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Refineries refuse to lower furnace oil prices for power generation

January 14, 2022

ISLAMABAD: The local refineries have rejected the government proposal asking for discount in the prices of furnace oil for use in power plants on the ground that lowering furnace oil prices is not a viable proposition.

The refineries are currently operating with lower throughput because of the huge stocks of furnace oil and they have no room in storages enough to store other petroleum products. The Pakistan Refinery Limited (PRL), the National Refinery Limited (NRL), the Attock Refinery Limited (ARL) and the BYCO have rejected the government proposal of lowering the furnace oil prices, terming it not an apt solution to the issue as it does not address the refineries sustainability issue. However, they asked the government to thrash out a comprehensive policy to this effect and immediately approve the Pakistan Refinery Policy 2021 without wasting more time that will ensure the environment-friendly production of POL products.

However, the Pak-Arab Refinery (PARCO) has responded positively to the proposal of the government and showed its willingness to reduce the furnace oil price to Rs 83,000 per metric ton for a limited period just to resolve the immediate crisis situation. The PARCO currently has the stock of 85,000 metric tons.

The government on January 6, 2022 asked the refineries to subside furnace oil prices so that the use of the product for power generation could be implemented as the furnace oil with discounted price will enable the government to match the economic merit order. Under the economic merit order (EMO), power plants using the cheapest fuel are first run. And those power plants which run on furnace oil come in EMO at second last as furnace oil prices are higher than the price of LNG which is used in LNG based power plants. And the fuel cost is a pass-through item to the end consumers. The power plants which run on diesel produce the priciest electricity which is why the plants based on diesel stand last in the Economic Merit Order.

The letter of Directorate General Oil written on January 7, 2022 to five local refineries available with The News mentions that Energy Minister Hammad Azhar in a meeting held on January 6, 2022 to discuss the fuel position with power plants. The letter says that in that particular meeting, it was decided to ask the refineries to lower their margins on furnace fuel oil for its consumption in power plants for electricity pleading that the power plants based on RFO with discounted rate will come in a better position in EMO and this is how the furnace oil’s use can be enhanced. The energy ministry also argued that it would facilitate discounted furnace oil prices to become viable, matching the merit order enabling enhancement in FO consumption for a limited period which will ease out the current constraints with refineries.

The Pakistan Refinery Limited (PRL) in its response to the DG oil letter said that the proposal to lower the furnace oil price is not viable. It said that PRL’s ex-refinery price of furnace oil for the first fortnight of January 2022 is at Rs 86,000 per ton against the import price of Rs 92,434 per ton and monthly the FOB average price of reference crude is approximately Rs101,000 per ton. The PRL in a letter to the DG Oil of which a copy is exclusively available with The News responded, saying that the proposal to lower the furnace oil price will further deteriorate the financial position of the refinery that will ultimately lead to suspension of operations.

Likewise, the Attock Refinery Limited (ARL) and the BYCO also rejected the government proposal, saying that it is not a financially viable solution. The ARL asked the government to implement an agreement with IPPs to keep fuel stock for 20 days. The BYCO says the crude oil price is more than the price of furnace oil and there lies no margin on furnace oil which is why refineries cannot reduce it further.

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