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Highlights


PSO faces $40 million in fuel oil stocks

Demurrage cost for fuel oil cargo at $105,000/week

$3 billion in debt from power, gas, airline

Power sector's fuel oil inventories low

Karachi — Pakistan has ordered power plants to increase purchases of fuel oil produced by domestic refineries by mid-December to restore trade flows, prevent further refinery cutbacks, and avoid a shortage of other oil products in the country.

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Fuel oil purchases from power plants have fallen following a government decision October 27 to halt power generation from oil-fired units in order to tackle smog in Punjab, Pakistan's most industrialized and populated province, and ahead of the slow winter demand season as well as start-up of Pakistan's second LNG terminal.

While the power operators are not expected to resume generation until February -- when hydroelectric generation is low -- they have sufficient storage capacity to temporary alleviate the supply chain blockade.

"This will help local refineries recover from huge losses, and also avert a supply crisis due to a shortage of other oil products," said an official with a domestic refinery. Pakistan consumes around 9.2 million mt/year of fuel oil, of which around 70% is imported and 30% produced in domestic refineries.

The decision was made in Islamabad November 28 during a meeting between Pakistan Prime Minister Shahid Khaqan Abbasi and members of local refineries, the Oil Companies Advisory Council, and the Power Division under the Ministry of Energy.

It followed separate letters sent by Pakistan State Oil and OCAC to the Ministry of Energy, asking for the power sector to resume purchases and warning over how rising stocks were disrupting refining operations and delaying deliveries of imported cargoes.



PSO PROBLEM UNRESOLVED


While the decision will resolve the problem of rising stocks at the refineries, the situation continues to worsen for PSO, the country's biggest petroleum products retailer and incumbent fuel oil importer.

Power plants had lifted only 56,227 mt of fuel oil from PSO in November versus 167,907 mt a year earlier and 409,619 mt in December 2016, according to a letter PSO sent to energy ministry on November 24.

As a result, PSO's fuel oil stocks have increased to 280,058 mt, worth Pakistan Rupees 41.9 billion ($39.8 million) and import cargoes have been deferred.

All eight cargoes of high sulfur fuel oil and low sulfur fuel oil that PSO bought from PetroChina and Vitol through tenders for delivery over November and December have been deferred. Each LSFO cargo is 55,000 mt in size, and HSFO is in 65,000 mt cargo sizes, according to PSO's tenders.

A 55,000 mt cargo scheduled for November 10 delivery has been idled off Port Qasim since, at a demurrage cost of $15,000/day for PSO, or $105,000/week, a company official said. PSO has managed to defer cargoes with its suppliers beyond the contractual limits through extensive efforts, PSO said in its letters, but further deferment is not possible.

If cargoes are not discharged in a timely manner, PSO will be exposed to huge demurrage and non-demurrage claims from suppliers, the Pakistan National Shipping Corporation, cartage contractors and Pakistan Railways, it added.

Five power plants -- Lalpir Power, Pakgen Power, Kohinoor Energy, Gul Ahmed and Tapal Ahmed -- have the combined capacity to store 210,500 mt of fuel oil, yet they only have 42,149 mt in stock, equivalent to 20% capacity, PSO said.

The fuel oil crisis has added to PSO's financial burden, with unpaid bills from power plants, airlines and gas distributors now mounting to Rupees 312 billion, or nearly $3 billion, up by almost Rupees 7 billion since mid-November, said a company official.


THE WAY FORWARD


Following the November 28 meeting and PSO's advice, the government has asked industry stakeholders to start submitting information about their crude oil and petroleum product supply and demand for three to six months forward to prevent a similar situation in future.

"We strongly suggest that an integrated energy planning (fuel management) team be assigned to define three to six months fuel requirements for the country on a two-month firm and four-month plan basis," PSO said in the letter.

"PSO is unable to coordinate with the whole power sector to determine LNG and fuel oil demand; given that power generation based on hydro, coal and nuclear power plants also need to be factored in," it added.

Meanwhile, the increase in fuel oil purchases will allow Pakistan's domestic refiners to raise operating rates from below 70% currently. The relatively low throughput rates have resulted in a drawdown of other oil product stocks such as jet fuel.

An OCAC official said immediate action was required to prevent a shortage of domestically produced jet fuel and flight disruptions. Most air carriers in Pakistan, including national airlines and Pakistan Air Force, purchase jet fuel from local refineries.

It will also prevent cutbacks in upstream oil and gas production, as most of the crude oil used by Pakistan's refineries is sourced from domestic fields.


LONGER TREND


Pakistan's power demand decreases in the winter season. Consumption is currently around 13,000 MW/day versus 11,000 MW/day at the peak of winter and 21,000 MW/day over the summer, when air conditioning usage rises.

In the long term however, 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 down inefficient fuel oil-fired plants.

"With one LNG terminal supplying 600 MMcf/day of gas and the second one due to start transmitting another 600 MMcf/day of gas in a couple of days, fuel oil demand will shrink," said an official with the energy ministry's Power Division.

The economics make sense. The use of fuel oil in electricity generation as a result of Pakistan's decade-long gas shortage has cost the government an extra $1 billion to $2 billion annually, according to the country's sole LNG importer Pakistan LNG.

Use of diesel and fuel oil in power generation peaked at 387,140 b/d in fiscal year 2014-15 (July-June), according to OCAC data, before falling 1% in fiscal 2015-16 following the start-up of Pakistan's first LNG import terminal in March 2015.

The second facility, the floating storage and regasification unit BW Integrity arrived at Port Qasim November 18, according to S&P Global Platts trade flow software cFlow.

Pakistan's LNG imports are expected to grow exponentially, as more terminals are ready to start operations, with Pakistan LNG estimating unconstrained demand to hit 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.

With domestic gas production faltering and pipeline import projects still uncertain, the country's dependency on LNG imports to tackle its gas and energy crisis is unlikely to fade away, especially since global oversupply is resulting in better supply terms for customers.

-- Haris Zamir, newsdesk@spglobal.com

-- Abache Abreu, abache.abreu@spglobal.com

-- Edited by Irene Tang, newsdesk@spglobal.com