Pakistan ponders fuel oil exports amid problem of plenty at home

The decision by the Pakistan to import fuel oil in a hurry towards the end of last year due to gas shortages and high LNG prices created a problem of plenty in the domestic market. As a result, Pakistani refiners are left with no choice but to reduce throughput.

“The fuel oil glut is a combination of fuel oil imports even when domestic refineries can produce fuel oil for power generation, as well as due to a decline in seasonal power demand due to the winter, leading to some of the domestic refiners halting operations due to containment issues,” said Shreyans Baid, analyst for South Asian oil markets at Platts Analytics.

A director at a Pakistani refiner said demand from electricity producers was extremely weak.

The country’s five refineries are currently producing about 3,000-4000 mt of fuel oil per day, as against their combined capacity of 8,000-9000 mt, because electricity producing companies were not buying the product despite the government’s directive to maintain stocks for about 30 days at their premises.

As a result, Pakistan State Oil, the company which procures fuel oil from the international market for its utilities companies, has not awarded any of its H1 January, H2 January and H1 February buy tenders for high sulfur fuel oil and low sulfur fuel oil, market traders said, with the same expected for the country’s H2 February buy tender as well.

The H2 February fuel oil buy tender, which, as with the previous tenders, seeks 65,000 mt of 3.5% sulfur fuel oil, and 50,000 mt of 1% sulfur fuel oil, closes Jan. 20, with validity up to a week later, according to the tender document.

Price implications

Despite this, the cash differential to the Mean of Platts Singapore 180 CST assessment, against which the PSO tenders are indexed indirectly, rose to a three-month high Jan. 18 at $3.56/mt before dropping to $3.44/mt Jan. 19, mostly underpinned by strong buying interest for straight-run fuel oil cargoes from East Asian refineries as a refinery feedstock, market traders said.

Pak Arab Refinery fuel oil stocks have more than doubled to 92,000 mt, from a month ago, while National Refinery stocks are up by 91% to 28,000 mt, and Pakistan Refinery’s stocks have risen to 16,000 mt from 3,886 mt, data from Oil Companies Advisory Council showed.

But fuel oil stocks at Cynergico, which was formerly known as Byco, and at Attock Refinery have dropped to 10,700 mt and 10,000 mt, respectively, from 26,000 mt and 30,000 mt levels a month earlier.

In December, Pakistan Refinery, having a capacity of 56,000 barrels per day, temporarily closed operations. Cynergico closed about 120,000 b/d capacity, while only 35,000 b/d was in operation, officials said.

Refineries have been urging the government to immediately ask power producing companies to start lifting fuel stocks as overflowing barrels would hurt the supply chain in the country.

“The slowdown in production at refineries will create shortages and the government has to spend more of its dollars to import. Any production closures would also hit local output of petrol, jet fuel and kerosene”, said the refinery director.

Not many buyers

Shahrukh Saleem, research analyst at Karachi-based brokerage house AKD Securities, said that the refineries have exported fuel oil in the past and therefore exports again can’t be ruled out. But in the post IMO-2020 era, the market for fuel oil has considerably reduced and therefore finding markets overseas for the country’s excess cargoes would be tougher this time.

“However, countries like Bangladesh still use the product for power production. So that can be a possible market,” he said.

In terms of pricing, fuel oil will still be a loss-making product for local refineries even if is exported, although it will help in keeping utilization rates high, analysts said.

“We expect fuel oil demand to stand at 3.2 million mt in 2021-22 (July-June), out of which local refineries are expected to contribute 70%-75%”, said Saleem.

Arslan Hanif, research analyst at Arif Habib Securities said fuel oil exports may not be an easy task. “Our products have higher sulfur content and will be sold at discount compared to current market prices. On the other hand, demand for fuel oil is also a question mark because it’s not environmentally friendly.”

Hasnain Murtaza, research analyst at Next Capital, said a drop in fuel oil consumption is expected in 2022-2023 (July-June) to around 3.0 million mt as the county would look at alternative fuels, like coal and LNG, as their prices are expected to cool down from sky-high levels last year.

Pakistan fuel oil sales in six months ended Dec. 30, 2021 amounted to 1.91 million mt, up from 1.62 million mt in the same period a year earlier, OCAC data showed.

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