Margins of OMCs and dealers to increase up to Rs 0.34 per litre

Aftab Ahmed

Islamabad: The government is set to increase margins of oil marketing companies (OMCs) and dealers on petrol and high speed diesel up to Rs 0.34 per litre following fluctuation in inflation in line with depreciation of rupee against dollar.

The margins of oil marketing companies (OMCs) and dealers on petrol and High Speed diesel (HSD) are revised annually based on the consumer price Index (COI) for doing their business. Accordingly, the margins on petrol and high speed diesel were revised upward effective from July 1, 2018 in line with decision of economic coordination committee (ECC) of the cabinet.

In this regard, sources told that oil marketing companies have requested through Oil Companies Advisory Council (OCAC) for timely revision of the margins due to a substantial increase in the cost of doing business owning to an increase in inflation and evaluation of Pak Rupee in the currency of financial year 2018-19.

Accordingly, the revision in margins on petrol and high speed diesel (HSD) for OMCs and dealers has been worked out based on the CPI for the respective period from April 2018 to May 2019 duly published by the Pakistan Bureau of Statistics.

In view of this situation, Petroleum Division had proposed that the OMCs margins on petrol and high speed diesel may revised by Rs 0.25 per litre while dealers’ margins on petrol and high speed diesel may be revised by Rs 0.34 per litre and Rs 0.29 per litre respectively. With the proposed increase in margins, the OMCs and dealers’ margin on petrol would go up to Rs 2.89 and Rs 3.81 per litre respectively. The OMCs and dealers’ margin on high speed diesel would go up to Rs 2.89 and Rs 3.22 per litre respectively.

Pakistan Oil sector beyond  2020

The future of Pakistan Oil sector is very bleak in coming years.  Since November 2018, the free-fall of Pakistani rupee against US$ resulted in hefty losses to refineries and Oil Marketing Companies (OMCs), especially to those that are dependent on imported product. A conservative estimate puts these losses in excess of Rs 40 billion in just eight months. All the Companies have been declaring losses and the next step by the industry would be job-cuts, which is quite imminent. One of the major multinational oil marketing companies declared first ever losses in their 70 years history in Pakistan.

Where are we going? This is a question raised by everyone in Oil and Gas sector, which is a back bone for any country that provides fuel to spur economic growth and activity. The inaction of those at the top responsible for this important ministry either do not have the capacity or the will to address these issues. Instead of coming up with some sane and pragmatic solutions, they are sitting idle with their heads buried in sand like ostrich and hoping that the storm will pass over.

Since independence, the country has been a net importer of oil products At the time of independence, there was only one refinery located in Rawalpindi processing few thousand barrels of locally produced crude oil and balance was met by importing finished products like diesel, petrol, kerosene and aviation fuel.

During !960s, two refineries in Karachi namely Pakistan Refinery and National Refinery were commissioned but still the production of these refineries was insufficient to meet country’s demand thus dependence on import of finished products continued. After a lapse of almost 40 years, Parco refinery, a joint venture of Government of Pakistan and Abu Dhabi, with 100,000 barrels per day capacity was commissioned in Muzzafargarh In 2002, BYCO commissioned a second hand refinery in HUB area of Baluchistan Province followed by their another refinery in 2015.

Except Parco, all the refineries are old and cannot produce high quality fuels with the result that Pakistani fuel standards are the worst in the world, especially for diesel. When a barrel of crude is processed by our old and outdated refineries almost 35-40% of fuel oil is produced depending on the nature of crude oil processed and refinery configuration. The fuel oil contains 3.5% Sulphur and  it has been the main fuel for electricity generating plants. When burned, it releases sulphur dioxide and trioxide which combines with the water molecules in air and converts into sulphuric acid causing acid rains in country and across the borders.

Since 2002 numerous attempts have been made and refineries were given deadlines and incentives to produce international standard conforming fuels but the strong refinery lobby got away each time by getting extension in the implementation deadline.

But there are other international forces, which are working to clean the environment of our planet The International Maritime organization (IMO) in 2008 gave a deadline that no ship can burn fuel containing more than 0.5% sulphur from 1st January 2020 and after March 2020 no vessel is allowed to transport high sulphur fuels.

This regulation will result in the increased cost of imports, as low sulphur fuels are typically 150-200 US$MT more expensive than the high sulphur fuel. What will be the fate of high sulphur fuel oil (HSFO) produced by Pakistani Refineries? The consumption of fuel oil has been declining since the introduction of LNG and in the last fiscal year as barely 3.0 million MT fuel oil was consumed as against the peak of 9.5 million MT few years back.

Interestingly, a few months ago MoE advised refineries to reduce the production of fuel oil without realizing that reduction would also hamper production of petrol and diesel. The deficit demand of these products is being met by imports thus putting additional burden on precarious forex reserves.

The situation has been exacerbated by Nepra’s merit order, which has made around 6500MW power plants inoperative and the Government has been paying capacity charges to IPPS without using their facility for power generation. On the other hand if fuel oil is not lifted from refineries, it will result in lower throughput thus decreasing quantities of gasoline, diesel and other products supplied by local refineries.

Due to lack of vision and Ostrich approach, the Ministry of Energy is sitting idle without realizing what is going to hit the nation in 2020 after implementation of IMO regulation.

There is only one solution available at the moment. The GOP must link the price of locally produced fuel oil with the price of imported LNG i.e. SSGC’s announced price of LNG @ 11.37/ MMBTU earlier this month. When fuel oil price is linked to LNG, it will be around US$275/ MT. Thus plants operating on fuel oil will qualify in order of merit and gas can be diverted to other sectors where it is needed badly.

The Secretary of Energy Petroleum Division in a standing committee meeting, admitted that a short fall of 2-3 billion CFT/day exist. Now the question arises where this gas will come from and where it will be stored? After the two LNG terminals there is no progress on other 03 terminals which were planned and no major gas discoveries locally this gap will keep on increasing. The Iran-Pakistan (IP) and TAPI pipelines are a dream which will never come true.

The local gas/ LNG saved by utilizing fuel oil will fill the gap in demand and supply to some extent but the work must commence seriously on other LNG terminals. In addition, refineries should be given stringent deadlines to upgrade their facilities in line with IMO regulation and comply with globally accepted Euro specifications.

Another step, which needs to be taken immediately is to explore other cost-effective LNG import option and divert some additional quantities to PLL, which is a government subsidiary. In a recent tender by PLL, LNG rates were 7.5-8.6% of Brent crude as against to 13.37% being paid for LNG imported from Qatar. This will reduce the burden on our FOREX as well as bring down the weighted average price of LNG for our domestic and industrial consumers.

All these initiatives require the government will and buy-in and the implementation task force or a dedicated team else it is our history we always fail when it comes to implementation.  A word of caution is, If the above suggested steps are not taken immediately the refineries will face a closure and around 8.0 million MT petrol, diesel and other products will have to be imported to keep the wheels of economy moving.

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