Thursday February 02, 2023

ECC gives go-ahead to revised premium on diesel, petrol import

March 26, 2022

KARACHI: Economic Coordination Committee (ECC) on Friday gave go-ahead to the revised premium on import of diesel and petrol on fortnightly basis to provide a level playing field to oil companies vis-à-vis Pakistan State Oil (PSO), leaving no margin of losses for both.

ECC meeting chaired by Federal Minister Shaukat Tarin, gave approval to the summary of Petroleum Division, which proposed exclusion of Kuwait Petroleum Corporation (KPC) premium from price computation of high-speed diesel (HSD) for April-June 2022 period due to price volatility in the global market.

According to a summary, due to the volatile market conditions in the wake of Russia-Ukraine war and high demand of HSD in the forthcoming March-May harvesting season, the existing benchmarking appears unsustainable and oil marketing companies (OMCs) will suffer substantial losses.

“OMCs may be unable to import HSD leading to a potential shortage of HSD across the country,” the summary stated. ECC, while considering a summary dated July 21, 2020 submitted by the division had approved the parameters to determine ex-refinery/import prices for motor gasoline (mogas or petrol) and HSD (diesel), whereby the base price was fixed on the basis of 15 days’ average FOB (free on board price) prices of the Arab Gulf market (published in the Platts Oilgram).

Under the above base price, PSO’s last available average import premium and incidental charges (LC/NANK charges, wharfage, port charges etc) were added to calculate the cost and freight prices for finalising the local consumer prices. The premium (freight and supplier’s margin) is a lump sum cost of the supplier/exporter, which is either negotiated or offered in a tender process. PSO, being a public sector company, is obligated to procure imports in accordance with the Public Procurement Regulatory Authority (PPRA) rules/regulations.

As per existing arrangements, PSO imports its motor gasoline requirements entirely through spot tendering, while bulk of its HSD imports are made from KPC on the basis of a long-term agreement, which is revised/reviewed biannually. The premium on long-term basis is lesser than the tendered premium. Presently, KPC premium for PSO's HSD cargoes for January-June, 2022 is $2.40/bbl.

In case, KPC is unable to meet PSO’s HSD demand, the same is imported from the spot market. When PSO procures from both sources (KPC and spot market), the weighted average of KPC and spot premium is used as a benchmark to calculate the consumer prices, according to the summary.

Oil Companies Advisory Council (OCAC) pointed out that HSD premiums for the industry have been historically higher than PSO, implying the private oil sector was importing HSD at a relatively higher premium as compared to PSO’s benchmark premium. Due to this, the remaining OMCs are at a disadvantage. This difference has now risen significantly because of the prevailing geopolitical situation.

PSO’s tender for second fortnight of March, 2022 opened at $8.45/bbl, whereas premiums are even higher in the open market. PSO did not receive any offer in their HSD tender for the first fortnight of April 2022. Since the current dollar price is benchmarked on the basis of substantial imports by PSO from KPC at $2.4/bbl, any OMC importing at the PSO-tendered premium at $8.45/bbl would incur a loss of up to Rs6.8/Liter, creating an unsustainable position for importers.