Oil industry seeks war risk insurance allowance

The oil industry has approached the State Bank of Pakistan (SBP) requesting for temporary approval of imports on a cost, insurance and freight (CIF) basis along with a war risk premium allowance.

In a letter to the SBP governor, the Oil Companies Advisory Council (OCAC) said that due to the rapidly evolving geopolitical situation in the Middle East, the international oil and shipping markets have become extremely volatile and freight rates, insurance costs and the availability of vessels have been severely impacted.

It is also learnt that marine insurers have either withdrawn or sharply increased war risk coverage for ships operating in the Persian Gulf and the Strait of Hormuz due to the ongoing Iran-Israel-US conflict. Freight rates have reportedly been increased by almost four times, while war risk insurance premiums have surged dramatically, making tanker chartering extremely difficult and expensive.

The prevailing market conditions, it said, had severely limited the willingness of shipowners, insurers and suppliers to undertake cargo movements in the region.

Under the current regulatory framework, the refineries and oil marketing companies (OMCs) are required to import products on a C&F (cost and freight) basis, under which the supplier arranges and pays for freight up to the destination port, while the buyer is responsible for arranging and bearing the cost of product insurance, including any war risk coverage.

In the prevailing circumstances, the OCAC mentioned, obtaining adequate marine and war risk insurance cover has become extremely difficult. This challenge was recently reflected in a PSO spot tender floated on a C&F basis, where no bids were received for motor spirit (petrol), high-speed diesel and JP-1 cargoes.

The council proposed that imports may be temporarily allowed on a CIF basis. As per the SBP's Foreign Exchange Manual, Chapter 13 – Imports, "we understand that approval for CIF imports is required on a case-to-case basis. However, given the exceptional circumstances and the potential risk to national fuel supply, it is requested that a temporary general allowance be granted for petroleum cargoes (crude oil, refined products, base oil and allied materials) for up to two months," it said.

Under CIF arrangements, the supplier is responsible for arranging freight as well as marine/product insurance (including war risk coverage) as part of the delivery of cargo to the destination port, which will enable suppliers to secure appropriate insurance coverage and facilitate the movement of cargoes.

Given the critical importance of uninterrupted fuel supplies ahead of the upcoming crop sowing season, the OCAC called for early issuance of necessary approval/advisory to all commercial banks for CIF-based imports of crude oil and petroleum products, so that refineries and OMCs may book and secure the required cargoes.

In another letter, the OCAC sought intervention of the Oil and Gas Regulatory Authority (Ogra) as local administrations were sealing retail fuel stations. It highlighted the operational challenges being faced by the retail outlets in various parts of the country due to a sudden surge in fuel demand over the past few days, primarily driven by panic buying amid prevailing regional uncertainties.

In several locations, it said, sales had nearly doubled compared to the normal demand. "While OMCs have significantly increased dispatches and are making continuous efforts to replenish retail outlets, the abnormal demand has resulted in temporary stock depletion at certain stations pending tanker deliveries."

In some districts, the OCAC argued, the local administrations had initiated action to seal retail outlets that temporarily ran out of fuel. While the intent to ensure availability and prevent malpractice was appreciated, sealing outlets facing genuine stock exhaustion would be counterproductive and may further disrupt the supply chain, it added.

Such actions delay the resumption of sales, create operational complications for OMCs and may inadvertently intensify public anxiety and panic buying. The OCAC asked Ogra to advise the relevant provincial and local administrations to refrain from sealing retail fuel stations solely due to temporary stock depletion where replenishment was already in process.