Petroleum Refining Sector - Potential for Private Investment

By Chaudhry, M. H. | Economic Review, June 1991 | Go to article overview

Petroleum Refining Sector - Potential for Private Investment


Chaudhry, M. H., Economic Review


Petroleum Refining Sector - Potential for Private Investment

The present government strongly feels that industrialization cannot be stepped up by setting up the industry in the public sector and it is not function of the government to set up and run industry. The present government is therefore, making all out efforts to speed-up the process of industrialization and to adopt policies which are attractive for the private investments. For this reason during a very short span of time, the present government, has announced numerous incentives both in terms of attracting foreign investments into the country and to create confidence amongst the local investors to set-up industry.

Privatization policies are currently being pursued all over the world. There have been massive privatization programmes in developed as well as developing countries. Pakistan under the present government is also pursuing policies aiming to give private sector a lead role in the country's development. In order to achieve the objective of accelerated industrialization and attract private sector investment government has taken number of measures and announced numerous incentives. All the industrial sectors have been opened up for investment by private sector.

Petroleum refining sector, an important sector of the country as its products are a major source of energy being consumed in the country was previously domain of public sector is now open for investment by private sector both foreign and local investors.

As a part of deregulation programme the government has introduced the refinery pricing system. After instituting the refinery pricing system the refineries have switched from 18 per cent fixed return on paid-up capital to a flexible rate of return. NRL which in 1988 paid a dividend of 18 per cent increased the dividend payment rate in 1989-90 to 30 per cent.

The country's petroleum refining sector presently consists of three refineries i.e. National Refinery Limited (NRL) Pakistan Refinery Limited (PRL) and Attock Refinery Limited (ARL), NRL and PRL are located in Karachi and process both local and imported crude oils whereas ARL located in Rawalpindi, is the oldest refinery in the country and is being operated on indigenous crude oil since its establishment in 1930s. The two Karachi refineries were established in mid 60's in the private sector. In 1972 one of the three refineries in the country namely National Refinery Ltd., was nationalized. With the nationalization the controls of the government on this industry grew stronger and stronger, as a result the growth in the petroleum refining sector from the private sector came to a standstill.

Petroleum products consumption during the last decade increased at an annual growth rate of about 8.5 per cent i.e. almost one and half times more than the growth in GDP. In 1989-90 over 10 million metric tons of petroleum products were consumed. The local supply and imports of petroleum products had equal shares in the total consumption. The demand/ supply pattern of petroleum products consumptions for the year 1989-90 was as follows:-

Despite high growth in petroleum products consumption the petroleum refining sector has not expanded likewise to meet the demand. The only appreciable development in the refining sector during the last Eighteen years has been in National Refinery which is managed by State Petroleum Refining and Petroleum Corporation (PERAC), a corporation under the Ministry of Production. National Refinery when taken over by PERAC was a small refinery with an investment of around Rs. 10 crores and developed it into the largest refining complex in the country with an investment of about Rs. 350 crores. This complex now has the crude oil processing capacity of 2.7 million tonnes per annum.

The country's petroleum products requirements is therefore, met to the extent of only about 50 per cent from the local refineries and the balance demand is all imported. …

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