The oil industry has serious concerns about the government’s intention to import oil on behalf of international suppliers through custom bonded storage facilities.
Sources said the system would only work if oil prices were deregulated, and the Oil Companies Advisory Council (OCAC) had rejected it when it was initially proposed in December last year, reported a national daily.
The Economic Coordination Committee (ECC) Monday deliberated on the summary of imports through custom bonded storage facilities by foreign suppliers but put it on hold for the time being. The suggested system was claimed to be unfavorable for the oil industry.
Sources said remittances for imports would not be permitted at the import stage if the summary was approved. They said the impact of foreign exchange outflows would be the same as it is now, and there would be no beneficial impact on the country’s foreign reserves.
International suppliers have the option to hedge their goods, giving them a competitive advantage and making it unfair for oil marketing companies (OMCs) that are not permitted to employ any hedging option. Sources opined that this strategy might potentially endanger local manufacturing by disrupting the supply of local refineries which would have far-reaching economic consequences for the economy.
On another note, imports on foreign suppliers’ accounts would aggravate congestion at the ports, particularly during the agricultural season.
Pertinently, berthing is managed by Port Qasim Authority with no involvement from OCAC, so managing port congestion would become more difficult. Sources argued that OMCs will be letting go of their existing contracts in order to benefit from this proposed arrangement and that the importer may bring in merchandise using a penetration price approach in order to upset existing supply contracts. This is a considerable risk, especially given that re-entering supply contracts at earlier pricing would be impossible.
This structure exposes the government to a significant risk of supply chain breakdown, particularly given the volatile international market environment in the event of reliance on a single supplier.
Sources remarked that the importer is not obligated to import, and they may opt not to do anything of the sort and pay a fine or halt operations just to avoid losses, something that could substantially impact the competitive laws of Pakistan.