An Economic Coordination Committee-constituted panel has proposed basing oil pricing mechanism on Platts average with fortnightly price revision.
The move is aimed at better planning for oil stocks, fair competition in oil industry, margins aligned with international pricing trends and smoothing out volatility of prices due to linking with Pakistan State Oil (PSO) import price.
Sources told The Express Tribune that the proposed mechanism has several benefits including boosting healthy competition.
In its report, the sub-body said the margins will be closely aligned with international pricing trend and smooth out volatility and distortions caused by PSO’s purchasing dates. It will help make advance three-month plans with refineries and Oil Marketing Companies (OMCs), lead to better inventory management and enhance reporting of sales arid enforcement of stock requirement.
The committee claimed complete transparency, visibility of prices and reduced dependence on one OMC i.e. PSO. It added that the proposed formula is already implemented in cases of MS and HSD and when no imports are made by PSO in previous months. However, these situations are rarely observed.
The Petroleum Division has requested ECC to adopt the proposed pricing method from first of August or September this year – based on the Platts average as per parameters in line with recommendations of the committee.
Pricing methodology for Motor Gasoline/ Motor Spirit (MS) and High Speed Diesel (HSD)
The sub-committee proposed that the price should be based on Arab Gulf Platts daily average for the number of days in the pricing period as the base commodity price. Furthermore, the premium above Platts, freight and incidentals should be taken as average of PSO’s procurement for the pricing period and added to the base commodity average price.
The sub-body said the levies and taxation be at applicable rates while the exchange rate will be used provisionally, for PSO, but converted to actual rate upon retirement of LC (not later than 60 days from B/L date). Any adjustment made for prior period through a change in incidentals as soon as possible, as per present practice, is already approved by ECC vides its decision.
The period of price applicability will be set to a fortnight i.e. 1-15 and 16-end of the month. The new pricing system is for MS and HSD (Euro-11-V spec. MS&HSD). Other approved parameters will remain unchanged. Other petroleum products pricing may continue as per current practice in vogue.
Current system
Under the existing system, prices of petroleum products are determined under the ECC's decisions whereby refineries are allowed to fix and announce the ex-refinery sale prices on a monthly basis. This is subject to the condition that the ex-refinery price of the petroleum products cannot be more than the PSO's average actual landed import price of the previous month (which is priced on C&F basis on a 5-day average of the Arab Gulf Market Platts price around the date of the Bill of Lading).
It was observed that present oil pricing system should be reviewed as the existing mechanism creates some distortions in a volatile environment. The current system does not cover the month mean of Arab Gulf Platts rates. A two-three months lag is included in PSO’s previous month’s price.
A single company’s (PSO) rates are the bench mark for all other OMCs and refineries.
As witnessed on June 1, oil prices remain volatile due to the Covid-19 pandemic and prolonged lockdown in the country. Consequently, the OMCs are constrained and capped by PSO's import price. Their procurement, storage and sale in a volatile market can create shortage of oil in Pakistan.
The refineries take 40-45 day cycle to import crude oil and produce finished product. Therefore, they tend to curtail production if PSO's procurement prices are on a lower side which ultimately adds to any shortage.
ECC considered the June 8 summary by the Petroleum Division’s which constituted the committee comprising Advisor to the Prime Minister on Commerce, Minister for Industries and Production, Advisor to PM on Institutional, Reforms & Austerity, SAPM on Petroleum, Secretary Finance and Secretary Petroleum Division to propose any revisions that it may deem necessary in the methodology of petroleum product pricing.
The committee has held two meetings and consulted with PSO, Shell, Attock Refinery, Pakistan Refinery and an independent oil and gas expert. The working paper was prepared to devise a revised mechanism for oil prices which was deliberated in the June 22 huddle.
A consensus was reached to frame the reviewed pricing system for MS and HSD on a fortnightly index basis published by Platts as per their detailed recommendations.
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