Honorable Shah Khalid & Honorable Fahd Khan 2.
Refinery economics is extremely complex and includes many considerations. However, I have carried out feasibility studies of a few refineries in my time & I shall attempt to clarify the situation in the simplest possible way I can.
Under normal conditions, the total value of the refinery output is higher than the total crude import cost plus refining expenses because what a refinery does is to add value.
An example would be the textile mill. Just as a basic textile mill converts raw cotton that one buys in bales unto cotton yarn of various grades such as staple fiber yarn, ply yarn & filament yarn, which together fetch a higher value than the raw cotton input, a refinery converts crude oil into various usable products of higher value.
Complex textile mills also have fabric manufacturing, dying & calendaring facilities. Refineries also often have a Petro Chemical complex attached. For example, SATORP (Saudi Total Oil Refinery Project) uses Arab Heavy crude oil as feed as converts it into LPG, gasoline, Jet fuel, diesel, pet coke as well as benzene, xylene, propylene and a few more.
Nearly all the products except petroleum coke command higher value in the market. The profit is called the refinery margin. However, there are occasions where there are too many products chasing too few homes and thus the product prices drop and refineries start losing money (negative margin). If these conditions persist for any length of time, inefficient refineries are forced to close down.
A rule of thumb is that more the complex the refinery, greater the capital outlay but higher the profit margin. Simpler the refinery, lower the profit margin. At the present time, except for a few countries such as Pakistan, nearly all of the simply hydroskimming refineries like Attock Oil, Morgah & PRL, Karachi have been closed down.
One of the major problems for the Pakistan oil-refining industry is that it is located very close to the Arab Gulf which has a large number of the very complex state of the art refineries. Since the crude is produced within the country there is hardly any freight cost. This enables the refineries to generate petroleum products at a low cost. On the other hand, a refinery in Pakistan would have to import crude oil (more expensive than the Arab Gulf refinery feed) but also supply the products to the Pakistani market at import parity price otherwise the country would suffer a loss.
As the Pakistan market is not very large and refinery output does not match exactly what is required, part of the product has to be exported. Since the capital costs are huge, refinery projects are often not economically viable. The only alternative is to buy second-hand out- of- date refineries because these require only a fraction of the capital outlay of a new refinery and reinstall the same in Pakistan. But then refinery margins won't be good. This explains why Bosicor never ran at full capacity & is only running “On & Off” basis. Also why Alghurair refinery would probably never come stream.
Of course, if a sufficient quantity of crude oil had been discovered in Pakistan things would have been different.
