When it comes to crude oil, there is no escaping the fallout of wild fluctuation in price, especially when government does not allow importers to hedge. Add to that a restriction on forward booking of dollars and the business is sure to face trouble.
Byco, Pakistan’s largest oil refiner in terms of capacity, learnt this the hard way — it took a severe financial hit in 2008-09 as crude plunged after hitting a historic high. The company’s oil stock, in the thousands of tons, lost value within days.
It has taken more than four years for Byco to come out of the shock. Now its management follows a strict policy of keeping inventory of both crude oil and the petroleum products at the minimum.
“We don’t keep stock of more than five days. Our philosophy for the last one-and-a-half years has been to churn out as quickly as we can sell,” said Byco International Incorporated (BII) Chairman Amir Abbasscisy in an interview.
The BII is an integrated oil company with a jetty to handle imports, storage tanks, 155,000 barrels per day (bpd) of refining capacity and a distribution arm with 250 fuel stations spanned across the country.
Its refining base consists of a 35,000bpd plant and the country’s single largest refinery of 120,000bpd capacity.
Since the larger refinery, built at a cost of around $480 million, became operational earlier this year, industry people have not paid it due attention.
The plant has not utilised entire capacity, they say, and point to the perceived difficulty the group faces in arranging credit import crude.
But Abbasscisy says that Byco is in fact ahead in its debt repayment schedule and there are adequate working capital lines available from various banks.
“It’s incorrect to say that the refinery is not fully operational,” he says. “At what capacity we run is directly correlated to how much we can sell. And we don’t want to keep more than 4 to 5 days of either crude or refined products.”
The throughput of the larger and smaller refineries is 45% and 70%, respectively. “Breakeven point for our larger refinery is 40%. Anything over that and we start to make money.”
The fact that both refineries share many things like a common management, power generation, workforce, storage tanks and land has helped Byco bring vast efficiencies in its project. That helps it make money even at a lower throughput.
Shifting oil business dynamics has brought new challenges for refiners. Difficulty in predicting where price will move and helplessness in the face of rupee-dollar parity and no one wants to go long on crude. Similarly, they don’t want to overextend credit with sale of petroleum products.
What a refiner can do is run a plant efficiently and that is possible only when he collects cash on time, Abbasscisy said. “So we don’t do business with any marketing company that doesn’t pay us in 21 days.”
While he insists that sustainability, which means control over how much cash comes in and goes out, is important than capacity utilisation of a refinery, the fact remains that Byco relies on multiple oil marketing companies (OMC) to take its products to end consumers.
As things are, the OMCs often do business on their own terms.
Byco has had a shaky relationship with Pakistan State Oil (PSO), the marketing giant with over 3,500 fuel pumps, when it comes to timely payments to refineries.
“Just last month we have signed a deal with PSO, which will buy 40,000 tons of diesel, 15,000 of furnace oil and 6,000 tons of gasoline. But we don’t look at any upliftment if it’s not secured by a financial instrument,” said Abbasscisy.
For local refineries to survive, the government must give them a level playing field vis-à-vis imported products, he said.
Last year, PSO sold 3.5 million tons diesel. Around 600,000 tons of it was bought from Pak Arab Refinery, 250,000 tons from Attock, 40,000 tons from Pakistan Refinery and Byco while 2.5 million tons was imported from Kuwait Petroleum Corporation.
“What is the point in importing so much when local refineries have the capacity to meet the demand? Only the difference should be imported,” he said.
Pushed by Byco, the government last month restricted PSO to import between 2 to 2.5 million tons diesel. “We still think this figure should be brought down to around 1.7 million tons.”
The company is also hoping to get government permission to start shipping diesel from Hub where the refinery is located to Port Qasim.
Published in The Express Tribune, November 20th, 2014.
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Some of the banks that lent to Byco have had to classify the loans as non-performing this year. Byco should focus more on getting its act together, instead of embarking upon futile PR exercises like this one.