Oil purchase: Power companies reluctant to make advance payments

New LC-backed system can eliminate circular debt from energy chain.

ISLAMABAD:

A persistent tussle between power companies and a major oil supplier on advance payments may aggravate the energy crisis as power producers have so far been reluctant to buy petroleum products by opening letters of credit which will ensure prompt payments for oil supplies, sources say.

The new mechanism, if adopted by all energy companies, will ensure smooth oil supply on cash rather than credit and will not create circular debt which has plagued the entire energy chain for the past many years.

On its part, Pakistan State Oil (PSO), the largest oil marketing company of the country, has started opening LCs for purchase of petroleum products from refineries after Pak-Arab Refinery Company (Parco) refused to supply on credit.

PSO is adopting the mechanism as its receivables, mainly from power companies, have touched Rs205.98 billion while it has to pay Rs178.802 billion to local as well as international fuel suppliers.

“The LC-backed system will force power companies to make advance payments to oil suppliers,” an official of the Ministry of Petroleum and Natural Resources said. “There will be no oil for the power sector if it does not make payments in advance.”

A senior official of the Ministry of Water and Power said power companies seemed not to be in a mood to adopt the new system. “The system, introduced by PSO, can be successful only if the power sector accepts it and opens LC for oil purchase,” he said.

However, at the same time, the official stressed that power companies had no money to implement the LC-backed payment system.

A PSO spokesperson said the company, as part of the vision of the new managing director, had embarked on a campaign to strengthen the supply line of petroleum products with maximum purchase from local refineries.

“In pursuit of this objective, the company has entered into sale-purchase agreements with Byco Petroleum and Bakri Trading Company as well as renegotiated its contract with Parco,” she said.

She was of the view that the initiative would benefit the national economy by reducing dependence on imported oil products, cut spending of foreign exchange, encourage foreign investment in the energy sector and maximise output of local refineries.

Published in The Express Tribune, May 23^rd, 2012.