The oil crisis in June 2020 exposed the sector’s vulnerability and necessitated the need for keeping strategic petroleum reserves in the country.
Almost all neighbouring countries like India, Bangladesh and China have built strategic reserves to ensure energy security. However, Pakistan has no such policy in place.
The recent oil price crash in the international market in the wake of Covid-19 pandemic provided an opportunity to oil consumers to reap benefits of sharply lower rates. Consequently, different countries ramped up oil imports to increase their strategic reserves but Pakistan imposed a ban on imports because of a lack of storages.
Petroleum, oil and lubricants (POL) reserves form an essential part of the country’s defence line. The Ministry of Energy (Petroleum Division) is responsible for ensuring the availability of strategic fuel reserves for meeting needs of different sectors. Previously, the ministry struck two contracts with state-run Pakistan State Oil (PSO) in 1985 and 1990 for keeping strategic fuel reserves at a cost of Rs183.058 million and Rs255.880 million respectively.
However, these arrangements were scrapped through a settlement agreement in 2006 in the wake of proposed privatisation of PSO which, however, did not take place.
PSO, despite revocation of the agreement, is regularly sharing data of its countrywide commercial stocks with the Ministry of Energy.
To resolve the matter and clinch a new deal with PSO, a high-level meeting was held in 2015 at the Ministry of Energy (Petroleum Division) under the chairmanship of then petroleum minister and was attended by all stakeholders.
It was decided in the huddle to analyse the strategic fuel requirement, fund requirement, building of additional storages and finalisation of a draft agreement through a committee. Subsequently, the committee during its three meetings ascertained the POL requirement.
In that connection, PSO prepared a draft agreement for maintaining strategic fuel reserves. To further discuss and finalise details of the proposed agreement, a meeting was held at the Petroleum Division on January 21, 2018.
Meeting participants discussed the recurring charges ie product loss, insurance cost, maintenance charges, etc to be borne annually on the strategic fuel reserves and that they could be reduced by the company.
The PSO managing director stated that annual charges indicated in the proposed agreement were based on a realistic calculation and actual insurance fee. He stressed that PSO was a commercial entity and being mired in circular debt it could ill-afford to pick up maintenance cost of strategic reserves and subsequent recurring cost on its own.
The PSO MD proposed that a nominal surcharge/cess should be levied at the rate of 25 paisa per litre on sales of high-speed diesel (HSD) and motor gasoline (petrol) to generate required funds for financing the construction of storages, purchasing POL products, bearing annual recurring cost of maintaining the reserves and cost of storage expansion in future.
The estimated cost of storage development was worked out at Rs4.9 billion, which the federal government may recover by introducing a nominal strategic fuel stock cess or surcharge. The proposed special cess will generate nearly Rs4 billion per annum, which can be deposited in a special account to be managed by National Bank of Pakistan (NBP) and operated jointly by the Petroleum Division, Finance Division and PSO.
It was proposed that PSO should be allocated funds from the account, particularly for meeting recurring expenses on the maintenance of strategic reserves based on the advice received from the Ministry of Energy (Petroleum Division) and the Finance Division.
New initiatives
The Ministry of Energy (Petroleum Division), under the present government, has already undertaken certain initiatives aimed at expanding the country’s oil refining capacity, expansion of existing oil storages at Keamari/ Port Qasim and PSO’s existing 12 oil depots, making the existing 800km white oil pipeline capable of carrying two products – HSD and motor gasoline, and laying white oil pipelines in three segments from Machike to Tarujabba, etc.
These initiatives will help lessen reliance on POL imports and enhance the availability of commercial and strategic fuel stocks in the country.
Notwithstanding all these initiatives, a well-defined national policy on strategic fuel reserves, however, does not exist. The Oil and Gas Regulatory Authority (Ogra) has made it mandatory for oil marketing companies (OMCs) to build storages in their areas of operation for keeping stock cover for a minimum 25 days.
Existing commercial stocks are counted as strategic reserves, though strategic reserves need to be maintained separately besides commercial stocks. Therefore, a policy on strategic fuel reserves with a mix of crude and refined products should be drawn up to reap benefits of lower oil prices in future. Pakistan has faced oil crisis in the past as well. During the tenure of previous Pakistan Muslim League-Nawaz (PML-N) government, Punjab faced an acute shortage of oil in 2015, prompting government to remove top officials of the Petroleum Division.
After the incident, the Petroleum Division started work with other stakeholders on building oil storages. However, the oil crisis in June this year exposed the little or no work done so far as well as indicated that the country was at the same position as in 2015 and there was a lack of storages.
Already, the government is generating funds in the shape of petroleum levy and the current year’s collection target is about Rs400 billion. Receipts are being spent on bridging the budget deficit, rather than on the oil sector.
The writer is a staff correspondent
Published in The Express Tribune, October 5th, 2020.
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storage is required plus more gas reserves and storage is also needed