FO glut likely to ease as IPPs book most of available inventories

LAHORE: Oil refiners reeling from brimming Furnace Oil (FO) inventories on the back of lackluster demand have finally breathed a sigh of relief as Independent Power Producers (IPPs) place firm orders of huge quantities for next several weeks.

"The oil refineries have received firm orders of 250,000 tonnes of furnace oil by IPPs for the month of January alone," said a senior official of ministry of Energy.

"The move will surely help easing out FO glut that has been plaguing the operation of almost all refineries in the country since last couple of weeks mainly due to lack of storage."

It is estimated that most of the FO available is going to be utilised by the power producers during seasonal low-output from hydropower plants plus exports will also lead to disposing of sizeable chunk of existing inventories.

"But, trend of power generation with FO may last till mid-February maxim as annual canal closure is going to end in a few weeks. Nevertheless, the uptake of 250,000 tons is a significant volume, which will essentially break the cycle of surplus inventories," said another official.

"It may even help consume all of surplus FO stock, ending unwarranted colure of refineries."

Refiners have been forced to cut output due to challenges being faced in selling FO as demand for the fuel could not pick up according to projections. Hence, Pakistan Refinery Limited (PRL) and Attock Refinery shut down its operations on dwindling fuel oil demand in the country and abundance of inventories in mid-December while National Refinery Limited (NRL), Byco and PARCO also faced similar daunting challenge.

Despite a petroleum division directive to power division to push independent power plants to lift furnace oil, situation remains unchanged for the bigger part of December. The ministry of Energy as a backup arrangements ensured availability of FO in greater quantities in anticipation of a surge in power demand during peak winter months.

"However, due to multiple factors, power demand could not pick up as envisaged," the official said.

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.

The closure of refineries could lead to disrupt whole fuel supply chain of petroleum products as a result of spilling over effect, adversely affecting availability of other products in the downstream sector. Fortunately, such an eventuality has been avoided with lifting of FO by IPPs.

Meanwhile, industry insiders were of the view that the glut like situation could have been avoided had the ample storage capacity of various types of fuels been in place. They added that government should also rethink FO utility, especially its affordability aspect, in the energy mix. Otherwise, such recurring of glut always put a strain on viability of whole energy chain at critical points, threatening energy security of the country. —Munawar Hasan