Oil supply chain may collapse if corrective measures not taken: refineries

ISLAMABAD/KARACHI: The country’s five refineries have warned the government that the country faces critically high stocks of high-speed diesel (HSD), sufficient for over 50 days’ worth of consumption at current demand levels, adding that any additional imports of this product could lead to the collapse of the country’s oil supply chain.

In a letter addressed to Secretary of Petroleum Momin Agha, dated September 1, 2024, the five refineries -- Pak-Arab Refinery Company (Parco), Pakistan Refinery Limited (PRL), National Refinery Limited (NRL), Attock Refinery Limited (ARL) and Cnergyico PK Limited (CPL) -- highlighted the issue of excessively high HSD stock, totalling 770,000 tonnes as of August 30, 2024. This stock is sufficient to cover 50 days at current demand rates.

The Oil Companies’ Advisory Council (OCAC) also sent a letter to Ogra on September 2, 2024, expressing concerns that the regulator’s permission for an oil marketing company (OMC) to import additional HSD would exacerbate the existing glut and lead to a crisis in the availability of petroleum products in the country.

The refineries’ letter questioned Ogra’s role in permitting OMCs to continue importing HSD despite the country already having an excess supply. Despite continuous correspondence with Ogra over the past two years, repeatedly pointing out that refineries are struggling due to the non-upliftment of HSD stocks by OMCs, Ogra has consistently allowed further imports.

This practice not only burdens foreign exchange reserves and risks refinery shutdowns but also violates Rule 35(g) of the OGRA Rules, which mandates that an undertaking be obtained from companies to uplift petroleum products from local refineries before opting for imports.

It appears that this regulation is not being enforced effectively, as indicated by HSD demand and supply projections for September 2024. The planned Parco turnaround in October does not justify excessive imports given the already high stock of HSD.

The letter detailed that as of August 30, 2024, refineries held 203,508 tonnes of HSD,and OMCs held 566,377 tonnes. The refineries’ declared production for September 2024 is 439,500 tonnes, making the total available stock for the month 1,209,457 tonnes. OMCs’ expected sales for September are estimated at 504,605 tonnes, with a projected closing inventory of 704,807 tonnes by September 30. Despite this, planned imports for September 2024 are 193,000 tonnes, which would increase the closing inventory to 897,807 tonnes.

The refineries also emphasized their role in providing essential energy security, contributing over 50 per cent of the country’s petroleum products. A slowdown or shutdown of refineries due to non-upliftment of stock would damage their case for upgrade projects, as high production of HSD and Mogas post-upgrade without adequate upliftment does not justify the necessary heavy investments. “If this situation is left unaddressed, it will lead to the collapse of the entire supply chain and jeopardize planned investments in the refining sector,” the refineries warned in their letter.

In a letter sent to the Petroleum Division, Ogra, while responding to the refineries’ joint letter, challenged the accuracy of the HSD stock figures reported by refineries, calling them “incorrect”.

Ogra issued a correction regarding the stock levels reported by refineries on August 30, 2024. According to the Oil Companies Advisory Council (OCAC)’s daily fact sheet, the actual diesel stock on that date was 759,256 metric tons, not the 770,000 metric tons reported by the refineries. That figure inaccurately included 94,443 metric tons of line fill, which is not available for sale.

The regulator clarified that the accurate stock of HSD as of August 30, 2024, is approximately 664,813 metric tons, which can cover 44 days of national demand. Ogra has advised PAPCO to correct its reporting in light of this information.

The letter further explained that sales, imports, and production estimates are finalized during the Product Review Meeting (PRM), taking into account various factors to enhance the resilience of the National Oil Supply Chain. However, due to varying estimates, continuous monitoring and adjustments are necessary to accommodate significant changes in underlying assumptions. Ogra mentioned that corrective actions have been implemented to alleviate pressure on refineries.

The oil body added that the OMC, which was previously advised to reroute its cargo or hold it at the outer anchorage until the last week of September, is now instructed to store its product in bonded storage until the third week of September 2024. This adjustment aims to ease refinery pressure and avoid demurrage costs. PSO has postponed one cargo of 55,000 metric tonnes scheduled for September 2024 and is considering revising its plans for December. “Imports for October will be reviewed and rationalized in a meeting scheduled for September 4, 2024,” Ogra added.

Ogra reported that PSO is currently holding approximately 336,000 metric tonnes of diesel, which accounts for 50 per cent of the total stock.

Ogra also emphasized that Rule 35(g) applies uniformly to all companies, regardless of size. Nonetheless, PSO is obligated by its government-to-government agreement with KPC to purchase a minimum of 1.8 million tonnes of HSD annually. Given the current demand and the influx of smuggled products, PSO must reassess the quantities stipulated in its contract with KPC, the regulator concluded.