Special editorial feature

Abolish Price Regulation

By J. Enver | July 2020

It is time when the petroleum product prices in Pakistan are deregulated and the government considers introducing a new mechanism that gives a greater role to the OMCs. Instead of setting petroleum prices and dealer margins on a monthly basis, the government should encourage that prices of POL products to be set on a real-time fortnightly or daily basis. This should incorporate the principles of demand and supply, take into consideration the landed cost of imported products and also consider other relevant factors.

At present, Pakistan’s petroleum sector is very vulnerable. To ensure energy security and safeguard national logistics of petroleum products, it is considered a matter of paramount importance that structural reforms be incorporated without any further delay. Complete deregulation of petrol and diesel is a must. This should be accompanied with incentives for upgradation investments by refineries and issuance of a Downstream Petroleum Policy in consultation with the industry.

At present, the Downstream Oil Sector (comprising refineries and OMCs) is a heavily regulated sector in Pakistan. It is monitored by the Ministry of Energy – Petroleum Division (MEPD) and the Oil & Gas Regulatory Authority (OGRA). The decisions and import approvals of the MEPD directly impact the delicate oil products supply chain in the country.

A broad perspective of sales and supplies of petrol across the nation needs to be given to explain the underlying factors which resulted in the recent shortage of petroleum and related products. There was a phenomenal increase in petrol sales in the past few months. Some 439,000 MT were sold in April. This rose to 663,000 MT in May (a growth of 51%). Such a sales pattern was quite unusual as was evident from average sales of petrol for the period from July 2019 to May 2020 (11 months). It was around 600,000 MT per month, translating into sales of around 20,000 MT per day. Another potential reason for the exceptionally high sales was the easing of COVID-19 lockdown in May and falling prices of petrol and related products in the international market, with a corresponding reflection in Pakistan’s domestic market.

A typical supply chain of petroleum products ranges from 45 to 60 days. In Pakistan, there has been heavy reliance on petrol imports which are based on various supply complexities such as securing appropriate quantities through international suppliers/traders, availability of bulk product carriers (ships) in the marine freight market, port constraints, etc. The extraordinary efforts of the Downstream Petroleum Sector need to be acknowledged in this regard. They arranged supplies and kept the wheels of the country moving under very difficult conditions.

Despite the constraints and difficult financial situation it was facing, the OMC sector continued to be a responsible corporate citizens of the country and made a huge contribution in maintaining the nation’s energy security. The sector never flinched in arranging supplies at a huge financial loss to itself due to the volatility of oil prices in the international market.

Since the supply chain logistics of petroleum products are totally different from other commodities, it was not correct to say that the Downstream Petroleum Sector was resorting to hoarding. It needs to be emphasized that petroleum products are bulk in nature, there is heavy reliance on imports with limited storage facilities in Pakistan and there are spikes in supply when a vessel arrives with imported petrol products and discharges its cargo at the port terminals of importing OMCs. Therefore the stocks at the port terminals of OMCs are essentially transitory stocks which should not be mistaken for hoarding.

Similarly available petrol stocks in refineries are not entirely saleable as some quantities are under testing for complying with product specifications while some of the quantity has to be retained for operational reasons such as refinery start-up in case of unplanned shutdowns.

The foreign exchange fluctuations and the rapidly-changing oil prices in the international market have a direct impact on the Downstream Petroleum Sector, which is governed by a pre-defined formula that cannot effectively handle price volatilities as experienced because of the on-going Covid-19 crisis.

The Downstream Petroleum Sector has been neglected for far too long as the policy currently followed dates back to 1997. With the changing characteristics of the market, simple and more pragmatic solutions should have been implemented, such as changing the price frequency to fifteen days or even less, to cut down the exposure period in times of price volatility. Such solutions were not put into practice despite repeated requests from the OMCs.

Deregulation Will Bring Positive Competition

- Oil & Gas Regulatory Authority (OGRA)

There are several reasons for increase in sales of POL products during last few months. First, the price differential between MS and CNG has been considerably reduced due to a decline in POL prices. Second, after the lockdown due to Covid -19, economic activity almost stopped but, before Eid, the lockdown was removed and there was sudden increase in demand which was usually higher than usual around Eid periods in the country. Thirdly, due to Covid-19 lockdown, borders with neighbouring countries were sealed, which stopped the smuggling of MS and HSD. This ultimately resulted in increase in demand for OMC products. Lastly, due to lockdown and lower demand, OMCs delayed / deferred their import of POL products. When the lockdown was unexpectedly eased much earlier, the refineries could not cope with the rise in demand, especially for MS and HSD. This resulted in dry outs in some parts of the country.

Deregulation of oil prices, except kerosene oil, will create an environment for ease of doing business while leading to positive competition and better customer service. A number of shortcomings have been observed and the policymakers (federal government) and OGRA are working to eliminate the deficiencies of the system through policymaking as well as enforcement actions in line with rules and regulations.

The misinformation and blame game that was recently directed towards the OMCs was unnecessary and counterproductive. What was urgently needed was a review and analysis of the inherent reasons for the shortage of petrol. There was an import embargo in March 2020 under OGRA instructions. This embargo was lifted after a month. Then, there were delayed approvals for imports. The easing of COVID-19 lockdowns added to the higher petrol consumption which was further aggravated by the consumer’s tendency to expect POL prices to really fall and there were also stock buildups in the retail networks.

What is needed now is that all stakeholders should work together to find workable solutions to any future petrol crisis in a cooperative, pragmatic and judicious manner. A really workable solution would be to deregulate the downstream sector in which prices should be set on a fortnightly or even a daily basis.