Petrol crisis: Oil companies, govt trade accusations of culpability

Unprecedented surge in demand caused by drop in prices, further price cuts expected in February.

ISLAMABAD/ KARACHI:

Oil companies and government officials continued to trade accusations on Friday, with neither side willing to accept culpability for the sudden crunch in petrol supplies in the northern half of the country.

Both sides agree on one fact: there was an unprecedented surge in demand for petrol after the government decided to reduce prices. At a press conference on Friday night, Petroleum Minister Shahid Khaqan Abbasi said that demand had surged by 25% after the 27% drop in oil prices from their peak in June 2014. Both sides also agree that the oil companies did not have the legally required 20 days’ worth of inventory to help deal with supply disruptions. But that is where the agreement ends.

Government officials claimed that the lack of inventory was the sole reason for the petrol shortage. Oil and Gas Regulatory Authority (Ogra) Chairman Saeed Ahmad Khan announced at a press conference on Friday that Ogra would be serving notices to oil companies for failing to meet the legally required levels of inventory.

But industry officials point out that if inventory was the only issue, then there would also be a shortage of diesel and the shortages would be uniform across the country. “The industry cannot be blamed for this situation. There is no shortage of diesel anywhere and petrol is available at all the pumps in Sindh and Balochistan,” said Aftab Husain, CEO of Pakistan Refinery and head of the Oil Companies Advisory Council (OCAC), an industry group.

Husain explained that one ship carrying 50,000 tons of oil products was delayed by a few days. “This, along with heavy fog in Punjab, hampered transportation and disrupted the supply chain,” he said.

Diesel is transported through a cross-country pipeline originating at Port Qasim, whereas petrol is transported mostly through trucks going north from Karachi.

Husain admitted that the oil industry often does not carry the full 20 days of required inventories, especially when prices are declining, but blamed government pricing policy for the situation. "Petroleum prices are revised once a month and whenever the price drops, we book a loss due to the reduced value of our petroleum stock," he said. “Complete deregulation of prices is the answer. But whenever we talk about it everyone starts writing against us.”

Ogra acknowledges the commercial difficulties faced by oil companies when prices are declining, but appears in no mood to accept this as an excuse for not complying with regulatory requirements, said the regulatory body’s chairman.

However, even though he blamed the oil companies for the current crisis, Khan agreed with their stance that oil and liquefied petroleum gas (LPG) prices should be deregulated. “In the beginning it will not be pleasant, but it will be good in the long run due to market competition,” said the Ogra chairman.

Yet even though everyone agrees that the oil price drop resulted in an unprecedented surge in demand, the government is planning on decreasing prices even further. The petroleum minister announced at his press conference that prices could be reduced by more than Rs5 per litre in February. Abbasi also appeared to insist that the privately owned oil marketing companies were more responsible for the supply crunch than the state-owned PSO, even though PSO has a 65% share in the petrol market.

Sales of petrol tend to rise particularly sharply on the first day of a government-mandated price cut. “Petrol sales hit 40,000 tons on January 1,” admitted the petroleum minister.

The current crisis appears to have been worsened by the fact that alternatives to petrol – specifically compressed natural gas (CNG) – have largely been absent from the market due to a shutdown of gas supply to CNG stations in Punjab. Abbasi said that if the weather did not turn too cold, the government might consider reopening some of the supply of natural gas to CNG stations. Natural gas is the primary heating fuel in most of the affluent parts of urban Pakistan.

Meanwhile, at a hearing at the Senate finance committee on Friday, Federal Finance Secretary Waqar Masood suggested that the current shortage is just the tip of the iceberg and that the country could be facing a rough six weeks before the crisis is fully resolved. Masood’s timeline is far longer than the 10 to 12 days promised by cabinet members during their speeches in the National Assembly on the same day.

The finance secretary pointed out that there is a 45 day lag between when an oil company opens a letter of credit (LC) with a bank for oil imports and when the petrol is actually delivered to petrol pumps across the country. The finance ministry has released Rs17 billion to the state-owned PSO to handle its LC requirements, but admits the company needs Rs27 billion for this month alone.



Masood admitted that the inter-corporate circular debt in the energy industry, caused in large part by government entities refusing to make the full payments they owe power companies, was at least partially the cause of the crisis. PSO has defaulted on at least Rs110 billion in LCs owed to its foreign suppliers. The finance secretary claimed that the government had been making timely payments of the subsidies it owes to power companies, which in turn owe PSO money for the fuel they use to generate electricity.

However, he admitted that the finance ministry refused to pay amount related to the cost of theft, meaning that the power companies still do not have enough money to pay PSO. When the power companies fail to pay PSO on time, PSO defaults on its payments due to foreign suppliers, who then refuse to supply more fuel without payments made upfront in cash.

The finance ministry has paid out Rs222 billion power subsidies so far this fiscal year, said Masood. The finance ministry has been urging the water and power ministry to crack down on electricity theft so that the circular debt problem can end once and for all.

Sources told The Express Tribune that another reason for the supply crunch was Finance Minister Ishaq Dar’s refusal to allow state-owned PSO to buy US dollars to make oil payments to its international supplies in December, because doing so would have reduced the country’s foreign exchange reserves below the $15 billion mark the minister was targeting.

Despite hearing that the drop in oil prices was at least partially responsible for the sudden supply shortage, the Senate finance committee passed a resolution demanding that the government reduce domestic oil prices even further, to fully match the global price drop.

Published in The Express Tribune, January 17^th, 2015.