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The energy sector mess is growing. The subsidies on petroleum are not only unstainable fiscally, but if they continue, there could be possibility of shortages in May or June (situation is under control as of now), and if the hydel flows do not normalize, given high LNG and coal prices, the electricity load shedding cannot be ruled out, as the demand is growing.

The problem in the petroleum sector is that cashflows of the OMCs are drying out. PTI government paid Rs20 billion in subsidy and last week another Rs11 billion were disbursed against the price differential claim (PDC). However, not increasing the price of petroleum products on 16th April wasn’t a wise decision. The subsidies are growing at a pace of Rs2 billion per day. The build up is happening fast. This would require more fiscal space and the industry would need more money.

The good news is that there is no shortage in the coming few weeks. HSD reserves are at 19 days while for petrol (MS) the stocks are enough for 23-25 days. However, with 6 days working week, consumption may increase a bit. Then there would be Eid holidays to lower the consumption. The government should announce week long Eid holidays to conserve energy.

Growing international HSD prices are increasing the PDC. There is shortage internationally, and that is why premium (over crude) on HSD is increasing. In Pakistan, peak season of HSD is coming – as Mid-April to Mid-May is usually the time for wheat harvesting and agriculture demand increases. Government must be very careful in managing HSD supplies as any shortage could create food security issues. The good thing is that around 70 percent of HSD demand is met through local refineries. In comparison, around 70 percent of MS demand relies on imports.

The real problem is continuation of import of HSD and MS. OMCs’ cash flows are drying up. PSO receivables are approaching Rs600 billion. International prices are increasing amid government receivables (against PDC) accumulating with OMCs. They need higher financing from banks. But after Hascol fiasco, banks are reluctant to lend. SBP is trying to sort this out.

Big companies – such as PSO, Shell and APL, may not be at the risk of default from the lens of banks and may continue to get financing and import. However, credit lines for smaller companies is drying and banks may not entertain them unless the PDC issue is resolved.

Then prices of coal and LNG are skyrocketing. Government has commitment of 7-8 cargos a month for May and June. The government has floated tenders for three cargoes each in spot for the next two months. The expected price is $30-32 /mmbtu. It is not advisable to import at these rates for power production, as even after the high premium, generation on HSD is cheaper. Then hydel supply is already lower this year. And the government should run its FO plants at full capacity.

The demand from the power sector could create more problems to ensure supply chain of HSD and FO in the next two months. The circular debt is growing with increase in fuel cost which is not passed on. IPPs cashflows are becoming tight. There are signs of fuel shortage in IPPs, along with payment issues. Energy crisis could become serious, if not managed right. Unfortunately, there is no cabinet yet to take charge.

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