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Feature: Pakistan's LNG transition to halve fuel oil demand by 2020

Karachi (Platts)--13 Dec 2017 1030 pm EST/330 GMT


Pakistan's fuel oil demand is expected to fall sharply over the next three years as growing LNG imports help the country move to a gas-based energy economy.

Fuel oil demand is likely to drop from 9.6 million mt in fiscal 2016-2017, running from July to June, to 4.5 million mt or less by fiscal 2019-2020, according to most of the companies surveyed by S&P Global Platts.

Pakistan fuel oil consumption and demand forecasts

The companies surveyed are Pakistan State Oil, the country's largest fuel oil importer and marketing company, and four Karachi-based brokerage houses -- Intermarket Securities, Foundation Securities, Topline Securities and Optimus Capital Management.

The most bearish estimate by Optimus Capital Management points to a consumption of 2 million mt/year in fiscal 2018-2019 and 2019-2020, versus the most bullish one by Intermarket Securities at 7.3 million mt in 2018-2019 and 6.5 million mt in 2019-2020.

"We were forecasting overall fuel oil demand to witness flat growth from fiscal year 2018 to fiscal year 2020," said Umair Naseer, head of research at Topline Securities.

"But given the government's resolve to utilize LNG for upcoming power plants, we now forecast fuel oil sales to decline from around 8 million mt in FY2018 to 4 million mt in 2020," he added.


FUEL OIL IMPORTS TO PLUNGE


Fuel oil imports could decline by up to 60% by fiscal 2019-2020 as the power sector switches to gas feedstock, Fawad Khan, executive director with Karachi-based BMA Capital, said.

This would result in a drop in imports from 6.6 million mt in fiscal 2016-2017 to 2.64 million mt in fiscal 2019-2020.

The startup of Pakistan's second floating storage and regasification unit in November has resulted in cutbacks to fuel oil-based power generation.

November fuel oil sales were at 402,000 mt, down 29% year on year and 55% lower month on month.

Port stocks of fuel oil increased to 280,058 mt by late November, worth Pakistan Rupees 41.9 billion ($39.8 million), resulting in severe import delays and demurrage costs per cargo of $15,000/day, or $105,000/week, according to PSO.

Demand for fuel oil produced at local refineries using largely domestic crude could also be affected by lower downstream consumption. Current domestic fuel oil output is around 2.9 million mt/year.

In recent months, the reduction in fuel oil purchases has forced domestic refiners to lower their operating rates to below 70% of capacity to avoid storage tanks from brimming over, which has resulted in a draw on the stocks of other oil products such as jet fuel.

Pakistan consumed around 9.6 million mt of fuel oil in fiscal 2016-2017, 70% of which comprised imports.


LNG BRIDGING GAS DEFICIT


The gradual displacement of fuel oil in Pakistan's power sector seems inevitable as more natural gas becomes available through rising LNG imports, allowing the government to shut inefficient fuel oil-fired plants.

One LNG terminal can deliver about 0.6 Bcf/day of gas, sufficient to generate about 3,000 MW of electricity, and almost completely replace Pakistan's fuel oil-based power generation, which reaches about 3,800 MW during the peak summer demand season. But fuel oil will not be completely displaced. While LNG imports could exceed 1.8 Bcf/d by 2019, once the country's third LNG terminal starts operating, most of the regasified LNG will be used to bridge the country's existing gas deficit.

Pakistan LNG estimates the gap between supply and demand in the country's gas sector at 2 Bcf/d under the current infrastructure and policy constraints, inhibiting the free flow of gas to residential, industrial and commercial customers, and at 4 Bcf/d if those constraints disappear.

The gap could widen as domestic gas production, which is responsible for around 2,500 MW of electricity generation, falters, pipeline import projects remain uncertain, and energy consumption continues to grow among both domestic and industrial consumers.

Pakistan's LNG imports are forecast to jump over the next five years, with Pakistan LNG estimating unconstrained demand at 30 million mt/year, or 4 Bcf/day of gas equivalent, by 2022, which is half of the country's total gas demand projection of 8 Bcf/d for that year, according to government estimates. A total of seven FSRUs are expected to service Pakistan's mounting gas demand, according to Pakistan's Ministry of Petroleum and Natural Resources. Two of them are already in operation.


MORE COAL, RENEWABLE CAPACITY


Another driver of lower fuel oil consumption will be new coal-based power generation capacity from 2019, Khan added.

Pakistan is due to commission several power generation projects with a combined capacity of 5,410 MW, including 2,520 MW from coal power plants, 1,320 MW from regasified LNG power plants, and the rest from renewables, including solar and wind power.

"This presents a unique opportunity to reduce the country's dependence on high cost, inefficient fuel oil-based power projects in both the public and private sectors," BMA Capital's Khan said.

It will also help the government fulfill its election promise of eliminating the chronic problem of load shedding and its costly economic consequences for both domestic and industrial consumers.

The transition to a gas-based energy economy presents significant challenges for state-owned PSO, which collects over 40% of its revenue from the fuel oil sector.

PSO accounts for 70% of Pakistan's fuel oil imports, the rest being handled by Hascol Pakistan and Shell Pakistan.

"If you do not add another profitable segment to PSO, then it could be in trouble," a government official told S&P Global Platts in November.

"Lower sales could mean loss of business and earnings," Khan said. "The only way to reduce the impact is to increase imports of LNG, although it remains to be seen if the government will allow PSO to remain involved in the LNG business."

PSO currently imports 4.5 million mt of LNG through term contracts with QatarGas and Swiss LNG trader Gunvor via the country's first LNG terminal, the FSRU Exquisite.

Imports to the second terminal are handled by Pakistan LNG, a state-owned company created in December 2015 to manage Pakistan's LNG purchases, imports, storage, regasification and distribution.

-- Abache Abreu, abache.abreu@spglobal.com

-- Haris Zamir, newsdesk@spglobal.com

-- Edited by E Shailaja Nair, shailaja.nair@spglobal.com


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