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May 28, 2020

OMCs struggling for survival due to lockdown

Top Story

May 28, 2020

LAHORE: The lockdown in the country following the Covid-19 pandemic has put the last nail in the coffin of the Oil Marketing Companies (OMCs) in Pakistan as they were already struggling for survival besides incurring losses after the depreciation of the rupee against the dollar.

The worst patch of the OMCs started from the spring of 2018 as the Pakistan rupee was depreciated with a jump of Rs 5 per dollar and reached Rs 115 parity per dollar after staying in the range of Rs 105-110 for almost four years.

According to an official, the OMCs were expecting that it would be died down after a bit of commotion. However, the OMCs witnessed exchange loss in their books. After all, the letters of credit opened by the OMCs for import of petrol and diesel were going to be settled at the new rate, causing a loss.

Following the losses, the OMCs approached the Oil Companies Advisory Council (OCAC), Ministry of Energy and OGRA. The government was reminded that according to ECC decisions made in 2011-2012, the losses occurred due to exchange rates were to be made part of the price and passed on to the consumer as the OMCs margin was fixed.

By early October 2018, the exchange rate was further climbed to Rs 132 but the OCAC did not respond to the letters of the OMCs. The losses by this time had swelled to billions. The rate closed at Rs 140 and the effect of government apathy would result in losses of billions when these companies announced their results.

On the one hand, the official said the OMCs were being forced to bear these losses and, on the other, their pleas for help on the OMCs margin were being ignored. According to an independent study by the Pakistan Institute of Development Economics (PIDE), this margin was not enough to continue to encourage investments in the oil marketing sector. The dollar/rupee rate was in freefall and closed at Rs 164 at the end of June 2019. According to industry estimates, Rs 40 billion losses were incurred by this date. The budget also increased the rate of turnover tax on the OMCs from 0.50 per cent to 0.75 per cent. The industry official said it was already an extremely high rate considering the meagre margins and the foreign exchange losses being incurred. The official claimed that the OMCs margin that was supposed to have been revised w.e.f. 1 July, 2019 was delayed and got implemented from 1 December, 2019, taking it from Rs 2.64 to Rs 2.81 per liter that further aggravated the industry’s problems.

The industry official said that after decades of neglect, starting with the PSO, the country started modernizing its oil retail infrastructure with new OMCs starting to appear in the country in early 2000s. The OMCs not only brought much needed investment in the sector but almost doubled the number of retail outlets in the country and built storage facilities in Pakistan. They must also ensure that the country has 20 days of stock available to meet strategic needs of the country.

The white oil pipeline commissioned in 2006 that led to almost 4,000 tank lorries off the roads and provided relief to the public in terms of lower freight and helped the environment had to be supplied with a dead stock of diesel which was provided by the OMCs. To date, the costs of holding this dead stock continues to be put on the OMCs, a sector that provides employment to more than 200,000 people, the industry official said.

Further, these OMCs do not simply operate retail outlets selling fuel. They also provide a lifeline to communities around the country with their convenience shops, pharmacies, cafes, etc. apart from the regular services one would normally expect at a petrol station. It would be difficult to imagine how life would be if these did not exist and the petrol pumps on motorways and highways provide nothing more than fuel.

The industry official claimed that the industry was now sitting on losses of almost Rs 100 billion due to above-mentioned reasons. Even if the issues of the OMCs stop growing today, it will take almost a decade to recover these losses. The financial results from the OMCs for the quarter ending 31 March, 2020 are likely to be the worst ever in the recent history due to not just the factors mentioned above but also the inventory losses resulting from a sudden drop in global prices and lockdown.

Unless the government takes urgent action to address the genuine concerns of the industry, not only the state-owned PSO is going to further drown in losses, some of the other OMCs may also end up losing the battle for survival, the industry official warned.