The Oil Companies Advisory Council (OCAC) has raised red flags over the ability to sustain the petroleum stockpile as the local oil industry’s operating capacity has been reduced further due to the Inland Freight Equalisation Margin (IFEM), which has affected the cash flow of oil markets.
In a letter to the state minister for Petroleum Division, the OCAC raised concerns about the oil industry’s financial predicament. With the current borrowing rate and product costs, the industry may be unable to maintain the 20-day stock cover for motor fuels. High credit letter confirmation charges and high demurrage costs have multiplied the industry’s financial woes and rendered it inoperable, said the letter.
It requested that the government effectively withdraw the negative IFEM in the next price increase on April 1, 2023, and include demurrage costs and LC confirmation charges in motor fuel pricing to keep the industry afloat.
The OCAC contended that rather than being reimbursed for freight charges incurred, which is the true purpose of IFEM, the Oil Marketing Companies (OMCs) are effectively reimbursing the consumer for adjustments that are recovered by the OMCs after a significant delay.
The aim is to convince the government to “declutter IFEM” by removing unrelated adjustments and that negative IFEM be discontinued in the next price change because OMCs have been financing an indirect subsidy to consumers for more than six months.
The letter also discusses the oil industry’s failure to finance the cost of mandatory motor fuel stock. The industry requested that the government immediately increase the OMCs’ margin to Rs. 7 per liter, matching the dealer’s margin.
Regarding the demurrage costs, the industry states in the letter that the process surrounding LC confirmation is causing disruption in berthing schedules, resulting in higher demurrage costs.
The OCAC recommended to the government that these be evaluated on a case-by-case basis and reimbursed as a pass-through cost by including them as a line item in fuel pricing. Concerning the LC confirmation charges, the letter informed the minister that the current economic situation has increased the country’s risk and resulted in high LC confirmation charges, threatening the industry’s viability.
The industry demanded that the government include the LC confirmation charges as a separate line item in motor fuel pricing.