Upcoming federal cabinet’s economic coordination committee (ECC) may grant its approval to implement a mechanism of fortnightly reimbursement of Price Differential Claims (PDCs) of the oil marketing Companies (OMCs) and refineries in order to avert shortage of petroleum products.
According to sources, the Petroleum Division has forwarded a summary to ECC of the Cabinet and sought its necessary approval for the fortnightly reimbursement of PDCs of OMCs and refineries. It is expected that in the upcoming ECC meeting it is likely to grant its approval in this regard.
“The Minister for Energy has seen and authorised submission of the summary with subject ‘Reimbursement of Price Differential Claims of Oil Marketing Companies (OMCs) and Refineries’ to the ECC of the Cabinet for consideration and approval,” said sources.
As per details, the petroleum division, in its summary for ECC, said that a special PDC payment procedure has been developed in consultation with the industry, Oil and Gas Regulatory Authority (OGRA) and Finance Division.
Similarly, the Petroleum Division proposed that a special assignment account may be opened with Pakistan State Oil (PSO) to be used for drawal of PDC by PSO for its own claims and issuance of PDC to other OMCs/ refineries, in accordance with the proposed mechanism. Furthermore, it is proposed that initially an amount of Rs 20 billion may be provided through a supplementary grant to PSO in accordance with the mechanism.
“The proposals for further supplementary grants, if any, will be submitted to the ECC, subsequently in accordance with the anticipated requirements, as and when required,” said the sources.
They added that OGRA has also been requested to estimate the amounts required for payment of PDC for the period 1-4 November, 2022, the current fortnight and the next fortnight.
Earlier, OCAC, the representative entity of the industry, had protested to the Petroleum Division for expecting the oil sector to bear the burden of billions under the guise of PDC. It is highly unrealistic and might expose the energy market in the country to serious risks.
Sources in petroleum division said that in liu with rising oil prices (the price of Brent crude as on 4th March, 2022 is $ 111.5/bbl), PDC is estimated to be in the range of Rs 10-15/litre in the coming fortnight (16-31 March, 2022) which would translate into an expected PDC of a whopping Rs 12 billion roughly every two weeks.
They further said that in order to avert any shortages in the market, it is essential to nurture the confidence of the oil industry. In effect that any price differential borne by them during a fortnight will be reimbursed promptly.
They said the core need for the mechanism to work is promptness so that the industry continues its procurement from the international market in a smooth and uninterrupted manner. This is also critical on account of the fact that the prices of the cargoes in the international market have increased substantially and might increase even further and has been putting pressure on the working capital requirements of the industry and any delay in the processing of the PDC might stretch the credit limits of the industry to an unsustainable level, said sources of petroleum division.
Oil prices have been steadily on the rise since September last year, directly leading to increases in the consumer prices of petroleum products in the country. To counter this and provide relief to the masses the Prime Minister announced a relief package on 28th February, 2022. The Package includes a reduction in the consumer price of Motor Spirit and diesel by Rs 10/litre and a commitment to keep the prices stable till the end of the fiscal year.
It is relevant to note that in order to implement the premier’s announcement, Finance Ministry moved a summary on the same date and resultantly the consumer prices of Motor Gasoline were fixed at the rate of Rs 149.86/litre and those of High Speed Diesel (HSD) at the rate of Rs 144.15/litre.
To make this happen, the rate of sales tax on both the products was brought down to zero percent. The rate of petroleum levy was brought down to Rs 1.81/litre on Motor Gasoline and zero on High Speed Diesel. In fact a price differential of Rs 2.28/litre on high speed diesel was created as a result of this fixation. This price differential would be paid to the OMCs/refineries by the government as a subsidy in accordance with the proposal of the Finance Division, approved by the PM.
When the government decided to cut fuel prices, the government’s revenue from petroleum imports was net positive. For instance, the imported price for HSD was $119.3/barrel and $117.8/barrel for petrol. The PDC is calculated at Rs13 per litre for HSD and Rs8.4 per litre for petrol. There is no GST for HSD and petrol, CD is calculated at Rs13.6/litre and Rs13.4/litre, respectively.
According to these figures, the government still earns Rs5 billion per month from the sale of 600,000 tonnes of HSD and 700,000 tonnes of fuel. The government, on the other hand, is foregoing a Rs51 billion petroleum charge at full Rs30/litre and a Rs42 billion GST at full 17 percent. On PL and GST, Rs93 billion in income is lost each month. When you factor in Rs18 billion in PDC, the government’s monthly income loss potential is Rs111 billion. Despite this, the government receives net income of Rs5 billion (at the above-mentioned price). As international prices continue to soar the divide would get only wider, and might cause intense ramifications from the IMF.
OCAC, in a letter to Secretary Petroleum dated March 4, 2022 had already proposed a mechanism to be based on government sponsored subsidy in the form of consortium of banks to facilitate business normalcy and support the ministry of energy in expediting the same.
“We request you to approve the mechanism enabling swift implementation of the process for timely remittances of PDC claims,” stated the OCAC letter, further adding ”As discussed in the meeting, the management of cash flow is critically challenging for the downstream sector owing to insufficient margins, rupee dollar parity, constraints in financing facility, circular debt, outstanding PDCs since 2004 and other external factors such as the geopolitical situation, high premiums, etc.”
“The sooner the process is approved and implemented, the quicker will be the redressal of already constricted working capital constraints faced by the oil industry,” said OCAC.
OCAC further sought favourable consideration on the shared mechanism and looked forward to formal approval enabling immediate implementation of the same before the announcement of new PDCs in the next fortnight, if any.
On March 2, 2022, Petroleum Secretary Ali Raza Bhutta and Oil and Gas Regulatory Authority (OGRA) chairman Masroor Khan, in an urgent meeting with the representatives of oil industry including Oil Marketing Companies (OMCs) and refineries asked to submit their proposals regarding formulating a mechanism for fortnightly reimbursement of PDCs of the oil companies.
Petroleum secretary and OGRA chairman also gave assurances to the oil industry that its proposals would be immediately taken up with the finance ministry and a finalised mechanism would be shared with OMCs before seeking important approval from the federal cabinet’s Economic Coordination Committee (ECC).
Following to the assurances/promises of Secretary Petroleum and OGRA chairman, the Oil Companies Advisory Council (OCAC) proposed the “funded subsidy” mechanism for fortnightly reimbursement of Price Differential Claims (PDCs) and urged from the petroleum division to implement the mechanism for timely remittance of PDC of the oil industry.
Priorly, the Oil Companies Advisory Council (OCAC) in a letter dated March 1, 2022 to petroleum secretary requested to remove the Price Differential Claim (PDC) by revising petroleum product prices immediately or develop an alternate subsidy mechanism in order to avoid imminent petroleum shortage of the petroleum products in the country.
OCAC also requested for an urgent meeting within the next few days with industry representatives to appraise the current situation and challenges being faced by the oil industry and to save the country from imminent shortage of the petroleum products.
It is noted with deep concern that PDC has been imposed despite the fact that OCAC had highlighted the critical condition of the industry.
OCAC, vide its letter dated February 3, 2022 had requested the ministry’s support in avoiding further imposition of PDC as the same will have an untenable impact on industry’s cash flows which would lead to catastrophic disruption in the POL supply chain of the country,
The OCAC further said that in order to ensure uninterrupted supplies and to manage working capital requirements, the industry had already requested the State Bank of Pakistan (SBP) to support in enhancement of their financing limits; a meeting was held on February 28, 2022 and sensing the gravity of situation the Governor SBP constituted a committee of leading banks to urgently provide their proposal in this matter.
As per OCAC, the decision to maintain prices at current level till July 2022 will lead to further build up of PDC for HSD and MOGAS as the international prices are on the sharp rise due to the current geopolitical situation.
If the local consumer prices are not aligned with the international market and PDC regime is continued, the industry will not be able to sustain and this will lead to severe supply chain disruption more so during the upcoming harvesting season resulting in a crisis of petroleum products shortage similar to what was faced in June 2020.