Special editorial feature

Download PDF:Pakistan Petroleum Industries

By Peerzada Faizan | July 2020

Oil is an essential raw material for key economic activities and holds an undeniably strategic value for an oil-dependent country like Pakistan. Comprising refineries and OMCs, the downstream oil sector in Pakistan is regulated by the Ministry of Energy – Petroleum Division (MEPD) and the Oil & Gas Regulatory Authority (OGRA). However, deregulation of the petroleum sector has been the need of the hour for some time now due to various reasons.

The oil marketing companies (OMCs) have been asking for the deregulation of the sector since the current regulated system is outdated and flawed and causes immense losses to the oil sector as well as deprives the public of the benefits it could gain from a deregulated oil regime. For an oil-dependent economy like ours, state-controlled oil prices have both short and long-term devastating consequences and decisions and import approvals have a direct impact on the supply chain functions.

As things currently stand, the downstream petroleum sector is arranging supplies at a huge financial loss to itself due to the volatility of prices in the international market. As per statistics released by the Oil Companies Advisory Council (OCAC), the replacement loss for June 2020 was around Rs 17 per litre which translated to around Rs 18 billion for refineries and OMCs. Similarly OMCs suffered foreign exchange losses in the range of Rs 40 to 50 billion in the past two years or so.

The downstream petroleum sector has been neglected for far too long. In addition, the vagaries of prices of petroleum products in the international market and foreign exchange fluctuations directly impact the oil sector, which is governed by a formula which is not able to handle price volatilities.

As a rule, the government does not allow oil companies to set their own prices, but this policy is having a devastating consequence on the sector while the general public is also deprived of benefits it could derive from oil deregulation. Considering the way things go in the international market, oil prices are always subject to change on a day-to-day basis. This is also true for the US dollar rate since global oil prices are set in dollars. In Pakistan, unfortunately, changes in oil prices are brought once a month, causing a huge loss to the oil sector. In the given scenario, it has now become more than imperative to deregulate the pricing mechanism for petroleum products.

Deregulation plays a decisive role in successfully addressing the supply chain issues for good and smoothens the cost and profit margins of OMCs. It also helps the industry in adopting the latest fuel standards. Other than addressing the country’s supply and demand requirements, deregulation is also essential for ensuring that the kind of choked supply situation the country ran into recently does not happen again. Deregulation of petroleum prices will help oil refineries to invest in further expansions and the OMCs would also be able to expand their storage capacity and retail networks.

Major oil companies in Pakistan have started reducing their costs using different strategies. Since energy supply is generally considered a matter of national interest, measures are increasingly being implemented at a national level to provide some relief to the local oil industry from the adverse effects of COVID-19, which is turning out to be a continuous disaster with no end in sight in the near future. Refineries have either closed down or are operating at low levels. The fuels that have been most seriously hit are motor gasoline and jet fuel. The country’s oil sector has to also grapple with poor decision-making by OGRA, which severely lacks clear-cut, result-oriented policies to drive the industry out of crisis situations.

The Case for Deregulation is Stronger

- Zeeshan Tayyeb, Chief Operating Officer, Gas & Oil Pakistan Ltd.

Pakistan has experienced an interesting yet unusual petroleum sector since the COVID-19 pandemic started to make itself known to the world. In 2019, the country’s consumption of Motor Gasoline and Gasoil was approximately 15 Million MTs split roughly down the middle. According to an estimate, the consumption of smuggled Gasoil or Diesel was anywhere between 25-35% of the total Diesel consumed.

In 2020, with the lockdowns in sight and the oil prices coming down rapidly, instead of rushing to fill up our tanks and lock in value deals for the future, the Government rushed to protect the local refineries, put a ban on the import of not just Mogas and Gasoil but also Crude.

Oil Marketing Companies (OMCs) that operate more than 8,500 retail outlets in the country pleaded with the Government not to ban imports as they were seeing a growth in demand. The growth was coming despite the COVID-19 pandemic, forcing shutdowns of industries and lockdowns to flatten the curve. Things were bad but they were not as bad for transport as everybody was fearing.

First, the strict lockdowns in the country did not last very long and you could see a lot of traffic particularly in the smaller cities. On the Gasoil front, we had the onset of the harvesting season coupled with the sealed borders pushing demand from OMCs. And to top it all, the lack of any meaningful movement in the CNG prices meant consumers moved to Motor Gasoline, driving demand further up.

Despite these hurdles, the industry has tried to cope with the challenges albeit with some difficulties. What is disappointing is that Pakistan failed not only in taking the benefit of record low oil prices to fill up its tanks but also miserably failed in putting in place agreements that could have massively helped in reducing the burden on our foreign exchange outflows. A long-term vision could have not just addressed this area but could have also have used the taxes on petroleum products to address gaps in Government revenues resulting from the pandemic.

The case for deregulation is now stronger than ever. Like any deregulation drive, after initial teething problems, a free market for petroleum products is expected to not just encourage investments in our outdated refineries but also bring in improvements to the consumers in the form of better quality fuels, more retail outlets that, in a country like Pakistan, are the lifeline to rural communities, but also a move to more sustainable fuels and policy decisions in areas such as solar energy, electric vehicles and a more balanced foreign exchange bill.

The long-term solution is to address the country’s overdependence on oil revenue through heavy taxation, which, together with faulty oil pricing, is a major hindrance to the attainment of the economy’s long-term potential growth. To be honest, almost the entire revenue cycle of the national exchequer revolves around driving money from oil taxation and levies and that too without consulting with the major oil companies operating in the country. A highly-taxed oil sector should not be perceived as the mainstay for revenue generation since such an approach limits our ability to explore new foreign exchange avenues as well as sustainable growth areas, which could earn the country a hundred times more than its financial resources, accumulated through imposing heavy taxes and regulatory duties.

The government’s regulators mostly rely on point-in-time analysis of emerging pricing trends and disregard the changes that have already taken place in the preceding month. Therefore, oil companies are forced to sell at the new prevailing prices, a costly exercise that has both its short and long-term consequences for the entire sector. The government must critically monitor and keep regulating gross margins for the oil companies, but it must allow OMCs to set or change their prices on a daily basis or whenever it is required.

The monthly movements in oil prices are an outdated practice and do not go well with a modern economy. To safeguard energy security and national logistics of petroleum products, the oil sector demands some drastic measures and structural reforms, such as complete deregulation of petrol and diesel, provision of incentives for up-gradation investments by refineries and the issuance of a Downstream Petroleum Policy in collaboration with industry members and major stakeholders. In doing so, deregulation of prices and privatization of assets must top the priority list.

Pakistan Oil Industry Should Work in Free Market

- Mohammad Wasi Khan, Director, Byco Petroleum Pakistan Limited

The weakness and volatility in international oil prices, an unprecedented devaluation of the Pakistani Rupees against the US dollar, and a large drop in furnace oil demand at home and abroad, has created very challenging and disturbing conditions for Pakistan’s downstream oil industry.

The sector’s woes compounded substantially this year as the spread of the novel coronavirus pushed commodity prices to historic lows and knocked out a large chunk of demand. The sale of the three key oil products - furnace oil (FO), high-speed diesel (HSD), and motor spirit (MS) - fell by a total of 15% in the eleven months of the fiscal year ending June 2020, as per analysts’ estimates.

Market conditions may get better as business activity picks up after easing of lockdown and travel restrictions but the future will be determined in large part by the trajectory of the pandemic and the subsequent government response. Pakistan’s economy is expected to contract by 2.6% in the fiscal year 2019-20 and by another 0.2% during 2020-21, as per the IMF’s projections. The business environment, therefore, will remain challenging for the sector’s oil companies.

Some major oil companies, fearing a financial collapse, have asked the government for a support package that will help them navigate through this crisis. The government, however, might not have enough fiscal space to fund a bailout during a recession when the fiscal deficit will likely expand due to a decrease in revenues and an increase in public spending on health and social sectors. The government, however, can still provide relief to them by making the business environment more conducive for sustainable operations. This can be done by deregulating the downstream oil industry and setting attractive rules for its participants.

In dynamic global energy markets, crude oil moves frequently from one price point to another. The volatility has increased this year and oil prices can vastly vary on a daily basis. Any changes in the value of the US currency, in which all commodities are denominated, also influence oil prices in Pakistan.

Since petroleum product prices in the local market are linked with the previous month’s prices, they do not reflect the prevailing conditions in the global as well as domestic energy market. This disconnect creates all sorts of problems. To avoid this, the government should deregulate the prices and adopt a new mechanism that operates on the principles of a free market and without any government intervention. The authorities should join hands with the industry experts and the key stakeholders to develop an autonomous platform, such as an energy exchange, which will determine petroleum prices, preferably on a real-time basis.