ISLAMABAD: With allegations that many oil marketing companies (OMCs) are involved in creating artificial fuel shortage in the country, the government should undertake a forensic audit of oil stocks, procurements and profits made by different companies.
Background discussions with different stakeholders suggest the sensitive oil supply chain, which is the backbone of country’s economy, should not be put at any risk that poses threat to the national energy security.
In the fresh episode, many OMCs, who had pocketed billions of rupees in the past following increase in petroleum product prices, tried to stave off inventory losses by curtailing supplies to retail outlets and shifting the entire supply burden to state-run Pakistan State Oil (PSO).
They were also hoping that petroleum prices would be jacked up in July, when they were expected to release the stock in the market to earn additional billions of rupees.
The regulator - Oil and Gas Regulatory Authority (Ogra) - recently slapped a cumulative fine of Rs40 million on six OMCs for hoarding and black-marketing. However, the fine looks like just peanuts as OMCs have saved billions of rupees by restricting supplies to retail outlets.
On the other side, the entire burden of fuel supply fell on PSO, which was said to have borne a loss of billions of rupees in June because its market share widened sharply in an effort to tackle fuel shortage. However, the market share of other OMCs contracted during the fuel crisis.
“For understanding the current situation, a deeper understanding of the supply chain is desirable,” remarked Oil Companies Advisory Committee (OCAC) CEO Zawar Haider, when asked for comment on the proposal of forensic audit.
OMCs’ market share
According to the oil industry, PSO’s market share in petrol sales stood at 34.6% between January and April 2020, but it went up to 54.4% in June 2020. Similarly, PSO’s share in high-speed diesel supply was calculated at 39.7% in January-April 2020, which swelled to 64.3% in June 2020.
On the other hand, the market share of Shell Pakistan in petrol sales had been 10.6% in January-April, but it went down to 5.3% in June. In diesel, the company’s share shrank from 7.3% to 2.8%.
Total Parco’s market share in petrol dropped to 10.1% against 12.9% earlier and in diesel its market share fell from 10.4% to 7.4%.
Attock Petroleum’s market share in petrol declined to 6.1% against 9.4% earlier and in diesel it contracted from 10.4% to 5.6%.
However, the market share of Gas & Oil Pakistan increased from 10.4% to 11.6% in petrol. Its share in diesel supply dropped from 9.7% to 8.3%.
PSO had sufficient stock of diesel. Owing to a sharp fall in prices, it booked inventory loss of around Rs12 billion in March and April 2020.
The company’s market share in the petroleum group is currently 56% against 35.7% in March 2020. This will lead to an additional loss of around Rs7 billion to PSO in motor gasoline (petrol) in June. The company is currently suffering a loss of around Rs22 per litre in petrol sales.
Why crisis erupted?
Oil industry players point to some major reasons for the current petroleum product shortage in the country. There is an unprecedented increase in demand for petrol and high-speed diesel, low production by domestic oil refineries due to unattractive prices, poor inventory management, reluctance/delay in imports by many OMCs and a lack of industry reforms.
Since the start of May 2020, there has been a sharp rise in the demand for both motor gasoline and high-speed diesel despite a partial lockdown in the country.
Unconfirmed reports suggest that due to the tightening of control over cross-border smuggling following the Covid-19 outbreak, the influx of petroleum products from Iran has either dropped sharply or come to a halt, which has suddenly put an additional demand impact on the supply chain in Pakistan.
Sales in the first week of June 2020 clearly indicate that this will be a record month for petrol sales in the history of Pakistan.
Similarly, high-speed diesel sales are expected to be at least 30-40% higher in June 2020 compared to average June sales in the previous couple of years. This is one of the contributing factors for the current shortage.
Low production by refineries
Sale prices for petroleum products are set by Ogra for both oil refineries and OMCs on the basis of previous month’s actual import cost for PSO.
After the Covid-19 outbreak, international oil prices started to plunge from the beginning of March 2020 and it continued till the end of April. However, the scenario reversed from the beginning of May and refineries and OMCs with lower inventories speculated that they would receive negative margins on the sale of petroleum products in June 2020.
Prices for June were set by Ogra based on PSO’s actual imports in May. Import cargoes, particularly motor gasoline, were purchased by PSO in May at almost record low international prices.
As refineries failed to maintain significant stocks, their crude import cost, compared to sale prices for refined products for June 2020, turned out to be much higher. Hence, the refineries first tried to pressurise the government not to reduce petroleum prices and when the proposal was turned down, they decided to shut down their plants or substantially reduce crude oil imports and refined petroleum production.
Poor inventory management
Owing to unfavourable sale prices and an erratic surge in demand in June 2020, a majority of OMCs have failed to make sufficient petroleum products available at filling stations.
A lack of inventory at storages and delay in imports in a bid to avoid losses are contributing to the shortage. However, OMCs may build up stocks and start sales after prices are revised from July 1.
Oil and gas is a capital-intensive industry and unlike power industry there are no sovereign guarantees. Commercial risks are one of the root causes that contribute to such shortages.
Published in The Express Tribune, June 17th, 2020.
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