Oil industry seeks swift resolution of challenges

The oil industry is heading towards collapse due to the failure of the regulator and government to resolve a host of issues including the recovery of sales tax and exchange rate losses, port infrastructure constraints and planned digitisation of retail outlets across the country.

The Oil Companies Advisory Council (OCAC) has drawn the attention of Oil and Gas Regulatory Authority (Ogra) chairman towards these issues.

OCAC Secretary General Dr Syed Nazir A Zaidi, in a letter written to Ogra chairman, a copy of which has also been sent to the petroleum minister, highlighted scores of industry challenges, which had been discussed in the presence of representatives from the Ministry of Energy (Petroleum Division), Ogra and oil marketing companies (OMCs). During that meeting, the minister directed Ogra to engage with the industry and address the issues in an amicable and time-bound manner.

In continuation of those discussions, the OCAC has submitted to Ogra a list of challenges for resolution. These include the reimbursement of general sales tax (GST) claims (from April 2022 to June 2024 and from July 2025 onwards).

Industry-wide GST claims amounting to Rs73 billion have been outstanding with the Federal Board of Revenue (FBR) for the period April 2022 to June 2024. As highlighted in the meeting, these pending claims have severely impacted industry liquidity and financial sustainability.

While GST claims for financial year 2024-25 are being settled through the inland freight equalisation margin (IFEM), industry members require a formal mechanism for the recovery of outstanding claims.

The minister had advised Ogra to work with the OCAC and finalise recommendations, which would later be taken up with the prime minister. In this regard, the OCAC has proposed the development of a mechanism for reimbursement, including the recovery of costs attributable to sales tax exemption (July 2025 onwards) and financing costs on unadjusted sales tax (April 2022 to June 2024) at Karachi Inter-Bank Offered Rate (Kibor) plus 2% for both OMCs and refineries.

Another major challenge to the industry is related to the exchange loss recovery framework. The existing exchange loss recovery mechanism fails to adequately compensate for the actual losses suffered by OMCs due to exchange rate volatility. Industry representatives have consistently pointed out the lack of a uniform, transparent and equitable methodology that could provide a level playing field for all importers.

The petroleum minister had emphasised that Ogra must verify the genuineness of financial claims and resolve them expeditiously. Accordingly, the industry has urged the regulator to promptly finalise a standardised exchange loss formula by incorporating a well-defined and timely adjustment cycle within the pricing mechanism.

"The current pricing formula is not viable and creates market distortions, particularly when no imports or settlements occur during a pricing period, leaving certain industry members uncompensated," it said.

Industry players have also invited Ogra's attention to the phase-3 digitisation timelines and cost-recovery mechanism.

They reaffirm their full cooperation with the regulator in digitisation efforts. However, the phase-3 (site-wise digitisation) presents operational and financial challenges due to highly compressed implementation timelines and the absence of a cost-recovery mechanism despite substantial expenditure.

The OCAC has requested Ogra to reassess the implementation timelines and establish a transparent cost-recovery mechanism.

Port infrastructure constraints and demurrage costs have impacted industry members as well. "Demurrage charges incurred by the oil industry due to port infrastructure constraints at Fotco (including channel depth limitations, restricted night navigation and unavailability of a dedicated MS pipeline) require immediate attention," the OCAC stressed.

"We seek Ogra's support in coordinating with port authorities to achieve structural and operational improvements and incorporating verifiable costs into the industry's cost-recovery framework through IFEM," it said, adding that in line with the minister's directives, Ogra should convene a meeting with the OCAC and industry stakeholders to finalise timelines, methodologies and approval processes for the above matters.