Inquiry report on POL shortage: Oil smuggling into Pakistan a reality

ISLAMABAD: A brief hiatus in oil smuggling due to the closure for a few days of the Pak-Iran border during the early days of the Covid-19 pandemic, badly affected the entire supply chain of petroleum products in Pakistan.

The findings of an inquiry commission on the shortage of petroleum products states that the smuggling of Iranian oil is a reality. “The quantum of smuggling through the land route [is] approximated at Rs250 billion.”

The report said the government must sensitise the concerned agency to take strict measures at the Pak-Iran border to curb this huge evasion of tax revenue.

Likewise, it said, smuggling through the sea route continues. Only in the month of July this year, two huge consignments of Iranian contraband oil were apprehended on the information of international agencies. In this regard, the PakistanCoast Guards assisted by the Pakistan Customs have to play their effective role and they may be directed as such, the report says.

The report recommended that the government must set up additional quality control laboratories across Pakistan. There is also a dire need of mobile testing units. In coordination with the district administration, such units should routinely check the quality of petroleum products in retail outlets and depots in their area of jurisdiction to curb this menace.

Two case studies, quoted by the report, said that the Hydrocarbon Development Institute of Pakistan (HIDP) tested two imported oil consignments and concluded that to the extent of tests carried out, the sample results fall under the typical characteristics of Oman/Iranian crude oil.

During the course of the inquiry, the report said, the commission was taken aback at the decision of the so-called ban on petroleum products in March-April 2020. This was an irrational decision driven by the inertia that prevailed both in the ministry of energy, petroleum department (MoEPD) and Oil & Gas Regulatory Authority (Ogra).

The report pointed out that India had filled its tanks/storages with 37 million metric tons of petroleum products when prices fell. Starting from a failure to develop strategic storage coupled with not getting the refinery stock lifted by the Oil Marketing Companies (OMCs) (in Feb, March and April), Pakistan lost out on a great opportunity. As long as the refinery stocks are lifted as per the quota allocation mandated by law, why should the private OMCs not be allowed to import as much as they can afford? Even if OMCs make money on the import of cheap oil cargo, it is a fair proposition in any free business environment, the report said.

The commission recommended that in future product review meetings (PRMs), only quotas of local refineries should be fixed as per the market shares of the OMCs (or as decided by mutual deliberation of the OMCs). The OMCs should only give their import plans and MoEPD should be content with a minimum stock of 20 days by each OMC. Had this practice been in vogue, all OMCs and the Pakistan government would have saved millions in foreign exchange through cheap procurement in April and May 2020.

It was also recommended that all illegal outlets must immediately be shut down while simultaneously initiating action not only against their owners but also against those who allowed them to prosper. In the same vein, the practice of unlawful regularisation of retail outlets built in violation of rules must be put to an end. No one knows the exact number of retail outlets operating in Pakistan be it MoEPD, department of explosives or Ogra. With he help of the district administration, the MoEPD, department of explosives and a representative of the OMCs, the exact number should be reconciled. Standard operating procedures should be developed so that this data is updated every month. The exact number and OMC-wise location of such retail outlets would thus be known to all concerned.

The report said both Ogra and MoEPD had been using an archaic formula of price fixing, dependent on the retrospective purchase prices of Pakistan State Oil. Though acceptable in normal times, this formula could not withstand the price volatility of the international market. During the course of this inquiry, the price fixing formula has been changed and is made dependent on fortnightly Platts rates. The average of 15 days Platts rates serves as the base of the ex-refinery price. This was a long-awaited correction. The commission, however, is of the view that this mechanism may be appraised after six months and the government might consider the same formula with an average of 30 days instead of 15 days. Such a step would decrease the number of frequent price changes bringing it to 12 instead of 24.