ISLAMABAD: Amid hue and cry over financial challenges and rising receivables, the government and the oil industry failed on Wednesday to finalise a mechanism for payment of price differential claims arising out of recent price cuts announced by Prime Minister Imran Khan, raising worries over product shortages.

The oil industry and relevant government stakeholders had been raising the alarm over disruptions in the supply chain in the coming harvesting months — March to June — because of a shortage of foreign exchange for oil imports, banks’ reluctance to increase credit limits to oil importers, and funds not cleared by the government on previous price differential claims (PDC).

The recent decision of the prime minister to reduce the prices of petroleum products, particularly high-speed diesel (HSD), has created a new phase of PDCs. The problem has been amplified by oil industry reports that banks had indicated curtailing their credit lines further on the premise that their profit margins on the sale of petroleum products were not sufficient to finance even the existing credit when adjusted against price differential claims.

Oil marketing companies (OMCs) are entitled to Rs3.65 per litre profit margin while the price differential claim on HSD works out at about Rs2.28 per litre, leaving limited space for them to finance their working capital.

Financial challenges and rising receivables may disrupt supply chain of petroleum products

The industry told the government that it would not be possible for it to maintain a supply chain with negative margins and financial constraints.

In view of SOS calls from the oil industry, the government arranged a meeting of oil industry representatives with the Oil and Gas Regulatory Authority (Ogra) chairman and the petroleum secretary on Wednesday.

Based on the ground situation, the petroleum division reported on Feb 28 that demand for diesel is expected to increase in the forthcoming harvesting season in the country during March-June, meaning it will be essential to have sufficient stocks.

Both the petroleum division and Ogra had also been writing letters to each other over the past week, warning of possible diesel shortages.

“It will be in the fitness of things [to ensure] sufficient stock build-up immediately to avoid port congestion due to imports, which have potential to disrupt the supply chain of other petroleum products as well.” It also wrote another SOS saying the prime minister had announced a “subsidy/PDC on HSD price at the rate of Rs2.28 per litre of OMCs/refineries till March 15”.

Ogra has to calculate the “PDC receivable of OMCs/refineries including arrears of Nov 1-4, 2021 and submit to the petroleum division” to develop a well-thought-out mechanism for releasing the subsidy amount “to avert any shortage in the market”.

The meeting, however, remained inconclusive, as the oil industry was asked by the government side to submit their proposals. The oil industry was, however, promised that its proposals would be immediately taken up with the finance ministry and a finalised mechanism would be shared with OMCs before seeking their approval from the cabinet’s Economic Coordination Committee (ECC).

Based on their financial challenges, the oil industry asked the government side as to how it wanted to ensure supply chain when their PDC arrears since 2009 were still outstanding and had further gone up in the first four days of November when the prime minister delayed a price increase.

As a way out, it proposed that a fast-track mechanism be put in place that ensured payments soon after completion of the first 15-day sale of the pricing cycle.

It, however, warned that PDC for the current fortnight would be on a smaller scale but this would keep going up as global oil prices showed a sudden surge beyond $112 a barrel compared to the previous pricing cycle when the price stood at around $98-99 a barrel.

As the government side highlighted audit issues and payment cycles, the oil industry suggested that government should clear 90-95pc of PDC claims upfront on completion of 15 days and keep 5-10pc pending until actualising and reconciling data through an audit. In any case, the industry had substantial assets and operations that they won’t be able to run away with for Rs2-3bn.

The oil industry told the government that several letters had been sent to the government since Nov 1 to highlight the negative impact of PDC on the oil industry.

It noted with “deep concern that PDC has been imposed despite the fact that [Oil Companies Advisory Council] had highlighted the critical condition of the industry” and requested to avoid the further imposition of PDC, having an untenable impact on industry’s cash flows, which would lead to catastrophic disruptions in the petroleum products’ supply chain of the country.

It said the current PDC of Rs2.28 per litre on HSD would create a receivable of around Rs1bn in the first fortnight of March 2022 and add to the previous receivable of Rs2.6bn pertaining to Nov 1-4, 2021 and Rs10bn pertaining to 2004-2008, aggravating the industry’s financial challenges.

The industry pointed out that it was already facing severe financing issues caused by increasing international prices, rupee’s devaluation, high import premiums and circular debt of around Rs1.3 trillion.

“In order to ensure uninterrupted supplies and to manage working capital requirements, the industry has already requested the State Bank of Pakistan to support in enhancement of their credit.

Additionally, the decision to maintain prices at the current level until July will lead to further build-up of PDC for HSD and petrol, as global oil prices are on the rise due to the ongoing geopolitical situation, it said.

“If the local consumer prices are not aligned with the international market and PDC regime is continued, the industry will not be able to sustain and this will lead to a severe supply chain disruptions, more so during the upcoming harvesting season resulting into a grievous crisis of petroleum products shortage similar to what was faced in June 2020,” it said.

Besides, it would adversely impact the business continuity of several companies, the oil industry said. “To avoid an imminent shortage of petroleum products, we request that the PDC element should be removed by revising petroleum product prices immediately or alternatively a subsidy mechanism be founded.

Published in Dawn, March 3rd, 2022