OGRA, Petroleum Division and OMCs to meet today to resolve the crisis

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ISLAMABAD: Oil Marketing Companies (OMCs), refineries, Ogra and officials of the Petroleum Division (PD) are expected to meet today to resolve the petroleum products crisis in view of the latest stock position and their availability to masses, reported The News.

A strategy would also be carved out during the meeting to ensure that such a situation does not happen in the future. However, there are many pockets in the country where even after seven days the severe crisis of POL supply exists.

However, six oil marketing companies which had received show-cause notices from Ogra for not maintaining their stocks have submitted their replies to the regulator and from today (Monday) onwards the Ogra will start hearing of the said OMCs on one by one basis prior to reach the decision to punish them, senior officials told The News.

Ogra had issued show-cause notices to six OMCs including Shell, Go, Hescol, Attock Petroleum Limited (APL), TOTAL, and Puma.

All the said OMCs have submitted their replies in response to show cause notices and each company wants to appear personally before the regulator to explain its positions and to this effect, the Ogra will start hearing from Monday onwards. After completion of the hearing, the regulator will find itself in a position to punish the OMCs involved in creating the POL supply crisis.

Attock Petroleum Limited, which is the oil marketing company of Attock Refinery Limited, will appear today before Ogra. The officials said many OMCs had moved their stocks to their depots and retail outlets located in various points of the country and the stock of Mogas (Petrol) is currently available for 12 days whereas diesel is available for 17 days stocks.

However, the official sources said maintaining the demand and supply of POL products was the prime responsibility of the Petroleum Division, which had ostensibly failed to maintain. And this becomes more clearer from the letter written by petroleum division on March 30, 2020 titled with ‘berthing of POL vessels at ports’.

The said letter available with The News mentions that the consumption of Motor Gasoline has dropped significantly due to enforcement of lockdown by provincial governments to control the spread of COVID-19, which is why refineries’ operations are being compromised due to no upliftment of products by the OMCs.

The letter further mentions that in this regard, oil marketing companies and refineries were also directed to cancel their planned cargoes from April 2020 onwards so that refineries and exploration and production (E&P) companies may be kept operational at an adequate level.

They said one of the top men of the Petroleum Division stopped the import of petrol and diesel in March, which is clear from the letter with a plan to create the shortage and import at a high price. When petrol diesel was $ 7 per barrel in the international market there was a ban on imports.

However, the industrial sources claim that it is the ECC which is responsible for POL supply crisis in the country as they argue by saying that the ECC had rejected the new price mechanism prepared by the Petroleum Division with inputs from refineries and OMCs, arguing that the price of the petroleum products in the international markets is on the rise due to an increase in demand after softening of the COVID-19 lockdown in many countries. Therefore, in view of the rising trend, the ECC observed that there is no need to adopt the proposed mechanism for fixing the prices of petroleum products.

They said the present system of monthly price adjustment based on PSO’s last month procurements served as a disincentive especially when there is volatility in the market. Therefore, the OMCs were reluctant to import when the margin was unfavorable and instead let the inventory run dry. This in turn resulted in supply-side insecurity at the national level. However, the ECC observed that the price of petroleum products in the international market is on the rise due to an increase in demand after the softening of the coronavirus lockdown in many countries.

The Petroleum Division had pitched the summary tabled on May 30 for the ECC’s consideration saying the new mechanism will be the basis for determining the selling prices for both refineries as well as OMCs; and to avoid any possibility of a shortage of PMG from June onwards, there is a need to address the fundamental pricing issue by minimizing the volatility risk, by reducing the price risk from 30 days to 15 days and creating visibility of pricing index. Therefore, the forthcoming price may be announced from June 16, 2020, rather than from June 1, 2020.

This would result in providing an incentive to OMCs to import product at the current PSO rate and thereby avoid inventory losses. Previous Cabinet decision of August 31, already allows fortnightly price for this dispensation.

The Petroleum Division opined that if they do not change the mechanism and continue with the present pricing regime, there is a high likelihood that not only refineries would curtail their production but also the imports by OMCs( other than PSO) would be insufficient to meet the demand leading to widespread shortage and dryouts.

The Petroleum Division had mentioned that the proposed mechanism might allow OMCs to reduce inventory losses in the first 15 day-period but thereafter alignment with the market conditions would be happening automatically.

The Petroleum Division had also indicated the possibility of a severe crisis of POL products in the country if their proposal for a new price mechanism is not approved with immediate effect.

According to that particular summary, prices of petroleum products are determined under the ECC’s decision of October 15, 2010, under which refineries are allowed to fix and announce the ex-refinery sales prices on a monthly basis.

This is subject to the condition that the ex-refinery price of the petroleum products cannot be more than the PSO’s average actual landed import price of the previous month which was the price on C&F basis on a 5-day average of the Arab Gulf Market Platts price around the date of the Bill of Lading (B/L).

In case of the unavailability of the PSO’s import prices, the ex-refinery price was to be fixed as per import parity pricing formula on the basis of prices established by the Platts Oil Gram for the Arab Gulf Market.

The oil marketing companies (OMCs) follow the same process with PSO’s benchmark as the price cap. PSO has historically imported approximately four vessels each of HSD and PMG every month, spread out roughly evenly over 30 days. Each parcel covers five pricing days.

The current pricing mechanism would generally mean that any current month’s price was roughly based on the average of the previous month’s Platts prices ( given 20-22 pricing days in a month). There were over 10 active importing OMCs and they were bound to follow PSO’s price cap provided it makes commercial/business sense to them.

The Petroleum Division recommended the proposals to the ECC on May 30, 2020 which included (i) ex-refinery price may be based on the average of fortnightly/ monthly Platts price plus premium ( average premium based on the tender awarded by PSO) including PSO’s incidentals and ocean gain/loss, taxes etc. as per the current practice.

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