ISLAMABAD: Around 15 oil marketing companies (OMCs) are reported to have imported over 2.4 billion litres of petrol from China in two years earning a windfall of more than Rs20bn because of a special arrangement allowed under the China-Pakistan Free Trade Agreement (CPFTA).

These OMCs have reported to the Ministry of Energy (Petroleum Division) through the Oil Companies Advisory Council (OCAC) that they had imported about 2.416bn litres of petrol (motor gasoline) from China between January 1, 2020 and January 1, 2022. They were not required to pay 10 per cent customs duty on these imports under the CPFTA unlike similar imports from the rest of the world.

On January 14, the Petroleum Division had directed all the OMCs to provide evidence-based data on import of petrol from China. “It has been observed that a number of OMCs have imported motor spirit from China” and under the CPFTA they should provide complete details of their petrol imports for the last two years — January 1, 2020 to January 1, 2022 — within 10 days.

In response, the OMCs also provided the names of ships, the port of origin where the product was loaded, product quantities in litres, the offloading port along with date of decanting and the duties paid.

2.4bn litres of petrol imported from China in two years

A government official said the OMCs did not violate any law in these imports even though they earned windfall profits.

“If at all there is any revenue loss or impact of cheaper duty-free imports from China has not reached Pakistani consumers, it is because of a loophole in the government policy/law and not because of any wrongdoing on the part of the OMCs,” an oil industry expert said.

Under the country’s import policy, petroleum products attract 10pc customs duty on imports while an equivalent 10pc deemed duty is applicable on local production of these products. However, the CPFTA provides duty exemption to thousands of items in bilateral trade, including petroleum products that in some cases entail 0.25-0.5pc additional customs duty (ACD).

It is not clear yet as to how and why the petroleum imports were made part of the revised CPFTA in 2019 when China is a net importer of oil and these products were not in the original FTA (Free Trade Agreement) signed in 2006 and then revised in 2016. It is also strange that such a facility is not part of the FTA with Malaysia which is a major oil producer and exporter.

According to the report submitted to the Petroleum Division through the OCAC, an umbrella association of about two dozen refineries and oil companies, the OMCs also paid about Rs1.447bn as ACD to the government kitty.

Interestingly, petroleum pricing at present is neither based on cost-plus formula nor on an individual OMC basis. Instead, prices are worked out by the Oil and Gas Regulatory Authority (Ogra) on the basis of rates published in Platt’s Oilgram and the OMCs are free to import their products from sources of their choice and keeping in view commercial viability.

No wonder then, the state-run Pakistan State Oil (PSO), which is a market leader, also took windfall benefit of petrol imports from China. It imported about 68 million litres of petrol from China and claimed customs duty waiver against the FTA certificate as per SRO.1640(1)/2019 S.No.10 and paid Rs64 million as ACD.

The biggest beneficiary of the facility appeared to be Shell Pakistan which imported about 1.165bn litres of petrol and claimed customs duty waiver and paid about Rs1.08bn as ACD. The second biggest beneficiary turned out to be Gas & Oil Pakistan which imported more than 474m litres of petrol from China and paid just Rs153m as ACD and no customs duty.

On the third position stood Total-Parco which imported about 288m litres in two years and did not pay customs duty or ACD, according to the report. It was followed by Attock Petroleum Limited (APL) with import quantities of more than 157m litres at no duties at all. Interestingly, APL is part of the Attock Group that also runs two refineries in the country.

Likewise, BE Energy imported 131m litres of petrol under the CPFTA and paid about Rs108m as ACD. Hascol Petroleum imported about 98m litres of petrol under the Chinese duty-free facility and paid about Rs40m as ACD.

Zoom Marketing and Zoom Petroleum imported 9.5m litres and 6.9m litres, respectively, completely duty free, while Taj Gasoline also imported 8.1m litres at no duty at all.

Other OMCs with smaller imports included Puma Energy, Oil Industries Pakistan, Vital Petroleum, Jinn Petroleum and Al-Noor Petroleum.

Under the CPFTA renegotiated in 2019, the government had issued statutory regulator orders on December 31, 2019, which abolished tariff on import of petrol. As such, there was no customs duty on import of petrol from China with effect from January 1, 2020. Normal petroleum imports from all other sources, mostly the Middle East, attract 10pc customs duty while similar deemed duty is applicable on production from local refineries.

This results in a price saving of about 10pc on petrol imports from China. However, this price differential is retained by the OMCs as windfall profit instead of its benefit reaching the exchequer or the consumers. Depending on international petrol price published in Platt’s Oilgram, the gap normally works out between Rs9 and Rs12 per litre.

Interestingly, the key purpose of the free trade agreement between the two friendly countries signed on April 28, 2019 was promotion of fair trade competition. China itself is a net importer of petroleum products, including petrol, and transportation cost to Pakistan is relatively higher than that of the Middle East. Yet this provides substantial cushion to the OMCs. The current position under the CPFTA is valid for four years — January 1, 2020 to December 31, 2024.

This happens despite the fact that local refineries had been crying over low capacity utilisation throughout the year, and at times complete closure of their refining facilities, mainly because of higher import of petroleum products. Three out of five local refineries faced shutdowns over the last couple of weeks.

The local refineries had told the government last month that domestic production of petrol and high speed diesel could potentially go up by 60pc and 48pc, respectively, at a significant foreign exchange saving provided the local refineries were operated to optimum capacity.

The oil import bill, particularly of refined petroleum products, has seen the largest chunk of 83pc increase in imports during the first five months of the current fiscal year.

Published in Dawn, January 24th, 2022