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July 9, 2020

OMCs refuse to import Euro-V fuel

Top Story

July 9, 2020

ISLAMABAD: The government's move to improve the environment and air quality of the country with the decision to import EURO V standard fuel got scuttled as oil marketing companies (OMCs) have shown their inability to import Euro V fuel on account of stock issues.

OMCs also opposed the import of EURO-V fuel saying this could result in an increase of Rs5-7 per litre for the consumers.

In Pakistan EURO-II fuel is being used which has sulphur content of 500ppm and the government wants to switch over to usage of EURO-V fuel in the country having sulphur content of 10ppm to make country environment pollution-free.

And to this effect, the government has already accorded approval to the import of EURO-V standard fuel and to this effect PSO has already been directed to import Mogas (Petrol) with EURO V standards. According to top officials, PSO, which normally imports POL products from Kuwait Petroleum is set to issue tenders for import of petrol as per EURO V specification approved by the government. Right now, Kuwait Petroleum is in process of up-gradation to produce the fuel of EURO-V and it will usher in the process of production of EURO V fuel from November-December this year. Meanwhile, PSO will import EURO-V petrol from other sources.

However, in a letter of oil companies advisory council (OCAC) on behalf of oil marketing and refineries written to Petroleum Division, built the argument saying that it would not be practically possible for OMCs to manage their distribution and retail network to separate the main grade RON 92 in terms of EURO-II and EURO-V even in major cities. And high price without significant environment benefits would be self-defeating till such time when imported and local supplies are of the same specification.

The letter signed by Asif Ansari, Secretary of OCAC mentioned that Pakistan currently imports around 500,000 MT per month which is about 70-80pc of the total demand. It mainly originates from Arab Gulf or regional refineries or blenders. With the proposed end point (FBP) of 205C and Sulphur content of 10ppm, more than 50 percent of this quantity cannot be supplied from current sources and the shortfall will have to be sourced from Europe. It says this could result in a high freight cost of minimum $3-4 per barrel, similarly the product price is estimated to be around $2-3 per barrel higher than current Mogas price. This approximately means a cumulative increase of Rs5-7 per litre to the consumers while it translates into additional cost to the country to the tune of $150-200 per annum or Rs25-33 billion per annum.

The letter also highlights that it was discussed that a phased approach should be adopted by first introducing EURO-IV specification as witnessed in other countries allowing to develop robust and reliable supply chain, preventing price shock to consumers, better analysis of incremental environmental benefits, adjustment of prevailing vehicle population to the new specification and allowing local refineries to upgrade through capital investment.

Currently there are challenges of availability of the products which will require 3-6 months for preparing and putting supply arrangements in place for new import specification of EURO-V. However, in case of PSO, it clarified that at least 60 days prior notice is required to arrange the product as per its procurement cycle. The letter goes on to say that as the industry understands, this new products specification being introduced for imports would be over and above the current specification of Mogas 92/95/97 RON being produced by local refineries. As such it would have a huge impact on storage and logistics of OMCs at terminal and depot and retail outlets level which needs to be closely considered for uninterrupted supply and smooth operation of distribution networks.

Pointing out the market conditions, the letter by OMCs says that the primary objective of introducing EURO-V specification is to control vehicle exhaust emissions. If this is so, then two factors need to be closely evaluated which are i) fuel specifications and ii) vehicle specifications and conditions in Pakistan. ‘As Pakistan has a large number of 2/3 wheelers as well as very old cars still running, the ultimate objective of bringing down emissions levels significantly would still be a challenge.’

The general objectives of reducing Sox may partially be achieved through proposed transition from EURO-II (500ppm) to EURO-V (10ppm).

And with the current configurations, local refineries may not be able to meet all the requirements of EURO-V especially specification parameters such as Manganese content, Benzene and Aromatics. Therefore, it is suggested that local products current specifications of EURO-II for refineries should be maintained.

Refineries should also be aligned to produce above specification through up-gradation and investment for which suitable incentives should be provided with reasonable timelines.

The letter also points out saying that pricing is a critical aspect of this change, which must be appreciated, especially under the current financial challenges outlook. It is estimated that based on the current information there will be an increase of $2-3 per barrel in the cost of the product. Furthermore, imported supplies may also be originating from Europe, which will attract an additional freight cost of $3-4 per barrel.

It says that in the current pricing mechanism (M-1), the cut over month must be carefully managed as it will create an exposure for the importing OMCs and they will be importing expensive products and will be selling at last month prices calculated on a different specification and cost of product. It will require ‘in-month’ changes and the pricing adjustment mechanism to account for the cost difference due to change in product specification.

The OCAC letter also recommended to the government saying that testing methods need to be improved in the country with high specification and stringent limits especially at discharge ports with more than one creditable testing bodies like HDIP (Hydrocarbon Development Institute of Pakistan (HDIP)). With the limits in EURO V specifications, it is important to increase the capacity building of all testing bodies with provisions on re-verification through independent laboratories for rejecting any cargo/vessel.

It also says that the proposed specifications should be dubbed as PAK 5 which could be close to EURO V specifications and even prevailing country Mogas specification is not entirely reflecting EURO 11 specification and should be correctly referred to as PAK 2 being close to EURO 11 specification.

Petroleum Division, the letter says, should clearly define whether these products EURO V-gasoline 92/95/97 are being introduced as new or additional products in the country. As OCAC understands, the proposed specifications are for imported gasoline 92/95/97 RON (EURO-V) such as local refineries would continue to produce Mogas 92/95/97 RON (EURO II) which remains to be the applicable specification for locally produced Mogas (Petrol) in the country.