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Wednesday July 17, 2024

Oil industry wary of govt plan to import on foreign suppliers’ account

By Tanveer Malik
June 06, 2023

KARACHI: The oil industry has serious reservations over the government plan to import oil on foreign suppliers' account through custom bonded storage facilities, sources told The News on Monday. The scheme would be effective if the oil prices are deregulated, sources said, and added that Oil Companies Advisory Council (OCAC) had opposed it when the plan first surfaced in December last year.

The federal government had put the summary on “import on foreign suppliers’ account through custom bonded storage facilities” in the Economic Coordination Committee (ECC), which met on Monday. Although the ECC could not take up the matter, it put it on hold for the time being, sources revealed. It was said that the proposed mechanism was not beneficial for the country, and its implementation could have serious consequences for the oil Industry.

They said that as per the plan, the remittance on account of imports would not be allowed at the time of imports. However, the impact of foreign exchange outflow would still remain the same as the current practice, where all importers have to transfer forex based on terms of supply arrangements e.g. 30 days from BL etc. Therefore, no positive impact would be observed on the forex reserves of the country.

They said that foreign suppliers have the option to hedge their product, this would give them an edge, removing the level playing field for the importing oil marketing companies (OMCs) that were are not allowed to use any hedging option.This method could also threaten local production as per the sources, since supplies of local refineries would get disturbed. Such a disruption could have massive economic effects not only on the oil industry, but also on the overall economy of the country. Furthermore, planning of import/local supplies would be compromised as well, they added.

At the ports, this plan would also create congestion because current importers were already facing setbacks on account of long waits, especially during the agriculture season. This arrangement would add to the woes of the existing importers as import and export by foreign suppliers will have to be accommodated using the current port infrastructure.

Managing port congestion will become a bigger challenge since the berthing priorities are being set by Port Qasim Authority with no inputs from OCAC. They pointed out that the OMCs will be letting go of their existing contracts to uplift from this recommended arrangement, and the importer might bring in product following penetration pricing strategy to disrupt existing supply contracts. Once disrupted, there will be adequate opportunity to increase prices. This is a significant risk especially during the current times when re-entering supply contracts at previous rates would not be possible.They pointed out that this arrangement exposes the country to high risk of supply chain breakdown, especially because of the dynamic international market situation in case of reliance on single source catering to approximately 50 percent of imports / deficit requirement of the entire country.

The importer would not be bound to import or they might choose not to import and still pay a penalty/declare force majeure to avoid a loss situation (recent LNG issue), this becomes a serious risk from a supply chain security perspective especially if viewed together with the above point. This might also result in violation of the competitive laws of the country, they added.