Money Matters

Refining business

By Israr Khan
Mon, 11, 21

Mohammad Wasi Khan is chairman of Byco, a leading petroleum company associated with the businesses of oil refining, petroleum marketing, and petroleum logistics. Here are excerpts from an interview with him.

File photo
File photo

Q. Despite collecting deemed duty, why didn’t Byco upgrade its 20-year-old obsolete plant?

A. There are some significant misconceptions about Byco as well as the oil refining industry in general that need a little clarification. The most important aspect for any refinery to operate is its being compliant with the applicable standards, holding valid process licenses and continuously upgrading its facility. In this respect, our two oil refineries do operate under the design and licenses issued by the world’s top class technology and process licensors. Further, our refineries are fully compliant to the applicable international standards for engineering, safety, integrity, quality control, quality assurance, environment etc, same as applicable to all refineries operating anywhere in the world.

Since its inception, Byco’s refineries have been going through continuous process of up-gradation by making substantial investment in the field of manufacturing superior quality and environmental friendly products, energy conservation and environmental improvements from time to time. In this regard, the installation of Reformer and Isomerization units has enabled Byco to convert its entire Naphtha into 92 Octane Motor Gasoline. Byco also converts Naphtha produced by EPRF (a local refining facility) into gasoline which was earlier being exported and in this way brings a substantial import substitution for the country. Amongst the local refineries, Byco has already announced its up-gradation project and is making progress into it. We plan to enhance configuration and processes to upgrade Byco into a conversion refinery producing cleaner Euro 5 fuels.

We have vigorous environmental protocols and strict monitoring mechanisms in place, which is also vouched by the federal and provincial Environmental Protection Agencies (EPAs). Byco remains fully compliant to the National Environmental Quality Standards (NEQS) set for the refineries. Substantial investment in the hardware and controls have been made in this regard. There has never been a single incident of breach of these standards ever since its initial startup.

The second misconception is around the use of deemed duty. Byco’s capital expenditures and commitments for plant upgrades have exceeded the funds collected on account of deemed duty. The company has invested far more than what was expected from it. But it is also important to note that no oil refinery can fully modernise its facilities by using funds just from deemed duty, considering the amount gathered was far too little as compared to the capital investment required to fully upgrade a refinery. The petroleum companies have to put up their own cash as well to bridge the funding gap, which is exactly what Byco has been doing.

Q. Did Tabish Gohar’s alteration of the refinery policy draft reportedly favouring Byco lead to his resignation?

A. Though we do not generally comment on news reports, yet we would like to point out that all stakeholders have been involved in the development of various drafts of refinery policy like an open book for all. However, we firmly believe that the oil refinery policy is expected to be beneficial for the entire industry, not for just one company. All domestic oil refiners have voiced their support for this measure. A favourable policy will allow all companies as well as Byco to upgrade their plants and facilities in a sustainable manner. With support from a refining policy, the companies will be in a better position to modernise their plants. After completion of up-gradation work, the refineries will become more efficient and you’ll see a meaningful increase in capacity utilisation.

More importantly, it is in Pakistan’s best interest to take measures that strengthen the country’s oil refineries to reduce our reliance on imported fuels, save foreign exchange, and improve the country’s energy security.

Q. Without expansion or balancing, modernisation and replacement (BMR), will refineries’ face going concern?

A. The business environment has changed rapidly in the past few years and will continue to evolve in the future, even more so with the onset of electric vehicles and the growing importance of petrochemicals. There is no doubt that refiners need to constantly update technology to become more efficient and produce higher quality products. Only those who adapt according to the changing market conditions whether by upgrading into a deep conversion refinery or by tweaking the crude slate or by building petrochemical capabilities, will thrive. Others, however, might have a difficult future.

Q. What would be the cost of expansion for both new and old refinery?

A. Oil refinery and its related projects are generally very capital intensive. Major upgrades or expansions usually go into hundreds of millions of dollars. Our goal is to substantially improve our capabilities and move from a hydro-skimming to a deep conversion refinery. We are currently planning to modernise our refinery under our Upgrade-I project by installing additional 15 plants in order to convert a bulk of our low-value furnace oil into gasoline and diesel, deep refine the entire production of petrol and diesel into Euro-V grade fuels and expand crude oil processing capacity. As it is, the size of this project is very large and as per the very initial estimates its capital cost shall be in the order of $750 to $850 million. Exact estimates will be available after the FEED study is done.

Q. When will Byco submit its updated plan? The government has given December 2021 as the last date to submit updated plan.

A. Byco has already moved beyond the planning phase and is currently in the phase of development. We have started civil works on the project site. The company has been keeping all stakeholders in the loop and we are in a good position to comply with the government’s deadlines.

Q. Does your company expect 10 percent tariff protection in refineries policy? If the government approves it, what would be its impact on the financial health of the company?

A. Byco hopes the new oil refinery policy will provide adequate tariff protection to the domestic industry so that all refineries can sustain and compete effectively with imports. The company reported a strong net profit of Rs3.59 billion for the previous fiscal year, however, in Q1, it faced challenges due to FX and inventory losses. We are operating in a challenging business environment primarily due to factors beyond access and control of the local refining industry since the industry is overly regulated. This will continue until deregulation of the industry under an apt policy framework is not done. However, the introduction of an oil refinery policy that gives adequate incentives and tariff protection will definitely help improve the business’s outlook.

Q. Other than mentioned support in refineries policy draft, what other favours do the refineries want to get from the government?

A. The introduction of a new oil refinery policy could be a big step in the right direction. However, the industry continues to operate under a burden of excessive regulation that has subdued free competition and has badly hurt the industry over the years. All aspects of the oil refining business are tightly controlled by the government.

The authorities have taken anti-competitive measures in the past, which had muffled innovation and brought in complacency. The policymakers should deregulate the industry and take steps that encourage free competition.

Currently, the Inland Freight Equalization Margin, or IFEM, goes against the principles of price competition. In most of the developed countries of the world, as well as in many emerging economies, every petrol pump has a different fuel price. That’s because the transportation cost for each location is different. Besides, the companies are also given free rein to price their products, which is based on their unique cost structure. But in Pakistan, the prices are kept artificially uniform through the IFEM, whether a petrol pump is located in Karachi or Kohat. This has made the country’s oil supply system inefficient and prone to corruption. And unfortunately, it’s the end consumer that foots the bill by paying IFEM from their pocket.

The government needs to take steps that loosen price controls. Previously, the government took the right decision by revising the pricing mechanism and changing it to a fortnightly basis. Further measures should also be taken along the same lines. Ideally, the pricing should be fully deregulated. Every company should be free to price their own product and the regulator should play a proactive role to ensure fair market competition. Those companies that can provide high-quality fuels at a low price will survive while the inefficient operators that have poor quality fuels and charge a high price will be pushed out by the market. The government should step back and let the invisible hand of the market do its work.

Q. Once up-gradation is complete, what is the products sale going to look like? How much increase in MS and HSD share do you expect?

A. Our production profile will change meaningfully after we complete the Upgrade-1 project. We will be producing higher quantities of Euro-V standard gasoline and diesel while furnace oil output will decline sharply. We are adding FCC (Fluidized Catalytic Cracking) which is going to convert furnace oil into petrol and diesel. All together 15 plants will be added including the FCC to deep refine entire production to Euro-V compliant fuels. Approximately 50 percent of our output will consist of diesel, 30 percent will be petrol, 10 percent will be furnace oil, and the rest will be other fuels. As a result, a vast majority – or 80 percent – of our future production is going to be petrol and diesel.

Q. If the government provides funds for up-gradation, would the company be ready to give it a shareholding in the company?

A. Byco has not asked for a direct subsidy or funds from the government and therefore cannot comment on rumours or speculation. Besides, we believe that if the oil refinery policy gives appropriate protection and incentives to the domestic companies and if the government deregulates the industry, then the oil refining business will start generating robust returns on a sustainable basis. In that case, the refineries will be in a position to fund their expansion from internally generated cash flows and won’t look towards the government for financial support.

Q. What would be the impact of the rising crude price on the balance sheet of the company? Will it help in boosting cash flow or can it be a challenge?

A. It is not the price of crude oil or products that count but the respective spreads between the main products and crude oil that drive the business’s profitability. Oil refining is inherently a cyclical business where movements in commodity prices impact profits and cash flows. The increase in oil prices can translate into inventory gains but they can also push raw material costs higher.

The pump prices and fuel demand also influence an oil refiner’s finances. Byco has been in the business for decades and has a strong track record of successfully navigating through oil price cycles. We are confident in our ability to continue to do well in the future.

Q. What is the refining capacity of Byco and its current capacity utilisation? Will the up-gradation boost the capacity?

A. Byco’s installed oil refining capacity is 156,000 barrels per day, which is 37 percent of the country’s total refining capacity of roughly 420,000 bpd. However, our utilisation rates have been low due to the furnace oil issue. This has been an industry-wide phenomenon. After completing the Upgrade-I project, our utilisation will be 100 percent.

The writer is a staff member