Fuel oil demand could rise by up to 20% in year ending June 2021
Markets keeping close eye on fuel oil procurement from February
Government assures uninterrupted supply despite shortages
Singapore — A sharp squeeze in domestic gas availability and the surge in LNG prices that has pushed up the cost of gas-based power generation have prompted Pakistan to turn to oil for power, a trend that could result in robust fuel oil consumption in coming months, analysts told S&P Global Platts.
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Register NowThe country's struggle to source spot LNG cargoes from overseas at a time when global LNG prices have surged many-fold on the back of cold weather, as well as the inability to supply gas from domestic sources, have left the country with little option other than turning to oil.
"While we do not believe Pakistan will fully utilize the existing oil capacity, we assume some switching will take place over the next couple of months. Pakistan has problems sourcing spot LNG cargoes -- hence higher usage of oil units could be expected on the back of lower gas availability," said Andre Lambine, senior power analyst at S&P Global Platts.
He added that Pakistan has unused oil-fired power plant capacity, especially now during winter, when power demand is lower than in summer. Grid-connected oil-fired power plant capacity in Pakistan is about 8 GW.
Fuel oil sales in Pakistan surged 38% year on year to 1.62 million mt in the second half of 2020, Oil Companies Advisory Council data showed.
Analysts said the country's fuel oil consumption could rise by as much as 20% by the end of the current 2020-21 fiscal year to June 30 as the gas supply situation was expected to tighter further, while the industrial sector's demand for power is rising amid a rush to meet international orders.
"Fuel oil imports are set to surge as the cost of RLNG has been relatively higher compared with fuel oil," said Tahir Abbas, director for research at Arif Habib Ltd., a Karachi-based brokerage firm, adding that fuel oil consumption is set to accelerate in January and February 2021.
RELATIVE COSTS
Shankar Talreja, deputy head of research at Karachi-based brokerage house Topline Securities, said the cost of power generation based on fuel oil was currently around Pakistan Rupees 12-13/kWh, while the cost per kwh of power based on RLNG has surpassed Rupees 15/kWh, making it unviable for the government to stick to power generation based solely on gas.
"As of now furnace oil sales are growing due to demand from the power generation side, both from the grid and the industry sector," Talreja added.
Fuel oil sales in Pakistan have already hit a three-year high of 240,000 mt in December 2020 on growing demand from the power sector, said Shahrukh Saleem, investment analyst at AKD Securities, adding that furnace oil sales in the current financial year are expected to post an increase after three consecutive years of declines on the back of a gas supply crisis and high LNG prices.
In a delivery period spanning end-October to end-January, state-owned Pakistan State Oil issued nine separate buy tenders seeking a maximum of 15 high sulfur fuel oil cargoes and eight cargoes of 0.5% fuel oil, ultimately purchasing two 50,000 mt cargoes of 0.5% fuel oil, one for delivery at Port Qasim over Nov. 23-Dec. 3 supplied by Trafigura, and the second delivered over Dec. 15-31 by Vitol.
The remaining tenders were cancelled, with no further announcement on the future procurement plan.
The fourth quarter and January tenders were notable for the increase in quantities of fuel oil sought by a company that since 2019 has switched to LNG.
EYES ON NEW DEALS
PSO, which procures both high sulfur and low sulfur fuel oil for domestic utility companies, has not yet decided on the procurement of additional cargoes ahead of the start of the summer season.
"We have received directives from the ministry and we are liaising with our customers on their procurement needs, but as yet, there's nothing we can comment on regarding February procurement and beyond," a company source said.
Syed Javed Ali Hamadani, managing director of Sui Northern Gas, met a delegation from the All Pakistan Textile Mills Association this week and assured them of uninterrupted gas supply to textile units to maintain exports. Textile exports comprise over 60% of the country's overall exports and has witnessed strong growth in recent months.
Pakistan LNG said in a Jan. 16 statement that petroleum supplier Emirates National Oil Co., or ENOC, Singapore had defaulted on an LNG cargo for end-February delivery to Pakistan LNG due to supply constraints, and the remaining bidders in the tender were unable to fill in for the delivery window at their original bid prices.
The default underscores the LNG cargo shortages that have pressured Asian LNG markets in recent weeks and contributed to the S&P Global Platts JKM, the benchmark for North Asian spot LNG cargoes, hitting an all-time high of $32.50/MMBtu on Jan. 13. But prices have come off sharply since then, and on Jan. 19 stood at $8.666/MMBtu.
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Pakistan finds answer in oil as gas shortage hits power sector - S&P Global
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