The Economic Coordination Committee (ECC) of the Cabinet Friday approved the summary moved by Petroleum Division on High-Speed Diesel (HSD)/ Gas Oil Premium. The summary was meant to facilitate and provide a level playing field to oil companies vis-a-vis Pakistan State Oil (PSO).
Federal Minister for Finance and Revenue Shaukat Tarin presided over the meeting of the Economic Coordination Committee (ECC).
Petroleum Division submitted a summary on High-Speed Diesel (HSD)/ Gas Oil Premium. The summary was meant to facilitate and provide a level playing field to oil companies vis-Ã -vis PSO. The chair, after deliberation, approved the summary and directed to revise the premium on a fortnightly basis. Therefore, its impact would increase or decrease depending on the international energy market.
The ECC, while considering a summary dated July 21, 2020, submitted by the Petroleum Division approved the parameters to determine the ex-refinery/import prices of Mogas (petrol) and HSD (diesel), whereby the base price is fixed on the basis of 15-day average FOB prices of the Arab Gulf market. In the above base price, PSO’s latest available import premium and incidental charges are added to arrive at C&F prices for finalizing the local consumer prices.
The premium (freight & supplier’s margin) is a lump sum cost of the supplier/exporter, which is either negotiated or offered in a tender process. PSO, being a public sector company, is obligated to procure imports in accordance with the PPRA rules/regulations. As per existing arrangements, PSO imports its mogas requirements entirely through spot tendering, while the bulk of its HSD imports is made from Kuwait Petroleum Corporation (KPC) following a long-term agreement, revised/reviewed biannually. The premium on a long-term basis is lesser than the tendered premium.
Presently, the KPC premium for PSO’s HSD cargoes for Jan-June, 2022 is $2.40 per bbl. In case KPC fails to meet PSO’s HSD demand, state-run oil marketing company PSO imports from the spot market. When PSO procures from both sources (KPC & spot market), the weighted average of KPC and spot premium is used as a benchmark to calculate the consumer prices.
The OCAC (Oil Companies Advisory Council) has stated that HSD premiums for the industry have been historically higher than PSO, implying that the industry was importing HSD at a relatively higher premium as compared to PSO’s benchmark premium.
Due to this, the remaining OMCs are facing loss due to this as the difference went up sharply in the current prevailing geopolitical situation. PSO’s tender for the second fortnight of March 2022 opened at $8.45 per bbl whereas premiums are even higher in the open market. It may also be appreciated that PSO did not receive any offer in their HSD tender for the first fortnight of April 2022.
Since the current HSD price is benchmarked on the basis of substantial imports by PSO from KPC ($2.4 per bbl), any OMC importing at the PSO tendered premium ($8.45 per bbl) would incur a loss of up to Rs. 6.8 per liter, creating an unsustainable position for importers. Therefore, OMCs have requested to urgently review this matter and revise the benchmarking process accordingly to save the industry from collapse.
Under the present volatile market condition due to war between Russia and Ukraine as well as high demand of HSD in the forthcoming harvesting season during March-May 2022, the existing benchmarking appears unsustainable and OMCS will sustain substantial losses and may be unable to import HSD leading to potential shortages of HSD across the country.
Petroleum Division, after consultation with OGRA in a number of meetings and on the basis of OGRA’s recommendations in these meetings, is, therefore, of the view that KPC premium needs to be excluded from price computation for a period from April to June 2022.
Accordingly, the premium on HSD import may be benchmarked on PSO’s average tendered premium for the previous fortnight. In case, there is no tender by PSO in a particular fortnight, the premium from the previous tender may be used for calculating HSD ex-refinery price.
However, this arrangement may lead to some benefits for PSO and local refineries, which may be adjusted by OGRA for recovery through the IFEM mechanism. This mechanism would be reviewed on the recommendation of OGRA on a fortnightly basis.
