Circular debt may lead to worst-ever power shortages in summer

The quagmire of circular debt may take a heavy toll in the shape of worst ever power shortages during the summer months. According to oil industry sources, because of the monster of circular debt all refineries and oil marketing companies (OMCs) are under severe pressure and unable to fulfil the rising demand of furnace oil, petrol and diesel in the country, which may invite yet another crisis in the coming months.
Currently, Rs 40 billion to Rs 50 billion are owed to refineries. Out of this amount, the share of Pak-Arab Refinery (Parco) alone comes to around Rs 30 billion, or 60 percent, while the remaining amount is of Pakistan Refinery Limited (PRL), National Refinery Limited (NRL), Attock Oil Refinery (ATRL) and Byco.
Sources said that the circular debt of Pakistan State Oil (PSO) alone stands at Rs 170 billion which, in turn, affects the refineries and OMCs as they are always short of funds for importing the required quantity of oil and for further processing. In totality, there is a circular debt of over Rs 200 to Rs 250 billion in the power and petroleum sector. The government owes this to industry and is responsible for many of the problems being faced by the oil and power sector.
Sources regretted that they even approached the Prime Minister for his intervention for solving this outstanding issue but he has yet to reply to their letter, leave alone "giving us an opportunity to meet and brief him about this serious crisis in the making."
Maybe the Prime Minister is more interested in cricket diplomacy and foreign visits than solving this important issue, which could put the whole country in darkness within the next two to three months. In its letter to the Prime Minister in March, the Oil Companies Advisory Committee (OCAC) had requested the Prime Minister for a meeting before March 31 to discuss the outstandings of the oil industry which needed urgent attention to avoid imminent collapse of the oil sector.
The OCAC had made it clear to the Prime Minister in its letter that the worsening circular debt issue and the unilaterally enforced adverse changes in the ex-refinery pricing mechanism over the past two years have already severely crippled the local supply chain.
Sources said that they even approached the Ministry of Petroleum for solving the industry issues, especially of circular debt, but they preferred to refer this to Finance Ministry, declaring it a finance related issue. Finance people, however, it seems, do not intend to resolve this issue soon.
The OCAC had also informed the ministry that refineries'' huge receivables as a result of circular debt were running into billions of rupees. "Also, the ECC decision on revision of pricing mechanism taken in December 2010 has been put in abeyance and the recent continuous increase in international crude prices has drastically reduced the refinery margins which were, in any case, negative on about 50 percent of the refinery production state.
Sources said that since the government does not have funds to clear up this circular debt, there is a continuous crisis in petroleum and power sector. "We often see different OMCs threatening other institutions for cutting down their oil supply due to this outstanding amount issue. It is temporarily resolved by government intervention by paying a little bit of the total outstanding amount. The real problem still exists," sources said.
An industry analyst told Business Recorder that once the summer heat peaks in the country in the next two to three months, power sector is going to face unprecedented crisis in the country in which one could easily say that there might be an occasion when a city could face full-day power breakdowns.
Since furnace oil is the main ingredient for power production and refineries and OMCs are facing severe fund shortages due to circular debt, "we are afraid that country is going to face a massive power shortage in upcoming months, " he said. Currently, Pakistan imports around 75 percent of its oil while around 25 percent is produced locally. The circular debt is increasing day by day due to the rising furnace oil import, which is attributed to rising local demand, especially of furnace oil.
Refineries are working at a low throughput, of around 70 percent to 75 percent. Thus they are unable to produce oil products as per the domestic consumption. The consumption of petrol and diesel has also increased substantially due to the use of petrol and diesel generators by small business and commercial areas of the country due to power shortages.
Petrol consumption in the country is around 0.2 million tons per month, out of which 110,000 to 120,000 tons is produced locally and the remaining 80,000 tons petrol is imported, which is four to seven rupees costlier than the petrol produced in the country through refineries. For this difference the government tells the oil sector to make a debit claim to government which itself has surpassed the amount of Rs 10 billion in the last few months.
In its letter to the Prime Minister, the representative body of oil the sector, OCAC, had warned that absorption of global price hike, effective from April 1, might result in collapse of the oil sector, leading to widespread shortages of petroleum products across the country.
The oil marketing companies have been facing deteriorating gross margins of refined oil in the recent past as the government of Pakistan had significantly lowered the fixed margins of each product. "Due to constantly rising trend of international prices which were not fully passed on to end-users, the margins have further declined and they are virtually negative and unsustainable. The government also failed to reimburse price differential claims (PDCs) and associated financing cost on petrol imports as well as high speed diesel (HSD) and other products worth billions of rupees and outstanding for over three years," sources said.
They urged the government to intervene by creating some ease for oil sector by resolving the circular debt issue so that refineries should work at 100 percent capacity and the country does not have to import the finished oil products which can be produced in the country with optimum output of refineries, commented a refinery official.