ISLAMABAD: Amid warnings about supply chain challenges and ret­ail prices increasing by up to Rs27 per litre in Gilgit-Baltistan, the major oil sector stakeholders — the regulator and the industry — have proposed gradual deregulation of petroleum prices over a period of two years to avoid the political pressure associated with pricing.

The government has also been advised to end its engagements with petroleum dealers and cartage contractors over their commissions and leave them to the oil industry to set their margins on a “competitive basis”.

It should also strengthen the Oil and Gas Regulatory Authority (Ogra) to ensure competitive market conditions, check cartelisation and monopolistic behaviour, and guarantee product quality, quantity, and availability to consumers.

The government has also been warned that the deregulation of inland freight equalisation margin (IFEM) — the pooling mechanism for uniform rates throughout the country — was announced in 2010, which quickly “escalated into a political challenge and the policy was reversed”.

Govt warned of supply chain issues, up to Rs27 per litre price hike in GB

In what appeared to be making the process even more cumbersome, the regulator has asserted that the pricing deregulation would need a comprehensive government policy covered through a legal framework and amendments to the Petroleum Levy Surcharge Rules 1967 and Oil Rules 2016 covering refineries upliftment, demand-supply, import, export and transportation along with new provisions for checking monopoly and anti-competition practices.

To counter the retail product prices going significantly higher in northern parts of the country and other regions away from ports and refineries, Ogra has suggested the expansion of the Benazir Income Support Programme (BISP) system for subsidising consumers of petrol, diesel and kerosene, particularly in Gilgit-Baltistan and Chitral.

The “government may introduce a direct subsidy for the residents of the area through BISP in view of the expected significant variation in retail outlet prices”.

Ogra has indicated that in case the IFEM is

abolished, the retail prices would vary by Rs6.50 to Rs8 per litre countrywide on average, although prices in Azad Kashmir and areas near ports and refineries would be lower by Rs2 to 5 per litre.

Under the main proposal of Ogra, the product prices “will be set by refineries and oil marketing companies (OMCs) themselves on a self-chosen frequency of daily, weekly, fortnightly or monthly on a competitive basis”.

It said the pricing deregulation should be approached in three phases.

In the first step, the ex-refinery price and OMC’s margin should be deregulated with oil supply chain management, to be followed by deregulation of dealers’ margin and then IFEM in six months each.

Ogra has also suggested that a careful assessment of the impact of deregulation should be carried out in view of the recently announced brownfield upgrade policy for refineries.

Ogra said the deregulation would mean the “OMCs would be free to import or locally procure as they deem fit”, and the existing arrangement would have to be abandoned, which required first upliftment of the local refinery product.

“To provide a level playing field to OMCs for negotiating ex-refinery price, the first upliftment priority principle of local products will have to be disbanded. The OMCs be given the choice to efficiently source their supplies locally or from the international market,” it said.

Both refineries and OMCs would follow the existing government policy for storage and

minimum stock requirements and the oil industry, including refineries, will implement digitisation of the entire supply chain up to the retail outlets for transparency of product availability.

Ogra has also proposed the introduction of independent retail outlets (without OMCs) to foster competition in the retail sector with company-operated outlets. “Alternatively, the OMCs may be allowed to set the margins for their dealers,” it said.

The refineries have agreed to follow the existing ex-refinery price principles of import parity price except to keep the 10pc customs duty paid by PSO on petrol and high-speed diesel as part of the import parity price as opposed to 7.5pc currently allowed as deemed duty on high-speed diesel only.

Published in Dawn, April 20th, 2024