Finance ministry asked to guarantee oil supply payments

Letter of credit-backed mechanism suggested to avoid debt pile-up.

ISLAMABAD: As the power sector continues to default on payments to Pakistan State Oil (PSO), the Ministry of Petroleum has asked the finance ministry to guarantee the cost of oil supplies to power companies on a daily basis.

The petroleum ministry has also given a plan of payment for oil supplies to the power sector to avoid pile-up of circular debt that has plagued the entire energy chain.

Sources said that the petroleum ministry told the finance and water and power ministries that the power sector must ensure payments against oil and gas supplies through advance letters of credit (L/C).

The petroleum ministry also asked the power sector to place timely orders with oil marketing companies (OMCs) for the arrangement of fuel.

OMCs can only make supply arrangements once an L/C, backed by payment guarantee or bank guarantee, is provided to them for advance supply order, the petroleum ministry said, adding alternatively the finance ministry may guarantee the cost of petroleum product supplies by PSO to the power sector on a daily basis.

Petroleum Secretary Ijaz Chaudhry confirmed that the petroleum ministry has suggested a mechanism for opening advance L/C to get supplies from PSO.

Under the mechanism, PSO will open an L/C against supply of fuel from oil refineries and the power sector will also have to open L/C to lift supplies from PSO, he said.

Another official said the entire energy sector was facing a critical liquidity crunch due to the circular debt. He was of the view that the L/C-backed payment mechanism may not be successful as the power sector as well as PSO will also require money to open the L/C.

Total receivables of PSO stand at Rs172.79 billion, with Rs35.5 billion from Wapda, Rs73.71 billion from Hubco, Rs38.6 billion from Kapco, Rs2.73 billion from PIA, Rs285 million from Oil and Gas Development Company, Rs5.06 billion from Karachi Electric Supply Company and Rs1.10 billion from Pakistan Railways.

Payables of PSO have accumulated to Rs135.4 billion, of which it has to pay Rs33.47 billion to Pak-Arab Refinery Company, Rs9.86 billion to Pakistan Refinery, Rs9.48 billion to National Refinery, Rs16.68 billion to Attock Refinery and Rs2.34 billion to Bosicor.

Published in The Express Tribune, November 17^th,  2011.