JS Securities Limited – Morning Briefing

Karachi, January 09, 2019 (PPI-OT): New government directives compound refineries’ woes

As per media reports, the government has announced a ban on the import of Furnace Oil (FO) and also instructed refineries to utilize deemed duty so far granted to them on sale of High Speed Diesel (HSD) to upgrade their plants.

The reports also suggest that govt. officials have warned that if the deemed duty is not fully used to upgrade the plants to modern standards, the collected funds would be utilized in the new Mehmood Kot oil refinery.

We believe that the requirement to eliminate manganese content from Motor Gasoline (MOGAS) products will severely limit the refineries’ ability to meet the mandatory RON 92 specifications.

Moreover, exporting thicker petroleum products (Naphtha and FO) would be unfeasible. This will result in higher transportation costs. For instance, the cost of transporting 250k tons of petroleum products across 1,500km comes at ~Rs 1bn, as per OGRA notified rates.

Imposed conditions troubling for refineries

As per media reports, the government has announced a ban on the import of Furnace Oil (FO) and also instructed refineries to utilize deemed duty granted to them on sale of High Speed Diesel (HSD) to upgrade their plants. The reports also suggest that govt. officials have warned that if the deemed duty is not used to modernize the plants; the collected funds would be utilized in the new Mehmood Kot oil refinery. In this situation, even installing a hydrocracking unit – which allows conversion of FO into Motor Gasoline (MOGAS) and other petroleum products – would not be feasible without govt. support. Moreover, exporting FO would most likely not result in a favourable pricing scenario.

Manganese content limit yet another nail for refineries

Nearly all oil refiners had installed isomerization plants around two years ago. To provide some background, isomerization plants convert low sulfur naphtha (LSR) to ~80-82 grade Research Octane Number (RON) Motor Gasoline (MOGAS) fuel. Due to the mandatory requirement of minimum RON 92, the refiners were adding manganese (Mg) to boost the octane levels.

However, automakers, particularly Honda Atlas Cars (HCAR) complained about choking and engine knocking issues in their cars due to the high manganese content used in the MOGAS products. This led to the Ministry of Energy imposing ceilings of 40mg per litre, which was further reduced to 24mg per litre effective November 1, 2018. From April 1, 2019, oil refiners will have to eliminate manganese from their products. We believe this requirement will severely limit the refiners’ ability to convert Naphtha to MOGAS of specified RON, leaving them no option but to export it.

However, Byco Petroleum (BYCO) is the only refinery to have installed a Catalytic Reformer, which converts heavy naphtha (HSF) into RON 92 petrol without the use of any additives. For other refineries, exporting thicker petroleum products (Napthta and FO) would be unfeasible given (1) an already weak demand supply dynamics of naphtha in the international markets and (2) significantly higher transportation expenses to the seaports. The cost of transporting petroleum products by road, as per Oil and Gas Regulatory Authority (OGRA), can be as high as ~Rs 2.27 per 1000 litres/km for distances up to 1979km. At the notified rate, the cost of transporting 250k tons of petroleum products (Naphtha and FO) across 1500km would be ~Rs 1bn.