Oil marketing companies (OMCs) in Pakistan are facing financial instability due to a dispute with the Oil and Gas Regulatory Authority (Ogra) over the recovery of exchange rate losses on imports.
Due to the Pakistani rupee’s sharp depreciation against the US dollar in February, OMCs reported losses of Rs 32 billion in just two weeks.
In a meeting held by Ogra on Friday, the matter was raised, and it was alleged that the regulator was infringing on the oil pricing mechanism in regard to exchange rate losses.
According to the OMCs, Ogra was required to settle the exchange rate losses according to the established pricing formula within 30 days. But Ogra had been making up these losses after 90 days, driving the OMCs’ finances into ruin.
Ogra insisted that after selling petroleum products in the market without compensating for exchange rate losses, OMCs should retire Letters of Credit (LCs) for oil imports. OMCs, with the exception of PSO, asked for permission to open LCs on a different date in the meantime. Currently, PSO’s import costs are correlated with oil prices.
Ogra called a meeting to discuss the matter, and representatives from the industry, including those from the Oil Companies Advisory Council (OCAC) and the Oil Marketing Association of Pakistan (OMAP), as well as representatives from Ogra and the Ministry of Energy (Petroleum Division), were present.
The exchange rate adjustment mechanism was thoroughly explained to stakeholders by the regulator’s finance department.
Reports of an unsuccessful media campaign against Ogra surfaced, though, and the regulator refuted them. Ogra emphasised in a statement that it is committed to safeguarding consumer interests and supplying its stakeholders with a level playing field.
The oil industry claimed last month that the government’s artificial control over petroleum product prices had resulted in a massive loss to it of Rs35.88 billion.
The estimated currency exchange loss for the second fortnight of February 2023 was $32.6 billion. The oil sector also reported losses of Rs305 million due to low margins and Rs2.9 billion due to customs duty.
Industry participants claim that the government is altering oil prices artificially and based only on verbal orders, which is against the accepted pricing formula. They assert that import taxes on gasoline and high-speed diesel (HSD) have been lowered as a result of verbal orders from Ogra.
Last month, Waqar Siddiqui, the chairman of OCAC, warned Musadik Malik, the minister of state for petroleum, that the government had been artificially adjusting oil prices without adhering to the established formula.
Siddiqui emphasised that this practice had persisted since last year, costing the oil sector Rs35 billion. If such arbitrary price changes continue, he cautioned, the industry won’t be able to meet the demand for oil.
Due to elevated global prices, the rupee’s depreciation, higher LC confirmation fees, difficulties in establishing and retiring LCs, high markup rates, and high import premiums, the industry is currently experiencing a severe financial crisis.
The Economic Coordination Committee (ECC) approved a long-overdue revision to OMC margins on motor fuels on October 31, 2022, but it hasn’t yet been fully incorporated into the HSD price, according to the OCAC chairman.
