Levy on furnace oil likely to cut local demand, spur exports, say analysts

KARACHI: The imposition of petroleum and carbon levies on furnace oil (FO) is expected to reduce domestic demand and increase exports in the upcoming fiscal year, according to analysts.

The government has proposed to introduce both a carbon levy (CL) and a petroleum levy (PL) on FO from July 1 in a bid to curb excessive fossil fuel use and raise additional funds for green energy initiatives.

This marks the first time a combined levy of Rs79.5 per litre will be imposed on FO -- comprising Rs77 per litre in PL and Rs2.5 per litre in CL.“Industry will continue using FO as an emergency fuel while gradually shifting towards renewable sources of power,” said Farhan Mahmood, an analyst at Sherman Securities. He said the impact on listed companies is likely to be limited, as many have already moved to coal and solar-based energy. The cement sector, which is highly energy-intensive, sees power costs make up around 15 per cent of production costs.

The levies are expected to raise the price of FO by around Rs85,000 per tonne (a 57 per cent increase), taking it to approximately Rs235,000 per tonne. This may dampen FO demand within the country. The government expects to collect Rs75 billion in revenue from the new charges.

FO consumption in FY25 is projected at around 0.9 million tonnes (950 million litres), down from 1.2 million tonnes in FY24. Over the past three years (FY23-FY25), Pakistan’s FO consumption has declined sharply -- by an average of 40 per cent per annum.

A decade ago, Pakistan’s FO consumption stood at around 9.2 million tonnes, with the power sector being the primary consumer, as FO accounted for nearly 35 per cent of the electricity generation mix. Today, that share has dropped to just 1.5 per cent, with coal and LNG having replaced FO in the energy mix.

Local refineries currently produce about 2.5 million tonnes of FO annually, while exports total around 1.5 million tonnes. FO is largely a declining product, primarily used as bunker fuel in shipping, and global demand is limited.

The industrial and power sectors together account for 99 per cent of domestic FO consumption. In both cases, FO is used primarily as a backup fuel. Industries lacking grid connectivity or alternative energy sources rely heavily on FO, particularly during power outages.

At present, electricity generation using FO costs around Rs25 per kWh -- a figure expected to rise to Rs40-42 per kWh following the levies.Regarding the power sector, Mahmood said the levies would have minimal impact on grid electricity tariffs, since FO accounts for just 1.5 per cent of the power mix.

He added that a decline in FO sales is unlikely to affect oil marketing companies (OMCs), given FO’s minimal contribution to their revenue. However, the impact on refineries could be significant, as FO makes up around 24 per cent of their production mix.

In FY25, local refineries are expected to produce 2.5 million tonnes of FO, while domestic consumption is estimated at just 0.9 million tonnes.Mahmood said refineries may now prioritise exporting surplus FO as domestic demand continues to weaken. Otherwise, they may be forced to cut throughput or temporarily halt operations, adversely affecting earnings.“Even if surplus volumes are exported, gross refining margins (GRMs) could come under pressure, as FO typically sells at a discount in export markets,” he added.