Oil industry seeks revision of exchange rate formula for imports

ISLAMABAD: The oil industry is pressing the government to change the way it calculates the exchange rate for petroleum imports, saying the current formula exposes the private sector to huge losses due to exchange rate fluctuations.

The industry has asked for a revision based on the ground realities so that it is not exposed to perpetual suffering due to the existing methodology for adjusting exchange losses and gains. The industry wants a consultative session with government functionaries to improve the existing pricing formula in a way that does not continue to harm private OMCs and refineries.

Currently, various OMCs and refineries are braving billions of losses due to exchange rate fluctuations. The industry wants exchange losses to be compensated based on the actual exchange losses, not on the existing formula, which is based on the exchange losses and gains of Pakistan State Oil (PSO).

In a letter addressed to the secretary of Petroleum and OGRA chairman on November 6, 2023, the OCAC (Oil Companies' Advisory Council) pointed out that the last revision of the pricing formula, effective from September 1, 2020, had addressed a major issue by shifting the price to an average of Arab Gulf Platts (daily FOB).

However, there are still anomalies in the current pricing formula that need to be addressed. The industry also pinpointed that, most significantly, the method for adjusting exchange losses and gains needs to be reviewed urgently to ensure that the impact of fluctuations in exchange rates is fully adjusted for all industry members.

The OCAC asked government functionaries to hold consultative sessions with industry members to hear their concerns and derive a way forward for developing a viable mechanism for complete adjustments of exchange losses and gains through pricing.

Under the existing pricing formula, the exchange rate is PSO benchmarked. PSO has the facility of LCs based on 30-60 days of credit and has access to the controlled price of the exchange rate, despite the fact that it imports diesel on a GtG basis. PSO is the entity that has unmatchable government support, whereas other OMCs have no support.

However, the competing private sector multinational and national oil marketing companies and refineries do not have the facility of LCs of 30 days based on credit or access to the rates of US dollars issued by the State Bank of Pakistan.

The private sector OMCs and refineries have to use commercial bank rates, which are mostly based on rates higher than the SBP rates. When exchange losses are incurred, the private companies suffer the most.

The LC confirmation charges are also high. The oil industry wants exchange losses and gains

to be based on actual exchange losses, not on the existing formula, which is PSO benchmarked.