ISLAMABAD: Amid indications that banking industry has agreed to enhance credit limits of major oil marketing companies (OMCs) and all refineries, except one, the oil industry has worked out a mechanism of “funded subsidy” for payment of 95 per cent of their price differential claims (PDCs) in 10 days.

Based on the proposed mechanism, the Ministry of Energy (Petroleum Division) has submitted a summary to the Economic Coordination Committee (ECC) of the cabinet for approval of the payment mechanism within the current week, most probably on Wednesday, a government official told Dawn.

Informed sources said that on the backing of the State Bank of Pakistan, leading banks have decided to increase the credit limit of major OMCs— the state-run Pakistan State Oil (PSO), Shell, Total-Parco Pakistan Limited (TPPL) and Bakri Energy (BE) — besides four out of five refineries in line with an increase in international oil prices.

The banks have, however, shown reluctance to increase their exposure to at least three key players — two OMCs and one refinery — because of their ‘single-sourced imports’ from a troubled entity associated with a defaulting firm.

Leading banks agree to increase credit limit of major OMCs, refineries

The recent engagements are also reported to have brought to the fore some of the OMCs that still had surplus letter of credit (LC) limits and yet wanted to increase them to expand their network unimpressive to the banks. Also, a refinery unutilised credit limit and that was felt enough to its crude import requirements.

In a communication to the Petroleum Division and Oil and Gas Regulatory Authority (Ogra), the Oil Companies Advisory Council (OCAC) — an umbrella association of about three dozen OMCs and refineries — has worked out a payment mechanism for ‘reimbursement of fortnightly PDCs’ through a government-funded facility or a consortium banking arrangement, as the government may decide on an upfront basis.

It said the oil industry would provide within four days the PDC claims of each fortnight authenticated by the external auditor of the respective companies and duly signed by their chief executive officers. The documents will be submitted to Ogra along with a certificate of assurance through email and urgent post within four days.

The regulator should complete its review of documents from the industry and the consortium of banks within the next dour days. Based on this, the consortium of banks, on the instructions of the government, would be required to clear 95pc of PDC claims of the respective fortnight within two days. This would mean reimbursement to companies 95pc of fortnightly claims within 10 days after completion of a fortnight.

Over the next 19 days, the regulator and banks’ consortium would ensure payment of remaining 5pc based on audit or any other verification mode the regulator and the government may like to put in place but all dues have to be cleared within 29 days. Since the companies involved were financially well established, minor disputed amounts, if any, could be adjusted or settled in the following fortnight.

The OCAC has asked the government to ensure approval and operationalisation of the proposed mechanism without any delay to “enable swift implementation of the process for timely remittance of PDC claims”.

It has reminded that management of cash flows was critically challenging for the downstream sector owing to insufficient margins, rupee-dollar parity, constrained financing facilities, circular debt and outstanding PDCs since 2014. It had also become tough with other external factors such as the geopolitical situation following Russia’s invasion of Ukraine and high premiums payable in the international market.

“The sooner the process is approved and implemented, the quicker will be the redressal of already constricted working capital constraints faced by the oil industry,” it said, adding that the mechanism should be up and running “before the announcement of new PDCs in the next fortnight” i.e. March 15 because the PDCs were anticipated to go up because of the rising international oil prices.

The oil industry and relevant government stakeholders — Petroleum Division and Ogra — had been raising alarm bells over disruption in supply chain in the coming harvesting months until June because of shortage of foreign exchange for oil imports, reluctance of banks to increase credit limits to oil importers and funds stuck up with the government on account of PDCs.

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

The oil marketing companies are entitled to Rs3.65 per litre profit margin while PDC on HSD works out at about Rs2.28 per litre, leaving limited space for them to finance their working capital. The industry had told the government that it would not be possible for it to maintain supply chain with negative margins and financial constraints. Both the Petroleum Division and Ogra had also been writing letters to each other over the past week warning diesel shortages.

Based on their financial challenges, the oil industry had expressed inability 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 Prime Minister Imran Khan delayed the price increase. As a way out, it proposed that a fast track mechanism be put in place that ensured payment soon after completion of first 15-day sale of pricing cycle.

Published in Dawn, March 7th, 2022