Pakistan’s oil industry on the brink of collapse, calls for urgent government intervention

According to recent reports, the oil industry in the country is facing serious challenges in obtaining crude oil and petroleum products due to foreign exchange constraints and current product pricing. These challenges have been exacerbated by the recent depreciation of the currency and an increase in the central bank’s policy rate.

The Oil Companies Advisory Council (OCAC), which comprises over three dozen major oil marketing companies (OMCs) and refineries, has expressed concern to the government about the possibility of a major disruption to the already fragile supply chain.

In a communication to the ministers for finance and energy, the governor of the State Bank of Pakistan (SBP), and the chairman of the Oil and Gas Regulatory Authority (Ogra), the OCAC has urged for urgent engagement to address the “severe impact of the recent depreciation of the rupee.”

The association has also requested the development and immediate implementation of a transparent mechanism for the recovery of foreign exchange losses in product pricing. If immediate revision of prices based on the current exchange rate is not feasible, the government should at least put a system in place immediately.

The recent steep depreciation has rendered the existing letter of credit (LC) lines inadequate for the industry, which could lead to import disruption of crude and refined products. The industry has also expressed concern about the cost of opening confirmed LCs, which has gone up many times and adversely impacted profitability.

Moreover, maintaining the 20 days’ mandatory stock cover as per OMCs license requirement at the current rupee-dollar parity and after the recent increase in the SBP policy rates has resulted in borrowing costs of more than 50 per cent of regulated margins. Additional working capital burdens can raise significant concerns around OMCs’ ability to sustain operations.

The association has reported that its members have been doubly hit due to the erosion of equity from foreign exchange losses and a reduction in working capital lines due to an increase in the rupee-dollar parity coupled with a rise in international oil prices, particularly high-speed diesel. The OMCs have already reported about Rs35 billion cumulative losses in POL pricing in recent months.

The international price of petrol has increased by 3 per cent ($2.8 per barrel) to $94.84 per barrel between Jan 1, 2022, and March 2, while HSD prices surged by $15.48 or 18 per cent to $103.53 per barrel. During the same period, the rupee depreciated by over 61 per cent or Rs108.38 against the US dollar. This means that oil prices and exchange rate changes require an increase in the oil industry’s needs by 90 per cent than LC limits in local currency compared with last year to produce the same quantity of HSD.

Therefore, the oil industry has called upon the government to ensure that the banking sector enhances limits for oil companies and refineries, enabling them to manage the impact of increased oil prices and rupee depreciation that are critical for the survival of the sector and the integrity of the POL supply chain.

According to Dawn, the OCAC has warned that the industry is on the brink of collapse, as fuel shortages in certain areas earlier this year highlight the fragile condition of the industry. Urgent government intervention is necessary to ensure uninterrupted supplies.