Credit ceiling raised for oil firms

ISLAMABAD:

Banks have revised credit lines for the oil industry to facilitate the import of petroleum products to meet the country’s requirements.

Earlier, the Oil Companies Advisory Council (OCAC) – an industry lobby – brought the matter before the State Bank of Pakistan (SBP), asking it to intervene and advise commercial banks to enhance the credit limit for oil companies.

OCAC pointed out that the banks had labelled the oil companies as risk entities and were not willing to provide financing for the import of petroleum products.

In a meeting with Oil and Gas Regulatory Authority (Ogra) Chairman Masroor Khan and Member (Oil) Zainul Abideen Qureshi, SBP Governor Reza Baqir confirmed that credit lines for the oil industry had been revisited to help meet import needs of petroleum products.

A central bank team, including the deputy governor, was present in the meeting.

According to a statement, matters pertaining to enhancing the credit limit came up for discussion. Ogra management, while appreciating the cooperation of the State Bank, declared the move as a good step towards facilitating the oil industry.

When reached for comments, a senior OCAC official explained that the SBP could only advise banks, which would have to actually deal with individual companies independently. However, he said that they were not aware of the increase in credit limit for the oil industry.

Earlier, the OCAC approached the SBP governor several times, requesting him to intervene as banks were reluctant to open Letters of Credit (LCs) for oil imports in the wake of surging global crude prices.

OCAC apprised the governor that commercial banks were not ready to extend financing to the oil industry, which was struggling to meet oil import needs in the face of soaring prices.

OCAC also warned of the depleting high-speed diesel reserves and presented a plan for replenishing the stocks.

It pointed out that the oil companies had insufficient credit lines from the commercial banks, which were hesitant to open LCs for oil imports.

Pakistan is a net oil importer and counts heavily on imports. Oil companies have to import petrol, diesel and jet fuel to meet domestic demand.

In that regard, OCAC argued, domestic banks should play their role in facilitating the oil marketing companies (OMCs) for imports.

With the surging oil prices following fast recovery of global economies from the pandemic and the Russia-Ukraine conflict, capital requirements of OMCs have increased significantly. Moreover, “on account of regulatory lags in adjusting consumer prices against import costs, the credit lines of OMCs are stretched,” the OCAC added.

Keeping in view the emerging situation, the oil industry body requested the SBP governor to advise banks to facilitate the OMCs in order to ensure smooth and uninterrupted fuel supplies in the country.

In the first half (Jul-Dec) of fiscal year 2021-22, sales of petroleum products in the country increased 24% as compared to the corresponding period of previous year.

Motor gasoline (petrol), high-speed diesel and furnace oil consumption went up 14%, 27% and 38% respectively.

The growth was primarily driven by the surge in economic and trade activities, growth in large-scale manufacturing industries, higher diesel demand from the agriculture sector, robust growth in auto sales, increasing domestic tourism and reliance on some furnace oil-based power plants for increase in electricity generation.

As the country’s refining capacity has limitations, the additional demand for petroleum products is continuously being catered to via imports. In FY21, OMCs imported 10 million tons of petroleum products valuing at $4.8 billion.

The working capital requirement of OMCs and refineries is increasing with the depreciation of the rupee, increase in international crude oil prices and higher domestic demand.

As of September 2021, average oil prices had increased by 50% since January 2021 ($81.56 per barrel vs $54.38 per barrel). Moreover, the rupee depreciated by 7% in the same time period.

 

Published in The Express Tribune, April 13^th, 2022.

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