International Journal of Chemical & Petrochemical

Technology (IJCPT)
ISSN 2277-4807
Vol. 3, Issue 2, Jun 2013, 25-30
© TJPRC Pvt. Ltd.

MODEL FOR SUSTAINABLE PROCUREMENT TO PREVENT ADULTERATION IN

IMPORTED FUEL OIL

ARSHAD H ABBASI1, FAREEHA MEHMOOD2 & AYESHA WASTI3

1
Senior Advisor of Water and Power at Sustainable Development Policy Institute (SDPI), Islamabad, Pakistan
2
Research Assistant in Water & Energy Unit at Sustainable Development Policy Institute (SDPI), Islamabad, Pakistan
3
Project Assistant in Water & Energy Unit at Sustainable Development Policy Institute (SDPI), Islamabad, Pakistan

ABSTRACT

Pakistan is facing an unprecedented energy crisis due to its undiversified energy mix and increased reliance on
fuel oil. At present more than 35% of the power is generated using imported Residual Fuel Oil (RFO) and the poor quality
of RFO being used for power generation directly affects the electrical output in terms of increased cost of generation as
compared to notified cost, which then has to be recovered through subsidy and also increases the operational and
maintenance cost of power plants. Thus, this brief proposes a model for Pakistan to procure petroleum products in a
sustainable manner hence enabling to monitor the quality & quantity of imported products to maximize the benefits. The
integration of web based approach in this model would further make the process transparent and competitive, thereby
addressing the adverse impacts of the prevalent energy crisis.

KEYWORDS: Petroleum Products, Energy Crisis, Power Plants Efficiency, Fuel Oil Quality, Sustainable Procurement

INTRODUCTION

Pakistan has been suffering from an unprecedented energy crisis which has been crippling the nation’s economy
and lives of millions of people since 2007(Pakistan Energy Outlook, 2012). The crisis is worsening by each day due to
undiversified energy mix as more than 65% of electricity is hydrocarbon based energy production (Pakistan Energy
Outlook, 2012). A large portion of Pakistan’s hydrocarbon based energy production-(both, for transportation and
electricity) was converted from oil to gas, considering that the country was blessed with abundant domestic gas reserves
and that it should avoid expensive oil imports (See Error! Reference source not found.).

Figure 1: Use of Gas and RFO for Power Generation Source: World Bank, 2010
26 Arshad H Abbasi, Fareeha Mehmood &Ayesha Wasti

This shift from oil to gas proved unsuccessful and showed devastating results in 2007 in terms of gas curtailment
that was available for power generation which compelled to shift back to oil imports for power generation (See Error!
Reference source not found.). At present more than 35% of the power generation relies on these expensive oil imports
and oil import bill for Fiscal Year (FY) 2011-12 has surged 26 percent to $15.25 billion against $12.08 billion in the FY
2010-11(State of Industry Report, 2012, Economic Survey of Pakistan, 2010-11). The total import of petroleum products
was 12.37 million and 53% of this import was Residual Fuel Oil (RFO) (Economic Survey of Pakistan, 2010-11). RFO is
obtained from different refinery processes and then blended with distillate fractions in different proportions to achieve
desired physical properties.

The quality and quantity of imported oil play a very vital role. Slight variation in fuel oil specifications such as
specific gravity, viscosity and water content can have a serious effect on the power plants output (Technical Audit Study of
GENCOs, 2011). The Technical Audit Study of Thermal Power Plants highlighted that the Generation Companies
(GENCOs) had been facing operational and financial problems due to the poor fuel oil quality used in them. Fuel samples
taken from the storage tanks of these plants exceeded the permissible limits of Pakistan Standard and Quality Control
Authority (PSQCA) standards (See Table 1) in terms of specific gravity, ash and water content.

Table 1: Fuel Oil Testing of Thermal Power Plants

TPS
PSQCA TPS Jamshoro TPS Guddu
Muzaffargarh
Test Specifications
Min Max Min Max Min Max
Specific Gravity 0.970 Max 0.969 0.985 0.950 0.972 0.966 0.971
Water Content Vol% 0.5% Max 1.20% 1.80% 8.00% 4.20% 1.40% 2.80%
Sulfur, Total, % mass 3.5% Max 2.80% 3.20% 2.50% 2.90% 2.70% 3.00%
Ash Content, % Wt 0.1% Max 0.30% 1.40% 0.00% 0.50% 0.00% 4.20%
Calorific Value,
18,200 Min 17,844 18,202 16,660 17,438 17,076 18,089
Gross, Btu/lb
Source: Technical Audit Study of Jamshoro, Guddu and Muzaffargarh
Thermal Power Stations in Pakistan, 2011

As seen from Table 1 the increased water and ash content when coupled with high specific gravity can lower the
calorific value from a minimum required value of 18,200 Btu/lb according to ASTM D240 to 16,660Btu/lb, which can lead
to increased fuel consumption (Technical Audit Study of GENCOs, 2011). The State of Industry Report, 2011 indicated
that the TPS Guddu Unit (1-4) consumed nearly 0.26kg/Kwh, which was very high as compared to the efficient operation
of IPPs (Liberty, HUBCO, Nishat & Kohinoor) within the country which consumed just 0.13-0.15kg/Kwh (State of
Industry Report, 2012). Poor fuel oil quality not only increased the consumption of fuel but also lead to wear and tear of
plants, which increased the O&M cost. The O&M cost along with fuel cost consequently increased the tariff received from
customers. The procurement of the contracts for importing fuel oil entirely ignored the competitive bidding which violated
the PPRA rules, 2004 and acted as one of the underlying reasons behind the dilapidated and poor quality of fuel oil.

The high dependency on imported oil for power generation, i.e. more than 35% (State of Industry Report, 2012)
provided the quality of fuel discussed above, had drained the national exchequer. As the actual cost of generation surpasses
the notified cost by the Government of Pakistan (GOP) and the gap had to be filled through subsidy. The GOP had granted
Rs.1600 billion to the power sector alone to recover this cost (Federal Budget Brief, 2011-12). The subsidy granted to
KESC lamented at figure of US$ 551 million which is even greater than GOP Budget allocation for Health, Research in
Science and Technology and environment, thus burdening the national economy (Federal Budget Brief, 2011-12).
Model for Sustainable Procurement to Prevent Adulteration in Imported Fuel Oil 27

Thus the current debate of electricity shortfall is due to the lack of availability of fuel and the compromised
quality of fuel oil. This can be analyzed with facts available in State of Industry Report,2012, which identifies that the total
installed generation capacity on 30th June, 2012 stands at 23,538 MW whereas, the available capacity is only 14000MW
against the peak demand of 19,500 MW (State of Industry Report, 2012).

Thus, in order to address the grievances associated with this persistent shortfall of around 5500 MW and to
maximize the benefits of imported petroleum products used for power generation, this brief is intended to present a
sustainable procurement model for Petroleum Industry of Pakistan which would help to relieve the burden on national
exchequer through monitoring the quality and quantity of products.

OBJECTIVES

• The foremost objective is to propose a model for procuring the petroleum products in a sustainable manner and
enabling to monitor the quality and quantity of imported products in petroleum sector efficiently

• To promote the cost effective and transparent operations through this model

• To integrate the concept of e-procurement in the Sustainable Procurement model and its associated benefits for
the petroleum sector

SUSTAINABLE PROCUREMENT MODEL

The gravity of situation in endemic energy crisis can be addressed effectively through the proposed model of
sustainable procurement (See figure 2). This model has been adopted from Sustainable Procurement Manual developed by
UNEP (Sustainable Procurement Manual, 2008). The sustainable procurement is a combination of social and
environmental factors with financial considerations while making the purchasing decisions. It is entailed beyond the
traditional economic parameters and makes decisions based social and environmental implications.
28 Arshad H Abbasi, Fareeha Mehmood &Ayesha Wasti

Figure 2: Sustainable Procurement Model

Procurement Planning

The first step comprises of planning about the procurement of goods or services and in this case petroleum
products. This is the most important step as it would be the driver for the proceeding steps of procurement. It deals with
defining the subject matter of proposed contract which is the description of product needed to procure and should be
finalized while considering the end use of procured product (Sustainable Procurement Manual, 2008). The performance
based definition is preferred to promote sustainable development. In addition to this, it is essential to have a market
analysis to have a clear understanding about the availability of products and their alternatives.

Product Definition

The information must be translated into measurable, technical specifications with which the product must comply
(Sustainable Procurement Manual, 2008). It is pertinent to include the environmental, technical and social considerations at
this stage for cost effective and efficient operations. The technical information in the case of petroleum products refers to
the fuel oil specifications including specific gravity, ash content, basic sediments and water content that must be within the
permissible limit defined in national/international standards. In addition to this the procurement procedure should also take
into account the consideration of the environmental impact of the product from raw material to its waste management. In
this case it refers to the delivery of the products and its waste management if any. The performance and functional
requirement are also the integral part of the definition of product. This would enhance the scope for market creativity and
would also challenge the market to develop more competitive and innovative technical solutions.
Model for Sustainable Procurement to Prevent Adulteration in Imported Fuel Oil 29

Sourcing

The selection criteria specified in the expression of interest are usually divided into two categories including:
Technical Capacity Criteria and Financial Capacity Criteria. The technical capacity criteria are translated in the form of
experience of similar previous contract (addressing the technical, environmental and social concerns) and relevant
experience of the bidder. It is proposed to maintain the prequalification criteria transparent and both aspects should be
taken into account while finalizing any of the bidders (Ingalls et al., 2003).

Evaluation

The core concept of this sustainable procurement model is to obtain the best value for money. Therefore, the best
value for money is interpreted in the form of reliability, quality, environmental friendly, efficiency and past performance
coupled with the pricing factor instead of equating it with just lowest initial price option. Thus, the evaluation must be in
accordance with the subject matter of contract and should follow the procurement procedures and standards in order to
ensure transparency and competition within the industry.

Contract Management
The contract performance clauses are added in order to specify the operating conditions of contract. The technical,
environmental and social consideration can be included in performance clauses provided that these have been published in
solicited documents. For example, in order to monitor the quality of imported petroleum products following performance
clauses would be added:
• Adjustment for Sulphur: If the specification of the fuel oil, pursuant to the PSQCA standards as set out in the
agreement, the price per barrel shall decrease by USD 0.02 for each 1/10th of a percent above 0.15%wt, sulphur in
the fuel oil (Contract for Sale and Purchase of Bulk Bony Crude Oil, 2007).
• Adjustment for Gravity: If the specification of fuel oil, pursuant to the PSQCA standard as set out in the
agreement, the price is to be increased or decrease by USD 0.003, if the specific gravity goes above or below the
37.3 degree API(Contract for Sale and Purchase of Bulk Bony Crude Oil, 2007)..
• Adjustment for BS & W: The maximum allowable quantity of BS & W shall not exceed six-tenth of one
percent of the volume. If the percentage of BS & W exceeds the maximum allowable limit, for each one tenth of
one percent above the maximum allowable limit in BS & W, the price per barrel shall decrease by USD
0.05(Contract for Sale and Purchase of Bulk Bony Crude Oil, 2007).
In addition to this, the provision of using the analyzers (sulphur & water analyzers) for the real time monitoring of
the specification would also be included within the contract.

E-Procurement
30 Arshad H Abbasi, Fareeha Mehmood &Ayesha Wasti

This whole process can be made further competitive, cost effective and transparent by purchasing the goods and
products electronically. The internet has revolutionized the world and has now become a major player in improving the
productivity within the businesses through e-procurement (Ageshin, 2001). There are various types of e-procurement
(Gunasekaran and Ngai, 2008) like e-MRO, e-sourcing, e-reverse auctioning, e-collaboration, e-tendering, e-informing and
web based ERP. The integration of technology within the sustainable procurement model would be the most radical
innovation in the business world as the costs would be reduced by leveraging the volumes, having structured supplier and
buyer relationships while improving the quality and performance within the system.

It would create new opportunities for petroleum industry to extend their supply chains by reducing the transaction
and sourcing cycle time and improved integration of the company with suppliers and customers. The centralized tracking
system of transactions enables full reporting on requisition, items purchased, orders processed and payments made, thus
promoting the transparency and minimizing the manual interventions and errors throughout the procurement process
(Angeles and Nath, 2007). The short cycle time from request to purchase order, better aggregation and lower
administrative costs have optimized the cost of procurement if compared with conventional methods (See Equation 1 & 2)
(Ingalls et al., 2003).

Cost of Procurement = Σ X1 + X2 + X3 +X4 +X5 +X6 +X7 +X8.........................Equation 1

Where X1 + X2 + X3 +X4 +X5 +X6 +X7 +X8 is equal to Costs of Goods, Quality, Transportation,
Communication, Internal Process, Reaching Suppliers, Intermediaries, Control & Compliance respectively

Cost of E-Procurement = Σ X1 + X2.........................Equation 2

Where X1 + X2 is equal to Costs of Goods and Quality while the rest of the costs are eliminated due to the web
based approach

CONCLUSIONS

This new technology is also entitled with the challenge of creating a formal procurement process, scaling up of
knowledge across the organization and adoption of the system by the employees. It also demands the skills and expertise to
manage the complex procurement process strategically. However, these challenges can be effortlessly overcome due to
overwhelming advantages and cost effectiveness for the Petroleum Industry (Ross and Lowes, 2000). It is the estimated
that Pakistan has spent Rs.42 billion for importing water from the Middle East as the sample taken from the imported fuel
has identified the presence of 8% water in the fuel storage tanks, whereas the permissible limit as per PSQCA standard
lies at 0.5%. Thus, this sustainable procurement model incurring the technical specifications and environmental costs
while procuring the products would not only save this public money but would also create opportunities for the Petroleum
Sector.

REFERENCES

1. Ageshin, A.E.(2001). E-Procurement At Work: A Case Study, Production and Inventory Management Journal,
APICS Educational and Research Foundation

2. Angeles, R. and Nath, R. (2007).Business-to-business E-procurement: Success Factors and Challenges to

Implementation. Supply Chain Management: An International Journal, 12 (2), 104 – 115
3. Hagler Bailly. (2011). Technical Audit Study of Jamshoro, Guddu and Muzaffargarh Thermal Power Stations in
Pakistan, Advanced Engineering Associates International, Islamabad
Model for Sustainable Procurement to Prevent Adulteration in Imported Fuel Oil 31

4. Ministry of Finance. (2012). Pakistan Economic Survey, Chapter 4: Energy,2011-12, Islamabad, Pakistan,
www.finance.gov.pk, retrieved on Feb 17th, 2013
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www.nepra.org.pk, retrieved on Feb 15th, 2013
6. Petroleum Institute of Pakistan. (2012). Pakistan Energy Outlook, 2011-12, Karachi, Pakistan, www.pip.org.pk,
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Optimization, World Energy, 3(2), 160-162
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Industry, Centre for Engineering Logistics and Distribution, Oklahoma State University
10. United Nations Environment Program. (2008). Sustainable Procurement: Buying for Better World
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