Pakistan’s Petroleum
Industry can be saved
by Deregulation,
Not Bailouts

The government’s supportive policies devised to protect the domestic oil refineries have not had any positive impact on the industry. On the contrary, such measures have only made things worse since they have reduced the incentive to improve efficiency, invest, and compete. Although the oil refiners have gradually upgraded their facilities in the last several years, these investments have been few and far between. The industry desperately needed capital for modernization but its key players exhibited a laidback attitude despite being forewarned about the upcoming headwinds several years in advance.

One of the main problems the industry has been facing in the last couple of years is the low upliftment of furnace oil. The power generation companies, who have been the primary buyers of furnace oil, have replaced the fuel with LNG which is cheaper and more environment-friendly. This has created numerous problems for refiners whose plants typically produce 30% to 40% furnace oil. This change didn’t occur overnight. The power companies have been using natural gas for the last several years. About five years ago, Shahid Khaqan Abbasi, who was the Petroleum Minister at that time, discussed the issue with the heads of the major refining companies.

Moreover, Pakistan isn’t the only country which is phasing out furnace oil consumption, particularly the high-sulfur variant called HSFO. In the international markets, the bunker industry has been the primary buyer of this fuel but its demand and prices have plunged after IMO 2020 regulations came into force from January. The regulation enacted by the International Maritime Organization aims to dramatically reduce sulphur oxides (SOx) emissions from ships by banning the use of fuels with more than 0.5% sulphur content. The IMO has been actively working to tackle maritime air pollution since the 1990s while IMO 2020 was formally announced in October 2016. In this period, the old oil refiners in Pakistan did not take any meaningful steps to tackle the problem though it had a very clear deadline.

As a result, the oil refiners which continue producing furnace oil can now neither sell the fuel to domestic utilities nor to the international shipping companies. This is the result of years of under-investment due to which some of the old refiners are finding it difficult to operate in today’s environment. If the government announces a major bailout package by giving billions of rupees to the refiners, some of these old operators are likely to further delay any upgradation plans. Many might continue running their outdated facilities, pumping out low-quality products like HSFO which are being phased out from the global market.

Instead of offering tax payer’s hard-earned money to the energy companies, the policymakers should start rolling back the incentives and lucrative contracts through which some of the old refiners have been getting a guaranteed rate of return. At the same time, the industry should be deregulated by removing laws that have been hampering the sector’s growth, such as the inland freight equalization margin (IFEM) which creates a discrepancy in the oil market and is prone to exploitation. This will give a level playing field to all refiners, not just a selected few who have cashed their early-entrant advantage and drained the nation’s resources for far too long. Those companies that can improve the efficiency of their operations, respond quickly to the market trends, reduce costs and improve product quality, will survive this difficult period and thrive in the long-run. On the other hand, those oil refiners which fail to improve their business will be pushed out of the market.

More importantly, the government will also save billions of rupees it would otherwise spend on bailing out oil refining companies with unsustainable business models. That money could be better spent on other critical areas, such as health and poverty alleviation, that desperately need the government’s support as the Coronavirus pandemic ravages on.