Welcoming partial deregulation

Ever since the petroleum ministry has changed hands, there has been a positive change in the way things are moving along.
There have been a few steps taken towards LNG imports, rationalising the gas plans and now comes the proposal to partially deregulate petroleum product prices. Oil marketing companies and refineries have long been demanding industry deregulation to increase efficiency and bring in competition.
Rumours had it that the government was considering complete deregulation of petroleum pricing from ex-refinery prices to inland freight equalisation margin (IFEM) and the dealer margin. The Petroleum Minister, Dr. Asim Hussain, however, has laid to rest these rumours. Speaking to BR Research, he categorically said that deregulation would be gradual and it would be partial in the initial stage.
Oil marketing companies have long been lobbying for an increase in their margins as they deem the current absolute margin on petroleum products to be on the lower side. But they will have to wait a little longer for that to happen as deregulating the OMC and dealer margins is not in consideration at the moment.
"We are not going for complete deregulation at the moment - the OMC and dealer margins will not be altered. The government intends to encourage competition for which the IFEM on petrol will be abolished in the first phase. The practise of subsidising the imported petrol through import parity prices will now end, which will save the government approximately Rs10 billion a year," Hussain told BR Research.
Whether or not the government will actually abolish the IFEM is yet to be seen as it may have to face stiff opposition from political parties. Adil Khattak of Attock Refinery Limited is of the view that doing away with the IFEM may not be easy for the government at this stage as it will create pricing variations in various parts of the country.
The decision to end the practise of subsidising Parco with an additional Rs10-12/ltr is a welcome move for other refineries as it will provide a level-playing field to all refineries. "Parco has a market share of nearly 50 percent, which means that refineries other than Parco will now get an additional Rs5-6/ltr, whereas Parco would lose the same amount - hence there should ideally be no change in the ex-refinery and consumer prices," said Khattak.
The removal of IFEM, should it be implemented, will not necessarily alter the financials of the petroleum supply chain companies as analysts believe the idea is to increase competition and remove distortions in the system.
Analysts following the sector believe that those OMCs which have an integrated setup will benefit more in the short-run and it might spur a competition to increase storage capacities, which will do a great deal in rationalising prices in the long-run.
These are early stages, though, as the partial deregulation proposal does not include diesel, which has the lions share in the market. It is, nevertheless, a small step in the right direction.