ARTICLE: In the month of June there are shortages of POL products to the extent that it has become a headline item for media.

Although there are arguments which can put these as results of short-term causes which emanate from ad hoc planning without due considerations. But the fact of the matter is that this is resulting from basic issues that arise from regulations which do not fully cover the dynamics that effect oil industry.

Underlying Causes

Since early 2000, GoP has been pursuing policies within POL sector to ensure a competitive landscape with new players and hence fresh investments. These policies were successful in bringing about changes with now more than 25 OMCs. New OMCs as well as established OMCs have invested in development of POL infrastructure.

Development of POL infrastructure and supply chain is capex heavy requiring long terms and sustainable profits to pay for and maintain. The biggest hurdle in this is pricing volatility which emanates from,

i) Price fluctuations in International markets

ii) Exchange rate

iii) Price fixation by GoP based on last month imports by PSO (30 days lag pricing)

In the FY 2020 the oil sector has suffered massive losses on account of both factors – please see charts in annex I for price fluctuations in crude, gasoline and gasoil. Both OMCs and refineries have suffered losses which have eroded their equity and hence capacity for sustainable operations. The government has not shown any sensitivity to these factors in their price fixing decisions.

Also supply chain is heavily regulated where MEPD decides who will lift from where and quantity of imports that is allowed to any OMC. OGRA makes decisions about the movement of product within the country.

In such a scenario to OMCs have very limited powers to manage and run efficient supply chains, which could allow them to run a sustainable and profitable business.

Short-term Causes

Reasons for shortage:

1. Timely import permissions not given by MEPD to OMCs who are therefore not able to maintain minimum stock levels.

2. This was due to under-estimation of demand and over-estimation of refinery production by MEPD.

3. PSO pricing for June done in a very short period, during which time OMCs had no permission of June import hence were not able to hedge in time. By the time permissions were granted the market was already much higher causing massive losses. The same phenomenon will repeat itself in July as permissions not done yet and PSO has already priced 40% with market moving higher very quickly.

4. Refinery-committed volumes are not made available thereby adding further to shortages. One critical factor for the refineries is their lack of ability to price their crude vs PSO's pricing especially when pricing is skewed over a very short period and not ratably spread over a month since most crude contracts are basis monthly pricing.

5. The impression that OMCs have “hoarded" or are “hoarding" products is incorrect. OMCs have sold record products even in difficult times during March, April and May, while prices were consistently falling. In spite of such heavy sales, MEPD has not considered and allowed imports for stock buildup, resulting in stock depletion.

6. In the absence of chance to arrange a smooth supply chain and manage pricing adequately in a very volatile market it is inevitable that there will be shortages in the market, and potentially most OMCs will go out of business which could lead to widespread shutdowns of pumps permanently.

Recommendations:

Solutions

Long-term

Full Deregulation

— GoP should deregulate oil sector and allow OMCs (which are now sufficient in numbers) as well as refineries to compete freely for market share in the country.

— OGRA as regulator should ensure maintenance of required standards, minimum stock and continued availability at sales outlets by OMCs.

This will ensure maximum benefits for the customer as customer satisfaction will be the sole criterion for OMCs in their decision making.

Short-term

1. Price differential to be provided by GoP to cover current import vs notified cost.

2. Pricing to be based on transparent international pricing period averages.

3. OMCs should be allowed to import as per their sales projections and demand for stocks. Ship berthings to be done as per previous policy of following SOPs and not on subjective daily decisions of ministry officials which results in unnecessary disruptions and Demurrage costs resulting in discouraging omcs to run their businesss.

4. Govt to block illegal smuggling of product from neighboring countries which hampers industry profitability and govt tax revenue. Govt must protect investors in the industry who have invested billions in infrastructure and supply chains and are vital contributors to tax revenue. it is impossible for industry to compete with smuggled product which is being imported without paying duties and taxes which amount to over PKR 40/LTR when omc regulates margin is only 2.8/LTR.

Copyright Business Recorder, 2020