Oil price deregulation not anytime soon

Oil price deregulation is unlikely to happen for at least two to three months despite news circulating that the government is likely to finalise the policy in a few days, said Topline Securities analyst Farhan Mahmood on Monday.

There is likely going to be no talk on the issue in Tuesday’s Economic Coordination Committee (ECC) meeting as the body has more important issues including the circular debt, added Mahmood.

The government was initially supposed to bring this policy in the last budget but due to lack of consensus amongst the major players in oil industry, the decision was postponed.

Deregulation of oil pricing is a complex procedure especially when local refineries and oil marketing companies are working separately unlike international practices which operate under one roof, said Mahmood.

What will happen to local oil prices?

If the government implements deregulation policy there will be price variation of Rs0.2 to Rs2.5 per litre on various oil products from southern to northern regions of the country.

The major reason of price variation could be the abolishment of Inland Freight Equalisation Margin (IFEM) which is a tool to equate oil prices throughout the country. IFEM is actually the transportation cost between refineries and the depots.

The price variation could be higher in upper parts given the fact that of the five big refineries in Pakistan three are located in the southern region while only two are in the central and northern regions of the country.

Impact on refineries

There is news that the government will not change the current diesel pricing mechanism, according to industry sources.

Diesel has a major share of  more than 30 per cent in the local energy products with relatively better margins, thanks to the deemed duty which local refineries get as an incentive so that their margins will be protected. Moreover, furnace oil is already deregulated which accounts for more than 30 per cent of total oil production.

Thus excluding diesel and furnace oil, the deregulation of other oil products like petrol, kerosene and jet fuel - holding a combined weight of 25 per cent in overall oil products - the impact of deregulation would be merely significant, said Mahmood.

National Refinery Limited would be better off compared to Byco and Pakistan Refinery Limited due to the fact that it has reasonably low refining cost with better valued products, said Mahmood. Any deregulation would not affect their earnings owing to their product mix, added Mahmood.

Impact on oil marketing companies

Though it is healthy for overall market competition, it will be negative for those oil marketing companies (OMCs) which lack back-up refinery, said Mahmood.

There will be more competition between OMCs to sustain market share following the deregulation, informed Mahmood.

“If the company’s policy would be to maintain market share then it has to sacrifice the margins,” said Mahmood.

Attock Petroleum Limited (APL) would be the major beneficiary as it has refineries both in northern and southern regions of the country. Other than APL, it will be a setback for other OMCs especially in the northern region, concluded Mahmood.

Published in The Express Tribune, September 21^st, 2010.