ISLAMABAD: The oil industry has warned the government of supply chain disruption and increase in oil sector’s circular debt if it maintained product rates despite rising international prices.

“Based on the critical condition of the industry and increasing trend in POL prices, we urge you to ensure that no further petroleum differential claim (PDC) is imposed on the industry as it will have an unmanageable impact on the cash flows of the industry and may also lead to catastrophic disruption in the POL supply chain,” said the Oil Companies Advisory Council (OCAC) — an umbrella organisation of more than two dozen oil refineries and marketing companies.

In fortnightly oil price review due on January 31, the prime minister rejected a proposal of the ministry of energy to increase petrol and HSD prices by Rs11 and Rs14 per liter to pass on the impact of international prices to consumers. In doing so, the government abolished general sales tax on key petroleum products, including petrol, high speed diesel (HSD), kerosene and light diesel oil (LDO) and reduced petroleum levy (PL) by Rs4.90 per liter on petrol and Rs4.13 per liter on HSD.

At present, there is not GST on all these products while PL stands at Rs13.92per liter on petrol and Rs9.30 per liter on HSD. The PL on kerosene and LDO now stands at Re1 and Rs5.5 per litre, respectively. This is despite the fact that the government had given a commitment to the International Monetary Fund (IMF) to increase PL on petrol and diesel by Rs4 per liter every month until it reached a maximum permissible limit of Rs30 per litre.

Industry warns of supply chain disruption, increase in circular debt

A senior official in the petroleum division said the oil industry had told the government that international oil prices were maintaining increasing trend and there was limited scope in taxation to absorb higher price impact. The industry feared that the government could try to absorb the increase in freight equalisation margin or price differential claim like it had done late last year.

In November last year, the government had maintained the product prices despite higher international trend but had to withdraw its decision after four days as problems started to crop up and the IMF called for a reversal. As a result, the prices were increased on November 4 but not before creation of about Rs3.4bn PDC which is still payable to the industry.

The OCAC reminded the petroleum division that it had taken the initiative for early withdrawal of the PDC which was introduced in the petroleum prices effective November 1 to 4, 2021. The Oil and Gas Regulatory Authority had finalised terms of reference for audit of the said PDC and the industry was initiating the process of appointment of auditors to finalise the audit by the end of March. The industry sought petroleum division’s further support in reimbursement of the PDC on the basis of audit.

The Industry also reminded the government that the PDC was previously imposed from 2004 to 2008 and an amount of about Rs291 billion was borne by the industry in lieu of subsidy provided by the government to the consumers. The government subsequently reimbursed Rs281bn to the industry while the remaining Rs10bn was still unpaid or disputed till date. “The industry has also faced several inquiries by the National Accountability Bureau as well as the Federal Investigation Agency in this matter and the Federal Board of Revenue also created heavy demand of sales tax on PDC from OMCs.”

Published in Dawn, February 4th, 2022