After extensive discussions in the cabinet’s energy and economic coordination committees, the government agreed to the demand of the oil industry to switch the petroleum pricing mechanism from a monthly to fortnightly basis on Arab Gulf Mean oil prices published in Platts Oilgram.

The key objectives of the change in the pricing mechanism were to “ensure fair competition … alignment of margins with international pricing trends and (the) smoothing out of volatility and distortions because of purchasing dates of one oil marketing company (OMC)” meaning Pakistan State Oil (PSO).

Simultaneously, the government also decided to upgrade the fuel grade to Euro-V standards from Euro-II standards introduced in 2016-17. Besides the environmental considerations, the driving force behind this upgrade was PSO’s limitations after its traditional supplier — Kuwait Petroleum — discontinued low-quality fuels.

As a result, the Economic Coordination Committee (ECC) on the request of the Petroleum Division decided on July 28 to adopt the revised pricing methodology for motor gasoline (petrol) and high-speed diesel (HSD) on a fortnightly basis based on Platts average to help OMCs minimise their inventory losses and ensure faster recovery of their costs.

Local refineries suspect a move to promote oil traders at the cost of local investment in ‘strategic assets’

It was officially announced that the new mechanism would allow planning for three months ahead with refineries and OMCs, better inventory management, improved reporting of sales and enforcement of stock requirements, transparency and visibility of prices and reduced dependence on one OMC.

The prices of petroleum products were previously determined by allowing refineries to fix and announce the ex-refinery sale prices on a monthly basis subject to the condition that their prices of the petroleum products could not be more than PSO’s average actual landed import price of the previous months.

Under the new methodology that comes into force on Sept 1, the price is based on Arab Gulf Platts daily average for the number of days (15 days) in the pricing period (using the mid-point of bid and ask) as the base commodity price. Any premium above Platts, freight and incidentals will be taken as an average of PSO’s procurement for the pricing period and added to the base commodity average price.

The exchange rate will be used as provisionally available for PSO, but it will be converted to the actual upon the retirement of the letter of credit no later than 60 days. It was thus decided that the period of the price applicability will be fortnightly.

From here onwards, the role of the bureaucracy came into play. The Petroleum Division issued guidelines last week for the computation of prices and introduced penalties for lower than Euro-V quality fuels with immediate effect. The local refineries particularly felt aggrieved and suspected a move to promote oil traders at the cost of local investment in ‘strategic assets’.

All the five domestic refineries jointly lodged a protest with the government. Because of the pricing penalties based on each RON (research octane number) for motor gasoline commonly known as petrol, some of the refineries believe they are better placed to switch to deregulated products. They consider upgrading the product through boosters to high octane blending component (HOBC) of 95 and 97 RON because of Rs20-25 per litre profitability as opposed to Rs2-3 per litre profit in the regulated 92RON petrol that may evaporate because of penalties and hence close down.

They have asked the government to stop the implementation of pricing guidelines. “We were surprised to note that these guidelines were issued by the Petroleum Division without consulting refineries being major stakeholders” despite the fact that it was notified on June 30, 2020 that the pricing calculation will be carried out in consultation with oil refineries and PSO regarding Euro-V petrol and diesel.

“The issuance of unilateral guidelines by the Petroleum Division for the pricing of Euro-V fuels for local refineries without consulting refineries defeats the very essence and spirit of the (energy committee’s) decision of June 4, 2020.”

While senior officials at the Petroleum Division defend the guidelines, the political leadership has hinted at calling a consultative session with refineries and the Oil and Gas Regulatory Authority (Ogra) in the next few days to address their legitimate concerns before the next pricing cycle commences on Sept 16.

The refineries believe that scaling down the premium for motor gasoline by 47.9pc derived from the variance of premium on HSD Euro-II and Euro-V as published in Platts was unreasonable and unjustified. Also, they argue that each product’s freight-on-board (FOB) price and premium, as assessed by Platts, were based on the demand-supply situation of that product in the regional markets and were specific to that particular product only. Hence, they could not be applied to other products principally and mathematically. Likewise, sulphur reduction in petrol was also not comparable with sulphur reduction in HSD.

In case an individual refinery is producing Euro-II premium motor gasoline (PMG), but the sulphur contents are up to 10 parts per million (ppm), then a sulphur penalty should not be applicable. It is meeting the Euro-V specification requirement in terms of sulphur. Moreover, some refineries have already been producing motor gasoline with comparatively better specifications than the government-specified Euro-II gasoline. But the government did not allow any premiums on that account.

They also challenge the logic for imposing a second penalty on MS 91 or below as refineries not producing 92 RON were already paying the RON penalty under the existing mechanism. Moreover, Euro-V petrol was 91 RON and not 92 RON internationally. Hence, there was no justification for the penalty.

But more importantly, the penalties should not be imposed unilaterally on the existing price structure. Refineries had not been given sufficient time to improve the specifications from Euro-II petrol to Euro-V as was done for the transition to Euro-II for HSD.

Published in Dawn, The Business and Finance Weekly, September 1st, 2020