Oil sector faces sustainability crisis as smuggling worsens diesel glut: OCAC warns

KARACHI: The oil sector is facing a serious sustainability crisis due to huge stocks of high-speed diesel (HSD), which may compromise the ability of refineries to import crude oil, the Oil Companies Advisory Council (OCAC) warned.

“The critically high HSD stocks (44 days cover) in the country pose significant challenges to the sustainability of the oil industry," the OCAC said in a letter to the Oil & Gas Regulatory Authority (OGRA).

"The alarming disparity between the high stocks of HSD (650,000 tonnes) in storage and the persistently low sales of 14,700 tonnes against planned 23,000 tonnes, primarily attributable to the rampant smuggling of POL products from the western borders, has started to exert adverse effects on the refineries and oil marketing companies (OMCs).”

The oil body noted that high HSD stocks necessitated the rental of additional storage space by one refinery and forced the closure of distillation units of another refinery. “We have extensively deliberated on strategies to address this issue in the last few meetings, but all has been in vain due to the pervasive influence of smuggled products,” OCAC added.

The OCAC pointed out that demand destruction and surplus inventory have created a vicious cycle, wherein the industry is struggling to maintain operational viability. "It is imperative to recognise the cascading implications of this challenging situation, exacerbating financial strain throughout the supply chain," it added.

"While the oil marketing companies engage in legitimate sales of HSD during the peak agricultural season, the suppressed market demand impacts their cash flows, rendering the OMCs unable to fulfill their financial obligations to refineries and simultaneously

retire LCs of imported product."

"Consequently, the ability of refineries to make timely payments for crude oil imports will be compromised, and due to these issues, we will be facing similar challenges as encountered in 2022 when LC establishment became an uphill task due to the rating of the country in the international market."

Due to high HSD stock levels, refineries will be constrained to curtail their throughput, which, in turn, will impact the production of MS, HSD, JP-1, and JP-8. The crux of the matter lies in cash flow constraints due to excessive stock levels, posing significant financial exposure to the oil industry.

OCAC urged OGRA to take immediate and decisive actions to restore market equilibrium and save the refineries and OMCs from collapse.The oil sector has been feeling the heat of Iranian smuggled products; however, despite the oil sector’s reservations, no tangible results have been witnessed against the smuggling of petroleum products.