Khattak says geopolitical events disrupting vital imports and further devaluing rupee; observes Illegal cross-border fuel smuggling not only deprives govt of crucial revenue but also distorts local oil supply chain; suggests cost of electricity per kWh must be significantly lower than price of a liter of petrol for effective EV pol icy
Monthly Energy Update Karachi, 9 February 2025 https://www.energyupdate.com.pk/2025/02/09/monthly-energy-update-february-magazine-2025/
Interview By M. Naeem Qureshi
Energy Update conducted an interview of M Adil Khattak, the Chairman of the Oil Companies Advisory Council (OCAC) and the Chief Executive Officer of Attock Refinery Limited. The details of his interview are given below:
Current Scenario:
Q No.1: What is your assessment of the current state of Pakistan's oil and gas sector?
Ans: Pakistan, being an energy-deficient country, faces significant challenges in its oil and gas sector due to external geopolitical events and internal policy shortcomings. The lack of adaptive strategies has further exacerbated the crisis. Critical issues, such as the delayed approval of the Brownfield Refinery Policy, the slow-paced adjustment of OMC margins, and the ineffective enforcement of regulatory measures to curb illegal cross-border fuel smuggling, are crippling the sector.
Adding to these woes, local crude oil production plummeted to a record low of 69,513 barrels per day (bpd) in FY 2022- 23, while natural gas output declined to 3,259 million cubic feet per day (MMCFD). Without a long-term vision and sustainable policies, Pakistan's energy sector risks further deterioration, jeopardizing the country's energy security and economic stability.
Major Challenges:
Q No.2: What are the biggest challenges facing the industry today pertaining to refining capacity, pricing, supply chain issues, and geopolitical factors?
Ans: The oil industry in Pakistan is in distress, grappling with challenges that are both external and domestic. Externally, geopolitical events wreak havoc on the nation's fragile energy framework, disrupting vital imports and further devaluing the Pakistani Rupee. With its heavy reliance on imports (crude and finished products), Pakistan remains at the mercy of global supply chain disruptions, leaving the oil sector vulnerable and exposed.
Domestically, the challenges are equally daunting. Illegal cross-border fuel smuggling not only deprives the government of crucial revenue but also distorts the local oil supply chain, causing significant damage. Refineries, the backbone of the sector, are in dire straits. No new greenfield refinery has been established in years, while existing refineries await long-overdue approvals for upgrades aimed at enhancing capacity, efficiency and reducing furnace oil
throughput. In FY2023- 24, nearly one million metric tons of furnace oil had to be exported-clear evidence of the urgent need for refinery upgrades, which require government support. With regulated fuel prices, oil marketing companies (OMCs) often face delays in margin revisions, leaving them financially strained. Storage limitations and inadequate port infrastructure further exacerbate the industry's difficulties, forcing oil import vessels to wait for days to berth, leading to significant demurrage costs.
The oil and gas sector in Pakistan is not just in crisis; it is struggling to survive. Without immediate and decisive policy intervention, the industry risks collapse, endangering the energy security of an already fragile economy.
Refinery Policy:
Q No.3: Could you share your perspective on the Refineries Upgradation Policy? What is hindering its implementation?
Ans: Consultation on the Refineries Upgradation Policy began in December 2019. The first draft was finalized in March 2021 and presented to the Cabinet Committee on Energy (CCOE) in August 202l. However, it took another two years before the policy was approved in August 2023.
After extensive and prolonged consultations involving the government, refineries, and independent financial and legal advisory firms, the policy for the upgradation of brownfield refineries was amended in February 2024. If implemented, the policy is expected to attract an investment of USD 5-6 billion, enabling oil refineries to undertake major upgrades. These upgrades aim to achieve compliance with Euro- V specifications, increase the production of petrol and diesel by 100% and 50%, respectively, and reduce furnace oil production by 80%. The reduction in furnace oil production is particularly critical, given the steep decline in its demand in recent years, which often leads to storage constraints forcing the refineries to reduce capacity utilization.
Concurrently in February 2024, the federal government also announced the introduction of Customs Bonded Facilitation Rules 2024, aimed at enabling foreign suppliers to import, sell, and re-export petroleum products. This required amendments to the Customs Rules, 2001. However, foreign suppliers expressed reluctance to operate under the existing policies, leading to unreasonable demands, such as the introduction of local operators for bonded warehouses and the inclusion of petrochemicals in the policy. The oil sector is already grappling with significant challenges, including rampant smuggling and petrol adulteration with Light Aliphatic Hydrocarbon Solvent. Granting import licenses under such conditions could risk flooding the market with substandard and harmful products, exacerbating the sector's difficulties.
Unfortunately, the implementation of refinery policy's upgrade remains stalled, primarily due to the exemption of petroleum products from sales tax under the Finance Act 2024. This change has left refineries unable to claim most input-stage sales tax, rendering their upgradation projects unviable and threatening current operations. Despite months of meetings at the Petroleum Division, OGRA, and FBR, the issue remains unresolved, with directives and deadlines from the Prime Minister'S Office and SIFC going unheeded. The reasons for
these inordinate delays may be attributed to a lack of capacity and coordination among relevant departments and frequent changes in political leadership and bureaucracy.
In contrast, India has successfully pursued its 2025 Vision for the Energy Sector. The country now boasts some of the largest and most modern refining complexes in the world, exporting petroleum products to nations with the most stringent environmental standards. Moreover, India's strategic planning allowed it to capitalize on the availability of discounted Russian crude oil, further strengthening its position in the global energy market.
Government Performance:
Q No.4: How do you evaluate the government's policies and initiatives in supporting the oil and gas sector?
Ans: Despite government efforts to encourage exploration and production through incentives for foreign investors, the gas and oil sector in Pakistan continues to face significant challenges. Persistent issues such as delays in policy implementation, overlapping regulatory frameworks, and the unresolved circular debt crisis hinder progress. These challenges highlight systemic weaknesses, including inconsistent governance, lack of political will, and inadequate stakeholder engagement. These regulatory bottlenecks discourage timely investment and complicate the approval processes for projects making them unviable. Addressing these issues requires greater transparency, streamlined regulations, and the adoption of consistent, long-term policies to restore investors' confidence and unlock the sector's full potential.
Pakistan's heavy reliance on imported oil exacerbates its vulnerabilities to global price fluctuations. The government has not invested sufficiently in developing domestic oil reserves, nor has it provided consistent support for alternative energy sources. This reliance strains foreign exchange reserves and increases the cost of energy production, further burdening the economy. Despite awareness of this bottleneck, the government has not prioritized or incentivized private investment in modernizing the sector.
While the sales tax issue remains unresolved despite numerous meetings and directives from the Prime Minister and the Special Investment Facilitation Council (SIFC), addressing the revision of the petroleum products' pricing mechanism at this juncture appears ill-timed. Moreover, the government has failed to engage key stakeholders, including private sector players, in policy formulation and decision-making processes, for e.g. deregulation. This disconnect results in policies that do not adequately address the practical challenges faced by the industry, as witnessed during the formulation and implementation of the Brownfield Refineries Policy over the past five years.
Despite repeated calls by the Prime Minister and Finance Minister to include private sector input, the Petroleum Division seems to prioritize working with public sector companies, potentially overlooking the value of broader collaboration.
Development Recommendations:
Q. No.5: What recommendations would you suggest to address the sector's challenges and enhance its growth and sustainability?
Ans: The recommendations are given below. The government starts work on such policies but stops midway and then starts afresh next year leading to nowhere.
· A formula should be developed for automatic revision of OMC margin annually.
· Phased deregulation of MS and HSD by keeping the private sector stakeholders also in loop of such methodology.
· Immediate deregulation of SKO and LDO to reduce the burden of low-consumption products on IFEM.
· Survey of special freight area.
· Pricing of jet fuel.
· Rolling out new Explosives Rules and repeal the outdated Explosives Rules 1937.
· Infrastructure upgradation, i.e. lifting of ban on strategic storage development especially at Kearnari and upgradation of ports.
· Expediting strategic projects such as KKLP-II Pipeline Project and Machike- T arujabba Pipeline Project.
· Promote safety standards in supply chain and logistics.
However, the top 3 recommendations revolve around the Brownfield Refinery Policy implementation, timely revision of OMC margins and curbing illegal cross border movement.
Role of OCAC:
Q. No.6: How does OCAC contribute to the development and advocacy of the oil and gas sector?
Ans: The Oil Companies Advisory Council (OCAC) plays a pivotal role in addressing the challenges faced by the oil industry and advocating for policy reforms. It facilitates timely coordination between authorities and industry stakeholders to resolve critical issues and emphasize their broader impact.
OCAC has consistently raised concerns about cross-border smuggling and illegal retail outlets with the relevant authorities. As a result of its efforts, the Federal Board of Revenue (FBR) has shut down approximately 1,200 illegal retail outlets dealing in substandard products. Furthermore, OCAC, on the instructions of FBR and OGRA, has developed a mobile application to raise public awareness, help identify illegal retail outlets, and allow users to file complaints.
Additionally, OCAC continues to address pressing industry concerns, such as product surpluses witnessed during most of the year (except peak seasons), logistical constraints, and demand forecasts based on the country's economic outlook. Through extensive collaboration with the KPT and KMC authorities, OCAC has successfully reconciled account discrepancies for industry members, dating back to 2005.
OCAC actively participates in energy forums, seminars, and conferences to highlight industry challenges, including shrinking fuel demand, pricing anomalies, production and storage
capacity constraints, and illicit trade, while presenting key recommendations for their resolution. On behalf of the Oil Companies Advisory Council (OCAC), we would like to reaffirm our commitment to extending full cooperation in the best interests of the nation and its energy sector.
EV Transition Threats:
Q No.7: In your view, what threats do electric vehicles (EVs) pose to oil marketing companies (OMes) and the refinery sector, and how should the industry prepare for this transition?
Ans: The EV policy was first issued by MEPD in 2019. However, due to the COVID-19 pandemic and economic downturn, the policy was not implemented. Recently, the Government of Pakistan (GoP) introduced a new EV Policy for 2025- 2030, which is still in its infancy. The new policy primarily focuses on 2 and 3-wheelers. However, the production targets assigned to 51 manufacturers have not been disclosed, leaving uncertainty about how demand for electric vehicles will be generated.
Electric vehicles (EVs) face direct competition from petrol as a fuel source. For the EV policy to be effective, the cost of electricity per kWh must be significantly lower than the price of a liter of petrol, or EVs must deliver better mileage in terms of cost efficiency. Without addressing this critical cost disparity, the policy is unlikely to drive widespread adoption.
Key aspects such as infrastructure development, tariffs, and incentives remain unspecified. With multiple interrelated departments involved, it seems un- likely that the policy will be implemented effectively. Although the policy outlines aggressive targets for converting existing retail outlets to EVs, it lacks a clear mechanism for managing the transition. The shift to EV s will drive demand for specialized lubricants, requiring the industry to undertake significant development efforts to address this emerging need.
To prepare for this transition, the industry should:
• Diversify product offerings, including lubricants and specialized fuels.
• Invest in EV charging infrastructure to remain competitive in the evolving energy landscape.
• Explore opportunities in hydrogen and other alternative fuels.
• Engage in research and development to adapt to changing market dynamics.
• Focus on skill development and technological advancement to build a resilient workforce.
• Fossil fuels continue to evolve, but their complete elimination is still a long way off.
· to ensure balanced and sustainable implementation of the New Energy Vehicle (NEV) Policy 2025- 2030, feasibility studies, infrastructure development, and demand creation strategies-aligned with tariff considerations-must be thoroughly evaluated.
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