Money Matters

Myth and reality

Money Matters
By Syed Jawaid Iqbal
Mon, 04, 21

The OMCs in the country have been blamed for the shortage of petrol in June 2020. However, nothing could be further from the truth as this happened to be the second such shortage in almost 70 years. The first shortage in 2015 for petrol and diesel and the second one for petrol in June 2020 both resulted from unnecessary interference by the government.

The OMCs in the country have been blamed for the shortage of petrol in June 2020. However, nothing could be further from the truth as this happened to be the second such shortage in almost 70 years. The first shortage in 2015 for petrol and diesel and the second one for petrol in June 2020 both resulted from unnecessary interference by the government.

In Pakistan, the petroleum sector is a highly regulated area which includes purchase, import, storage and pricing of the commodity. It is also mandatory that petrol and petroleum products be sold in retail by the oil marketing companies (OMCs) only and by no other entity.

Since import and sale of petroleum is regulated, the Ministry of Energy - Petroleum Division (MEPD) of the government of Pakistan conducts a monthly review at its end and grants permission to the OMCs to import petroleum and petroleum products. For these imports, ships carrying the petroleum products of OMCs are only allowed to berth at ports in Pakistan after due permission from the MEPD.

In March 2020, in the first Covid-19 wave, the MEPD imposed a ban on import of petrol and diesel. This was apparently done to protect the local refineries. At the time, since the prices of petrol were at rock-bottom in world markets, countries like China, India and most other oil importing nations built up their stocks to take advantage of the low prices. However, the ban on import of oil products by the Pakistan government created a crisis for the local OMCs as they had already booked import orders and had to ask ships to turn back with their cargoes; the oil import contracts from the suppliers were forcibly cancelled.

It is quite obvious that had the Pakistan government not imposed the ban and had the cargoes not been cancelled, there would have been no shortage of petrol in the country and the crisis that raised its ugly head in June, 2020 would have been avoided.

After a month, the ban was partially lifted but the damage to the country’s oil supply chain had been done. After partial lifting of the ban, the MEPD imposed such conditions on the OMCs that 20 percent of their total requirement was to be acquired from local refineries.

The OMCs pointed out to the government that without imports they would not be able to maintain stocks for 20 days as was required by the government but permission was not granted to them to import the differential. At a meeting between the OMCs and the government on June 8, 2020, it was clarified by the OMCs present on the occasion that, despite the shortage, they could salvage the situation, provided the refineries supplied oil products as per their commitment and the OMCs maintained stocks at their outlets, though the losses that were to be incurred in this regard were quite heavy.

On June 9, 2020, a Fuel Crisis Committee comprising FIA staff was sent to inspect depots across the country. The committee reported that stocks at the depots were in accordance with the numbers reported by the OMCs. However, the stocks at the OMCs were described as ‘hoarding’ and FIRs were registered against the CEOs of OMCs in this regard, which were dismissed with charges dropped almost immediately on hearing of the cases.

One vessel that has been mentioned in various media reports is MT Ploutos. It gave a Notice of Arrival and Readiness at 22:35 hours on June 15, 2020 to the port authorities in Karachi. However, the berthing request of the vessel was delayed by MEPD and three other vessels were permitted berthing out-of-turn. The refusal by the MEPD to give berthing permission to MT Ploutos for 11 days despite numerous requests by OMCs is also directly responsible for the delays faced by the vessel in offloading petrol.

Despite these shortcomings on part of the MEPD, the OMCs have been continuously blamed for the oil shortage and have been termed as a ‘mafia’ as a convenient means to ignore the lessons that could have been learned to avoid the crisis from occurring again.

It is also unfortunate that the oil sector has been accused of making inventory gains whereas its inventory losses have been ignored, though both are a part and parcel of the oil sector due to its regulated nature.

The top OMCs in Pakistan that account for more than 90 percent of consumer demand are either owned by the government (PSO), have a stake of the government (Total-Parco) or have investments from renowned international names. These companies comply with all regulations, code of corporate governance and international standards set by their investors and undertake annual audits, tax audits and several other checks and balances; they have been doing so for decades.

It is quite surprising then that these companies are being termed as a mafia. There is evidently a lack of understanding of underlying issues and the OMCs are being vilified to conveniently gain public sympathy.

The prices of petrol and diesel are regulated in Pakistan and OMCs have a fixed margin which is rather meagre. As such, the sector has continued to suffer losses due to the inaction of the government though the OMCs have been making pleas for help. The sector’s losses run into about Rs50 billion in respect of foreign exchange alone. In addition, the sector continues to suffer due to rampant smuggling of diesel, an inequitable ‘turnover’ tax and imposition of new conditions requiring billions of rupees in investment though there is no mechanism provided for recovery of the investment.

It is hoped, therefore, that the concerned arm of the government will evaluate the situation in a more realistic manner. The ordered probe must nail those actually responsible for the crisis. The difficulties of OMCs must be seen in the true light and steps must be taken to remedy the situation on a permanent basis so that the country is saved the suffering it faced in June, 2020.


The writer is a communications expert