ISLAMABAD: Kuwait has asked Pakistan to upgrade its market and fuel supply network to higher grade gas oil, commonly known as High Speed Diesel (HSD), to remain its long-term client.

Pakistan generally imports half of the country’s diesel requirement from Kuwait under a long-term arrangement between their respective state-run companies — Pakistan State Oil (PSO) and Kuwait Petroleum Company (KPC).

“KPC has informed that Euro-II diesel containing 500ppm (sulphur particles per million), which is currently in Pakistan’s use, would not be available to PSO from early 2020 because it would start producing Euro-V containing 10ppm on completion its Clean Fuel Project.

PSO imports about 0.4 - 0.5m tonnes of diesel per month from KPC against country’s total monthly consumption of about 0.8m tonnes. About 220,000 tonnes per month production comes from domestic refineries. As a result, the PSO has asked the petroleum division to take note of the situation and review pricing mechanism.

PSO is procuring at present gas oil of 500ppm under a long-term contract with KPC that has already been extended till December 2020, but KPC would have not have that poor quality fuel at its disposal beyond early 2020.

Therefore, it has requested confirmation on acceptance of 10ppm diesel specification.

The PSO has reported that existing pricing based on 500ppm sulphur (Euro-II) will not be commercially feasible for it because 10ppm sulphur (Euro-V) is almost $1 per barrel more expensive.

On top of that, discrepancy in imports with regard to specifications and pricing issues would also occur on 10ppm by PSO and 500ppm by other oil marketing companies, unless the government makes it mandatory for all diesel imports from 2020 to shift to a uniform 10ppm sulphur Euro-V level to ensure better quality and environmental friendly fuel in the country.

An official said the government had also announced a policy to improve fuel grades and KPC’s specifications were generally in line with those in the policy but local refineries had some issues with the timelines to upgrade because of additional investments required. He said all the stakeholders – oil marketing companies and refineries, the Oil and Gas Regulatory Authority and Hydrocarbon Development Institute of Pakistan – had been requested to give their technical and professional input on the situation.

Pakistan’s total demand for POL products is estimated to increase from 27m tonnes this year to about 32m tonnes in five years, showing an increase of 17.5pc, according to the Oil Companies Advisory Council – an umbrella organisation of oil companies.

The cost of oil imports generally range between $12-14bn per year. HSD would be a key driver for growth in consumption of petroleum products. Its consumption is estimated to increase by 46.4pc to 13.7m tonnes in five years from current level of 9.3m tonnes. The demand for motor gasoline, commonly known as petrol, currently stands at about 7.97m tonnes that would jump to 14.17m tonnes in 2021-22, showing an increase of about 78pc.

The imports of diesel in the country shifted to Euro-II specifications or 500ppm in January 2017. The OMCs and refineries declined to introduce Euro-III & Euro-IV compliant HSD, claiming that it was not feasible to sell the higher grade product in the Pakistani market when the petroleum division proposed better grades in a deregulated environment, and subsequently upgrade local refineries capable of matching the quality of the imported product.

The OMCs said cost benefit analysis of the higher grades did not support such a major shift. They said that even in Europe, the transition from Euro-I to Euro-V took 16 years, beginning with Euro-I in 1993 and culminating in Euro-V in 2009, where these standards were designed and adopted.

Higher grade fuels are considered more efficient and environment-friendly, but are expensive. Pakistan used to have 0.5pc sulphur content HSD, which produced 5,000ppm until December 2016. This was switched to 0.05ppm Euro-II having 500ppm. Euro-III should have 0.035pc (350ppm), Euro-IV 0.005ppm (50ppm) and Euro-V 0.001ppm (10ppm).

The domestic market, informed sources said, is far from adopting Euro-V fuel. For example, annual vehicle inspections, mandated vehicle tune-ups and action against smoke-emitting public transport and goods vehicles are not a norm or legal requirement in Pakistan, but are strictly implemented in Europe.

Also, the vehicle pool in the country was mostly old and in poor condition and hence the use of higher quality fuels will not necessarily improve emissions from such vehicles.

Published in Dawn, August 6th, 2018