ISLAMABAD: Amid record prices, the government has decided in principle to go for deregulation of the oil sector and has asked the Oil & Gas Regulatory Authority (Ogra) to work out its modalities in consultation with oil refineries and marketing companies.

A senior official told Dawn the government had asked Ogra to thrash out terms of reference for oil sector deregulation in order to promote competition and efficiency.

Oil meets 31pc of the country’s energy requirements. Despite these lucrative numbers, no refinery has been set up for more than a decade. Similarly, upgrades of the existing refineries have not kept pace with the latest technology.

The move comes at a time the when the government and the regulator have been struggling to ensure competition and efficiency in the much smaller segment of petroleum sector — liquefied petroleum gas (LPG) — even after two decades of deregulation and despite more than half of its supplies based on well-documented domestic production. On Monday, the Ogra “issued directives to the Chief Secretaries and district authorities to ensure that LPG is sold at prices notified by Ogra on Sept 1” at Rs2,013 per 11.8 kg cylinder for producers and Rs2,496 for consumers, an announcement said.

The product price in the market, on the other hand, ranged between Rs2,700 and 3,000 per cylinder and is steadily rising amid an increased demand from donors for flood-affected people and for the usual winter needs.

The Ogra asked district authorities “to initiate action against profiteers under the LPG Production and Distribution Rules 2001, Petroleum Products (Petroleum Levy) Ordinance 1961 and other applicable laws in the best interest of general public”, it said, adding that LPG plants and distributors had also been “directed to clearly display the LPG selling price on gate/passes and receipts for convenience of general public”.

An official said that after deregulation of petrol prices, Ogra at best would be able to issue such letters without any punitive action.

The regulator has called a meeting on Sept 7 of all the refineries, marketing companies and marketing associations, including the defunct Oil Companies Advisory Council (OCAC) and a smaller representative, the Oil Marketing Association of Pakistan (OMAP), for a consultative session.

Officials said all stakeholders had been asked to come up with their presentations on ‘Deregulation of Oil Sector’, including refining and marketing segments, on questions of benefits and repercussions. They said deregulation would mean opening up oil pricing and retail distribution to private companies.

These organisations would be free to set their own prices on competitive basis instead of looking for distribution margins fixed by the government.

Senior officials who have handled the business of retail oil marketing suggest that deregulation would get rid of the uniform ex-depot price set by the government across the country through the inland freight equalisation margin.

Retail prices may get Rs2-3 per litre cheaper in Karachi, Multan and Rawalpindi as these cities have a refining base, but get higher by Rs6-8 per litre in rural and far-flung areas.

While the government and the regulator struggle to protect urban consumers through surveillance and monitoring given the existing experience of their outreach and effectiveness, the rural consumers would be mostly at the mercy of retailers who start suffering in the shape of black-marketing ahead of increasing price trend and widespread adulteration.

Questionable premise

The sources said that a few senior politicians in the government were pushing for deregulation on the premise that it would encourage competition and the consumer would be free to go for the best price and quality.

They have, however, not studied the market dynamics where nobody, even in the petroleum division or at Ogra, could certify which company or retail pump even in Islamabad was offering the best products.

“In a market where even product measurement is questionable, the government and the regulator must first create enabling environment with ranking, certification and measurement standards before leaving the innocent consumer at the mercy of private sharks,” said a senior official.

The private companies are generally in favour of deregulation and attribute the lack of market development and poor investment prospects in the refining sector to a regulated environment and nominal profit margins.

The government has been studying petrol and diesel pricing for complete deregulation, including commissions of the OMCs and dealers on the pattern of HOBC.

The government has agreed in principle with the oil industry that IFEM mechanism should also be deregulated. It is currently used to keep prices uniform throughout the country.

This means the prices would significantly vary from one city to another and from one oil company to another. The consumer close to ports and refineries would be at an advantage while those away from ports and oil installations would have to pay more.

The difference could vary between Re1 and Rs5 per litre depending on the actual transportation cost.

Published in Dawn, September 6th, 2022