PM rejects new oil price proposal
Prime Minister Shehbaz Sharif has rejected a proposed new oil pricing formula, addressing deep concerns among the entire oil industry, which has warned of a massive fuel crisis if the revised framework is adopted.
Former petroleum minister Musaddiq Malik had proposed an oil inventory cost-based formula, which was turned down by the oil industry. Sources told The Express Tribune that PM Sharif in a meeting held on Tuesday directed the ex-petroleum minister, who is currently serving as the minister for climate change, not to interfere in the affairs of the petroleum ministry.
According to officials, the incumbent Petroleum Minister, Ali Pervaiz Malik, is managing the affairs successfully and has saved the country from an oil crisis at a time when international supply has been suspended due to the closure of the Strait of Hormuz by Iran following attacks by the United States and Israel on its territory.
"Don't interfere and let the minister (Ali Pervaiz) do his job," the PM remarked, according to sources privy to discussions in the meeting.
Earlier, the Oil Companies Advisory Council (OCAC) informed the petroleum ministry that meetings had been held with Musaddiq Malik, who also heads the committee on the new oil pricing formula.
OCAC revealed that the calculations presented by the Oil and Gas Regulatory Authority (Ogra) to the industry were not aligned with the government's proposed framework. It was further communicated that the revised pricing formula was based on a four-week Platts average and was expected to be implemented from the first week of April, subject to approval from the Prime Minister's Office.
The industry also highlighted concerns over the delay in release of pending price differential claims (PDCs) and got assurance of early release from Musaddiq Malik. Another meeting was scheduled for March 31 to come up with revised assessments. However, no detailed evaluation was shared with the industry.
During the meeting, Ogra presented the proposed pricing formula based on four-week Platts as opposed to the current pricing mechanism driven by PSO premiums and incidentals while also considering import volumes of other oil marketing companies (OMCs). However, the scenario did not provide adequate clarity about the methodology of price determination or the likely market response under varying price trends.
"The industry raised concern over the proposed formula, particularly its potential impact under the rising or declining price scenarios, which may lead to product imbalances and also adversely affect refinery offtakes," the OCAC said, adding that given the contractual obligations of refineries and OMCs to international suppliers, especially with respect to Letters of Credit (LC) retirement timelines, such experimental changes may pose significant financial and operational risks.
The industry also highlighted its strained financial capacity arising from elevated international fuel prices and the refineries' obligation to retire LCs within scheduled timelines. "Any such changes in the pricing formula may also impact the fuel-mix production of local products."
It is pertinent to mention that during the 2022 energy crisis erupted following the Russia-Ukraine war, the existing pricing mechanism proved to be robust and effective in managing market fluctuations. "We reiterate that the current pricing mechanism is transparent, time-tested and has consistently ensured supply chain stability across varying market conditions," the OCAC said. It recommended that the existing pricing mechanism be maintained during the period of heightened volatility.
In a letter to the secretary petroleum, Pakistan State Oil (PSO) Chief Executive Officer Abdus Sami said the proposed pricing mechanism may have a few theoretical merits, but its practical implementation entails significant challenges that require careful evaluation prior to rollout. The proposed system's notable takeaways are: OMCs will face significant cash flow constraints in the current volatile market situation as all procurements will be done at prevailing market prices, which may be significantly higher than the average of past four weeks.
There will be significant supply chain disruptions as refineries/OMCs will be reluctant to contract new supplies due to the existing formula and uncertainty regarding policies. Any rapid change in policies will also make the refineries/OMCs doubtful about making further investments in supply chain and infrastructure.
He added that the proposed pricing mechanism was expected to create disparity between the local and international oil pricing, which would create opportunities for arbitrage for certain OMCs.
The CEO cautioned that the proposal for PSO to undertake imports on behalf of the industry carries certain concerns. He said it would be difficult to sustain the supply chain in the current volatile situation as limited procurement opportunities were available for contracting future supplies. "In case of a dire situation, PSO will still require at least four to six weeks of lead time to ensure sustained supply of petroleum products," he mentioned.
The company is already facing liquidity constraints and will require an estimated additional credit limit equivalent to the LC size of the number of cargoes being contracted. The current value of one cargo is approximately $120 million.
The CEO emphasised that participating OMCs would need to provide firm demand commitments, offtake guarantee and payment security through formal agreements and financial instruments backed by the government of Pakistan. This arrangement may adversely impact the liquidity of other OMCs that currently benefit from extended credit terms with foreign suppliers.
In case of no procurement by the OMCs, PSO will bear the burden of excess inventory and associated financial risks and heavy inventory losses if prices decline.
"Concentrating the country's entire supply chain risk in a single entity may not be prudent. Additionally, it may result in missed opportunities, as several OMCs possess international trading capabilities that enable more efficient and diversified sourcing under normal conditions," the CEO stressed.
"We request the ministry that implementation of any change at the moment is not advisable as the current supply situation is precarious and the confidence of companies ensuring the supply chain should be a priority," he said.