Oil industry calls on govt to review exchange rate formula to mitigate losses

The oil industry urged the government to reconsider the method of calculating the exchange rate for petroleum imports, asserting that the current approach exposes the private sector to substantial losses stemming from exchange rate fluctuations.

In a letter dated November 6, 2023, addressed to the Secretary of Petroleum and OGRA Chairman, the Oil Companies Advisory Council (OCAC) expressed their concerns about the existing pricing formula and sought a revision based on practical considerations to mitigate ongoing losses to private oil marketing companies (OMCs) and refineries.

Presently, several OMCs and refineries are grappling with losses due to fluctuations in exchange rates. The industry is advocating for a revised compensation mechanism that addresses actual exchange losses rather than relying on the current formula, which is tied to the exchange losses and gains of the state-owned Pakistan State Oil (PSO).

The OCAC acknowledged a previous revision of the pricing formula effective from September 1, 2020, which shifted the pricing basis to an average of Arab Gulf Platts (daily FOB). However, the industry highlighted remaining anomalies, emphasizing the urgent need to review the method of adjusting exchange losses and gains to ensure fair treatment for all industry members.

Under the current pricing formula, the exchange rate is benchmarked against PSO, which benefits from facilities such as Letters of Credit (LCs) based on 30-60 days of credit and access to controlled exchange rates. 

In contrast, private sector OMCs and refineries, lacking these advantages, are compelled to use commercial bank rates, often higher than those offered by the State Bank of Pakistan (SBP).

The private sector companies face the brunt of exchange losses, exacerbated by high LC confirmation charges. The industry is advocating for a shift towards a system that bases exchange losses and gains on actual figures rather than the existing PSO-benchmarked formula.

The OCAC has called for consultative sessions with government officials to address concerns and collaboratively develop a viable mechanism for comprehensive adjustments of exchange losses and gains through pricing.