Oil sector presses for higher margins, citing rising costs

KARACHI: The oil sector has called on the Petroleum Division to address concerns over the margins of oil marketing companies (OMCs) on petroleum products, labelling the margin increase proposed by the Oil and Gas Regulatory Authority (OGRA) as “insufficient” to cover rising financial costs.

The Oil Companies Advisory Council (OCAC) recently wrote to the Director General (DG) Oil at the Petroleum Division, urging a review of OMC margins. In the letter, the OCAC referenced earlier communications -- dated June 14, October 2 and October 14 -- where it recommended an increase of Rs4.78 per litre in OMC margins, from Rs7.87 to Rs12.65 per litre.

“This recommendation was based on critical cost considerations, including financing costs for maintaining a 20-day stock cover, turnover tax, handling losses, demurrage costs, the financing of unadjusted sales tax and other operational expenses,” the letter stated.

Despite these recommendations, Ogra has proposed a margin increase of only Rs1.35 per litre, of which Rs0.5 per litre is allocated for the digitisation and automation of fuel pumps. The OCAC argued that the estimated cost of digitising fuel pumps exceeds $120 million, rendering the allocated Rs0.5 per litre grossly insufficient. Excluding this allocation, the effective margin increase would be just Rs0.85 per litre, significantly below the OCAC’s proposed increase.

The council noted that the proposed adjustment represents only an 11 per cent increase, which fails to adequately address the impacts of inflation.The OCAC highlighted additional challenges faced by the industry, including: smuggling of petroleum products, high financing costs, exemption of sales tax, high turnover tax and insufficient OMC margins.

These persistent issues, according to the OCAC, threaten the viability of the oil marketing sector. It stressed the need to align OMC margins with actual costs to sustain operations. The OCAC has sought the support of the Petroleum Division to convene an urgent meeting with industry stakeholders for a comprehensive review of OMC margins.

Last month, Ogra proposed raising margins on high-speed diesel (HSD) and petrol from Rs7.87 per litre to Rs9.88 per litre, marking a Rs1.35 per litre increase for OMCs. For petroleum dealers, Ogra suggested a Rs1.4 per litre increase, bringing their margin on HSD and petrol to Rs10.01 per litre from the current Rs8.64 per litre.