Ministry agrees to increase OMCs margin on MS, HSD

KARACHI: The Ministry of Energy has partially accepted a demand of the oil marketing companies (OMCs) for increasing their margins on sale of petroleum products, officials said on Tuesday.

A source in petroleum division said an increase in OMC’s margin to Rs6 per litre on the motor spirit and high-speed diesel was agreed at a meeting between senior ministry officials and industry representatives held in Islamabad on Tuesday.

“The oil industry also agreed on de-regulation of the sector in the next three months,” the source said.

The ministry’s recommendation will be presented to the Economic Coordination Committee (ECC) of the cabinet for formal approval.

The OMCs have sought increase in margins on petrol and diesel to Rs.8.85 per litre. Current margins of OMCs is Rs3. 68 per liter.

The demand of OMCs came only a couple of days after government reached an accord with the petroleum dealers and approved an increase to Rs7 per litre on the motor spirit and high-speed diesel from Rs4.90 and Rs4.13, respectively.

OMCs demanded for equalisation of their and dealers margins, when Oil Companies Advisory Council (OCAC) – a representative body of oil sector companies – sent a letter to the Ministry of Energy last week.

OCAC recognised the timely reimbursement of price differential claim (PDC), which was critical in enabling the industry to ensure uninterrupted fuel supplies.

However, after the culmination of PDC, OMCs were looking towards the government for immediate relief due to the progressive depletion in their financial position following increase in costs.

OCAC sought the equalisation of the OMC and dealer margins by revising OMC margin of Rs7 per litre from the existing 3.68 per litre on both-motor gas and diesel.

The council said that there were significant exposures and costs that OMC’s incurred to secure a smooth oil supply chain, from which dealers were protected; “therefore, there was no justification for a lower OMC margin as compared dealers”.

OCAC listed the costs that OMC’s were currently covering from their own margins as at today’s price the turnover tax of 0.5 percent consumes 35 percent of the OMCs’ margin, thereby significantly diminishing the profitability of OMCs.

Likewise, significantly increasing interest rates and increased letter of credit (LC) charges have severely impacted the industry’s profitability as approximately 65 percent of all motor fuels were imported.

OCAC also said that port congestion resulted in demurrages, which added to the charges. The industry paid over $27 million on account of demurrage over the last one year, with no end in sight on this account even in the medium-term, it noted.

All other ancillary costs, eg electricity, wages, bank borrowing charges etc that impact the dealers in running of their daily businesses impact the OMCs in a bigger way. In fact, with credit lines in place, part of the dealer financing was being paid for by the OMC. “It is evident that immediate action is required to ensure survival,’ the oil body said.