PRL shuts down refinery on weak furnace oil demand, inventory glut

ISLAMABAD: Pakistan Refinery Limited (PRL) on Thursday shut down its operations on dwindling fuel oil demand in the country and abundance of inventories.

“…due to operational and ullage constrains, PRL has temporarily shut down its refinery from today (December 16) until the situation improves,” the refinery said in a filing to Pakistan Stock Exchange.

PRL is the first casualty of an unprecedented slump in the independent power producers (IPPs) demand for furnace oil (FO).

Industry officials said the National Refinery Limited (NRL) is also planning to shut down its operations from December 23, 2021, owing to same reasons.

“Byco and PARCO refineries are transporting furnace oil to storage house and exploring the option for exporting it,” an industry official said.

Despite a petroleum division directive to power division to push independent power plants to lift furnace oil a week ago, situation remains unchanged so far.

The directorate general (oil) of petroleum division, in a letter dated December 9, 2021 had requested the power division to direct the power plants to lift furnace oil through PSO/OMCs immediately for stock buildup and provision of payments/LCs (letters of credit) to PSO.

According to the letter, last fuel position meeting chaired by minister for energy had decided that power plants would lift furnace oil for stock buildup and for consumption in case of exigencies.

Earlier, the Oil Companies Advisory Council (OCAC) in a letter written to DG (oil), had warned that refineries would start shutting down their operations due to the FO sales slump.

Because of limited storage, refineries are forced to reduce and in some cases, almost shut down crude processing, which would affect the availability of the petroleum products, eventually disturbing an already fragile supply chain.

At on hand when refineries are pressing for the lifting of furnace oil to avoid financial losses, Oil and Gas Regulatory Authority (OGRA) in its latest oil price revision notification reduced refinery cracks/spread on petrol (MS) and diesel (HSD) slightly by $1-2 per barrel versus crude oil on a fortnightly basis, while it kept the spread on furnace oil largely unchanged. These three products contribute major portion of local refineries’ fuel earnings.

For next 16 days, refineries will be enjoying a spread of roughly $6/barrel on MS and $12/barrel on HSD compared to around $7/barrel and $14/barrel respectively in the previous fortnight, according to a research report by Sherman Securities.

The report said due to slowdown in demand for higher distillates (MS & HSD) amid reemergence of Omicron variant, prices of refined products in international markets have reduced more than the crude oil price.

Currently, prices of MS and HSD for local refineries is settled at $81/barrel against $88/barrel last fortnight and $87/barrel against $94/barrel in the last fortnight while average crude oil price is around $75/barrel down, from $80/barrel.

Average refinery cracks/spread on MS and HSD during 2QFY22 stood at $9/barrel and $14/barrel respectively compared to average $5/barrel and $9/barrel spread on respective products in 1st quarter of QFY22. However, average spread on furnace oil remained flat at around negative $12/barrel.