Refineries Hit by New Carbon and Petroleum Levies on FO

Staff Report

Islamabad: Under IMF’s program for Resilience and Sustainability Financing (RSF), government is expected to impose both Carbon Levy (CL) and Petroleum Levy (PL) on Furnace Oil (FO) from July 01, 2025 to curb excessive fossil fuel consumption and gather additional funds for green energy programs.

This is the first time government will impose Levy of Rs79.5 per liter on FO including PL of Rs77 per liter and CL of Rs2.5 per liter.

This will inflate price of FO by Rs85,000 per ton (57%) to around Rs235,000 per ton and may impact FO demand in Pakistan.

Chairman Oil Companies Advisory Council (OCAC) Adil Khattak and Chief Executive Officer of Attock Refinery Limited said that this would have a catastrophic effect on refineries as they use furnace oil in- house as fuel in furnaces, boilers, power generation and other operations. Applicable of the proposed carbon and petroleum levies  on furnace oil on own process use would result in phenomenal increase in operation cost resulting in heavy losses leading to closure of refineries.

The imposition of carbon and petroleum levies on Furnace oil will raise its price by more than 80% proving to be death knell of quite a few industries including refineries, shipping and IPPs which use it as fuel or  own use in utilities operations. Is it the proverbial disconnect between power and petroleum mandarins, innocent ignorance of its negative fallout or is it mischievous intrigue of the import mafia who are hell bent to shut down the local refineries?

Our only hope now is the Petroleum Minister who, within a short period of assuming office, has proved his grit not only in understanding complex challenges but taking these head-on.

It is to be noted that, if international oil prices stay above US$75 per barrel during rest of the ongoing month, FO price after this Levy may increase by 67% to Rs250,000 per ton.

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Government may collect revenue of Rs75bn Pakistan is likely to consume around 0.9mn tons (950mn liters) of FO during FY25 compared to 1.2mn tons during F24.

Over the last 3 years (FY23-FY25), Pakistan’s FO consumption declined sharply by average 40% per annum. Interestingly, 10 years back Pakistan’s FO consumption was around 9.2mn tons as power sector was the major consumer since FO based electricity generation mix at that time was around 35%.

Now Coal and LNG substituted FO as share of FO is now only 1.5% of the electricity generation mix. Local refineries produce around 2.5mn tons while annual export is 1.5mn tons.

FO is a dyeing product used as bunker fuel for the ships and thus its global demand is limited. Impact on Industry and Power Sector Currently Industry and Power sector are the two major consumers of FO which generate 99% of the country’s demand for FO.

Whether it is industry or Power, FO is mainly used as a back-up fuel for electricity generation. Most of the industries which do not have GRID electricity or any other alternate depend majorly on FO whereas in event of electricity load shedding most of the Key Data Sector Energy Stance Over-Weight Current Maket Cap. (Rs bn) 2,800 Current Turnover (mn sh) 38.1 Current Traded Value (Rs bn) 3.7 3m 6m 12m Avg. Daily Maket Cap. (Rs bn) 2,825 2,856 2,445 Avg.

Energy Yearbook, Sherman Research Page 3 industries rely on FO based power generation. Currently, cost of electricity generation on FO is around Rs25 per Kw/h which may increase to Rs40-42/kwh.

Thus, we believe that industry will continue to use FO as an emergency fuel while gradually shift towards renewable source of electricity generation. We do not expect major impact on listed firms as most of the companies have already shifted to coal and solar based power generation, Sherman Research said in a report.

Cement rely heavily on energy for power generation which contribute 15% of the cost of production, however, we believe that annualized earnings of CHCC and KOHC will negatively impact by 3-4% as FO contribute 15% and 28% of their electricity demand. As far as impact on Power sector is concerned, we do not expect any major impact on Grid electricity rates as FO contribute 1.5% of electricity generation.

Impact on OMCs and Refineries

Decline in FO sales may not impact OMCs as FO share in total revenue is negligible. However, this is ‘Negative’ for refineries as FO contribute around 24% of their production mix.

During FY25, it is estimated that local refineries to produce 2.5mn tons of FO while consumption is estimated lower at 0.9mn tons.

Thus, it is anticipated that refineries will now focus to export surplus quantity of FO as local consumption to further dry down, other wise they will be compelled to reduce refinery throughput or temporarily shut down their production units, impacting negatively on earnings.

Similarly, if surplus quantity is exported, their GRMs may get affected as FO usually sells at a discounted price in export market. Assuming current Industry GRMs of US$10 per barrel, every US$5 per barrel discount on FO, if exported will affect GRMs by 12%.

However, the impact varies on company to company basis (based on production mix) and depends on the availability of the buyer in export market. For north based refineries including ATRL, cost of exporting will be higher which may affect earnings.