Ogra's proposed fuel price increase that was expected on 1 November was rejected by the Federal Government. Ogra had proposed to increase the retail price of gasoline by Rs 10.73 per liter, and Rs 7.70 per liter on diesel. The international price of oil has been steadily rising, having reached about $83 per barrel of Brent crude, as the world's economy recovers from the Covid-19 slowdown.
The Government of Pakistan rightly wanted to protect consumers and the economy from rising international oil prices, and therefore rejected Ogra's proposal. Instead they devised a strategy to essentially subsidize the increased costs to the end user; Oil Marketing Companies would label the above increase as a "Price Differential Claim (PDC)", an amount that OMCs could have later claimed from the Government as a refund. The problem is that the Federal Government has already instituted such a PDC in the past and they still have not fully refunded companies' PDC amounts that was charged as much as 13 years ago.
They say that the road to hell is paved with good intentions. The Government's good intentions last year, when they banned fuel imports to protect Pakistan's oil refiners, exactly when oil prices were at a historic low, were ill-conceived and eventually led to serious damage to the entire economy when in June 2020 there was a nationwide fuel shortage.
The refiners complained to the government that they had purchased oil at much higher prices, and that they needed protection from the falling international oil prices. Petroleum Refiners, and the oil industry in general, are usually screaming that the industry needs deregulation. But refiners looked extremely hypocritical in 2020, when free market principles were rejected by them to protect them from lower prices which could have significantly advantaged the common man and the entire Pakistani economy.
Then in May, the government forcibly lowered retail prices to where just about anyone in the oil industry would be selling below their costs. The result? Pakistan's nationwide fuel shortage of June 2020. And the same could have been set in motion by the government again with the PDC.
The net impact of the PDC was estimated to cost about PKR 9-10 billion for the fortnight beginning 1 November 2021. PSO and Shell would surely be able to absorb such a hit to their cash flows. Unfortunately for a company like Hascol and countless other smaller players, such a devastating blow could not only affect our supply chain and ability to operate, but even shut many OMCs down altogether.
Hascol has been facing a liquidity crisis as a result of its inability to pay its creditors. The company owes some Rs 54 billion to 19 banks and DFIs. We have made significant progress in talks with our creditors to restructure Hascol's liabilities, and thereby create the necessary fiscal space to build back the company's operations. In the meantime, Hascol has been struggling to continue servicing its 650 retail outlets including at strategic locations such as the M2 Lahore-Islamabad Motorway.
Hascol calculated the PDC's potential negative cash flow impact for this fortnight alone to be PKR 260 million for the company. The PDC would have impeded Hascol's ability to supply fuel significantly, right when we are slowly rehabilitating ourselves from a near closure of our operations this past summer, and could have proven a death knell for the company.
Just when Hascol was about to conclude the restructuring discussions, averting a complete devastation of its market share, and begin to get back on its feet, Pakistan's petroleum regulators had thrown a major spanner in the works, in the form of the Price Differential Claim.
Hascol's major shareholder, Vitol, has been supporting the company throughout the recent difficult period. Vitol has invested over $100 million in Hascol, having taken a 40% equity stake in the company when the going was tough to say the least.
Vitol's $89 million invested in HPL through rights issues have almost completely been wiped out as a result of the crash in the company's stock price which has fallen from over Rs 300 to around Rs 5 today. Rs 8 billion were invested by Vitol into Hascol in January 2020. Covid-19 unfortunately didn't allow this investment to raise Hascol's sales due to the demand destruction caused by the pandemic. To turn the company around, Vitol has completely revamped Hascol's management and reconstituted the company's Board of Directors. I joined Hascol as its Chairman last year and we have a new CEO and management. Global best practices are being followed to improve risk management after much had gone wrong at Hascol.
Hascol is fully cooperating with its regulators to ensure complete transparency, and we have every intention to right the wrongs of the past. Hascol has called a Board meeting for the 12th of November, 2021 to review HPL's financial accounts for the year 2020.
On behalf of the Board of Directors and management of Hascol Petroleum Limited, I want to congratulate Imran Khan and the Government of Pakistan that they reversed course on PDC. Thereby averting a major crisis and potential fuel shortage across the country. Prudently nimble policy has partially accepted Ogra's proposed price increase. We request the government to allow market forces to determine the price of fuel in the country, rescinding Inland Freight Equalization Margin (IFEM) and let market participants compete on price.
This will benefit the average Pakistani and the economy as a whole, as it will drive down the price and allow survival of the fittest operators. Inefficiencies will rightly be punished. Otherwise, good intentions could wreck progress made not just for our company but damage the whole petroleum industry and Pakistan's economy as we saw in 2020.
(The writer is Chairman of the Board of Directors of Hascol Petroleum and former Foreign Minister of the UK)
Copyright Business Recorder, 2021