Special editorial feature

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

By Sarfaraz A Khan | July 2020

The oil refining sector in Pakistan is going through one of its most challenging periods. Energy companies have been under pressure for the past few years due to the weak levels of furnace oil consumption and the economic slowdown. The business environment turned from bad to worse in 2020 after the Coronavirus derailed global economic growth, pushed commodity prices to historic lows and decimated oil demand. The demand for refined products has fallen substantially this year, which will severely dent the industry’s performance. The four major Pakistani oil refiners have already reported a combined loss of Rs 14 billion for the first three months of 2020 and can announce even bigger losses in the future. The situation has become so dire that some energy companies have reportedly asked the government to take effective measures to support and protect the domestic oil refiners.

The policymakers should take a moment to reflect on how the industry, which plays such a critical role in Pakistan’s energy mix, got into this situation in the first place. Although some of the old and well-established refineries are now seemingly asking for government assistance, it is this very support and protection which a select group of refiners has received over decades, that has corroded the oil refining industry.

There are five major oil refining companies in Pakistan - Byco Petroleum, Pakistan Refinery, National Refinery, PARCO, and Attock Refinery. Of these, Byco is the youngest. It was founded in the mid-1990s as a public limited company. The other refineries have been operating for more than four decades. Attock Refinery is the oldest, tracing its roots to 1922.

Apart from Byco, all other oil refineries have a long history of maintaining a strong relationship with key sector participants. Some are backed by rich and powerful parents, such as PARCO, which is a joint venture between the Government of Pakistan and the Emirate of Abu Dhabi or the Pakistan Refinery which is a subsidiary of the government-owned Pakistan State Oil. These old refiners have capitalized on this advantage by securing attractive contracts which allows them to earn a healthy and sustainable rate of return. In addition to this, these companies have also received subsidies worth billions of rupees in the past. In the early 2000s, for instance, when the oil refining sector was going through another rough patch, it received Rs8 billion in annual subsidies from the government.

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The author is an Energy Analyst who contributes extensively to American media, including Investing.com and Seeking Alpha, as well as leading Pakistani dailies such as Dawn and Business Recorder.

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