Pakistan is on the brink of an oil crisis as banks are refusing to open and confirm Letters of Credit (LCs) to import petroleum products. The Oil Companies Advisory Council (OCAC), a group of refineries and oil marketing companies (OMCs) has brought this issue to the attention of the finance secretary and the State Bank of Pakistan (SBP).
In a letter to the finance secretary, OCAC highlighted the difficulties oil companies face in opening LCs.
If LCs are not established on a timely basis, critical imports of petroleum products will be impacted, which may lead to fuel shortage in the country.
The council further added that once the supply chain faces such disruptions, it could take up to 2 months to resolve.
To meet consumer demand and bridge the energy deficit, Pakistan imports approximately 430,000 tons of mogas (petrol), 200,000 tons of high-speed diesel, and 650,000 tons of crude oil each month at a cost of around $1.3 billion.
OCAC said:
These imports require the opening of LCs, however, the industry is facing severe challenges of opening and confirmation of the LCs, which has caused delay in multiple cargoes and a few cancellations as well.
Despite the challenges, the industry, under the oversight of the Oil and Gas Regulatory Authority (OGRA) and the Ministry of Energy (Petroleum Division), has been able to maintain fuel supplies throughout the country. However, the situation has worsened in recent months as banks are declining requests to open LCs.
In order to avoid any disruption, urgent intervention is required for streamlining the process and ensuring timely establishment of LCs for the import of petroleum products.
Additionally, Hascol Petroleum reported facing difficulties in opening LCs and entering import contracts for petroleum products in a letter to the SBP governor. The company’s CEO said:
Imports of petroleum products require a definitive financial instrument (in the form of import contracts/confirmed LCs), as per requisite banking regulations, however, delays in opening import contracts/confirmed LCs and FX remittances, despite the availability of LC lines, are hampering the oil supply chain, leading to supply disruptions in the country, particularly at our retail network.
Additionally, the lack of import contracts and LCs are causing negative reactions from international oil suppliers, resulting in the cancellation of oil shipments.
The company noted that the situation became worse in the first week of January when banks denied requests for new contracts and LCs, which could lead to severe oil shortages at retail stations in the near future.
