments to the country's oil suppliers, who in turn cannot meet their international payment obligations, leading to a credit crunch and supply disruptions.
Power producers are grappling with widespread electricity theft, payment delays and defaults by their customers -- including government offices and state-owned companies -- and high downstream subsidies that prevent them from recovering the costs of fuel purchases, power generation and distribution.
Pending payments have snowballed back to Rupees 625 billion, or around $5.65 billion, since July 2013, when Pakistan's prime minister at that time Nawaz Sharif wiped out close to $5 billion of debt from the energy sector through the issuing of bonds and some cash payments shortly after taking office.
-- Abache Abreu, email@example.com, with Haris Zamir
-- Edited by Geetha Narayanasamy, firstname.lastname@example.org