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The two biggest risks are demand-supply manipulation, creating shortages and manipulate prices. Shortages can be countrywide by importing or procuring less or in inner locations. In OECD countries, there is a requirement of three months of storage, which is diligently maintained. Storage costs money both in terms of capex and operating and financial costs of maintaining inventories. All of this is passed on to the consumer and is reflected in prices. An optimum inventory requirement at various levels may have to be worked out and enforced; easier said than done. Competitive pricing pressures may resist storage costs.

International oil companies

Multinational oil companies like Shell, BP, Chevron, Exxon and others are withdrawing from low margin business of petroleum retail. One of the main reasons of winding up from Pakistan is, among others, this larger policy of withdrawal. One is not sure if, after deregulation, the purported argument of attracting foreign investment and companies would work. Good riddance — there is enough experience locally in the sector. Foreign investment is not free; it causes foreign exchange drain.

PSO

PSO (Pakistan State Oil), a government company, having a market share of almost 50-60%, is a major instrument of the writ of the government, all good and bad may be partially ascribed to this largest and listed company. Fortunately, being a listed company, there are many safeguards that are legally implemented. It is argued that due to the presence of PSO, price manipulation can be resisted, unless GoP becomes totally careless about it and its functionaries and government becomes beneficiaries of profiteering and loot. One has to be optimistic but the risk is always there. Besides, PSO privatization has been often talked about.

It is said that Oil Refineries (ORs) are leading the demand for deregulating the oil sector. Oil refineries are outdated and lack scale economies, which requires a minimum capacity of 200,000 bbl/day. Under various pretexts, ORs have been extracting concessions such as deemed duty. In the new proposed oil policy also, they insisted on tax holidays and deemed duty. In all fairness, ORs had to be protected like other industries by a reasonable margin, otherwise ORs cannot survive in the long run. It is a separate matter that under the recent market situation they made hay while sun shines. Gross margins crossed 40% as opposed to a normal of 15-20%.

Under deregulation, it is said that they expect higher margins and profits and have thus done away with erstwhile concession demands. Thus those who are dreaming of lower prices may be disappointed when reality arrives finally. On the other hand, this may not go uncontrolled. PSO may be a stabilizing market price leader. So long it is not privatised, it may continues to provide this function. In India, there is deregulation but market is controlled by three large public-sector companies. There is almost no difference in prices among the three public-sector companies, indicating some guidance or consensus-seeking process violating the spirit of true competition. The same may happen here with more frequency and intensity.

Is competition delivering in advanced countries — yes and no?

Will Petroleum prices come down under deregulation in Pakistan? What is the evidence from countries having open markets? Are prices being really determined there by real competition? Broadly and to a large extent; yes. There is considerable evidence of consensual and not a really competitive pricing. There may be price leaders which signal the sector if not outright conspiracy based price setting. Petrol pumps are charging more than they should. Let us quote from a recent U.K. publication:

Only one in 10 petrol stations are charging a fair price for fuel and small local forecourts are giving drivers a better deal than the big boys, new findings have shown. Recent falls in the oil price should mean that price at the pumps should be at least 10p-a-litre cheaper, around 174p-a-litre for petrol, and much lower than the country’s average 188p-a-litre.

https://www.thesun.co.uk/money/19275630/uks-cheapest-petrol-station-try-small-forecourts/amp

Independent petrol pumps

There are a number of business models governing the petrol distribution and selling business. Normal business models are: 1. COCO — oil Company Owned and Company Operated; CODO — Company Owned and Dealer Operated and DODO — Dealers Owned ad Dealers Operated. First and second kind of business models have a low prevalence due to investment amount and risks. Mostly, the DODO business model is practiced throughout the world. Under DODO, dealers are bound to buy from the OMCs (Oil Marketing Companies) and observe quality and safety practices as well. Dealers benefit from the reputation of OMCs and their infrastructure and stability of supply.

Independent petrol pumps (IPPs) are a new innovation in the petroleum sector. IPPs are independent of any Oil Marketing Company (OMC), as the name implies; they can buy petroleum from any source. They have low overheads. In Europe, there is a 20% market share of IPPs. In nuevo capitalist countries like Bulgaria, IPPs market is even higher at 64%; it is 56% in Czech Republic. The market share and acceptability of IPPs is on the rise, as they invariably sell at a lower price than OMC-related petrol pumps. OMCs in the free markets charge a lot of overheads in the form of QA, safety and royalty, etc., but not in Pakistan. In Pakistan, OMCs’ and dealers’ margins are fixed by the regulator. It would be useful to quote from a recent article from a UK publication on the subject:

“Independently owned fuel stations are more likely to offer fairer pricing that major retailers, according to the RAC….just 10% (407) of a sample of more than 4,500 UK forecourts are charging a ‘fair’ price for petrol and diesel, with the vast majority of these being independently owned sites rather than major fuel retailers……Weekly wholesale petrol prices have fallen by a massive 17p a litre, from a weekly average of around 152p at the start of June to just 135p this week. Yet average pump prices have reduced by a paltry 4p.”https://www.fleetnews.co.uk/news/car-industry-news/

In a lighter vein, our IPPs in Pakistan are the illegal petrol pumps. Reportedly, these have been closed down — difficult to believe? There were (are) 1,556 illegal petrol pumps (legal ones 8,000 +) which have all the business model characteristics of IPPs except that these are illegal and engage in many unhealthy practices. Can these be organized under an IPP scheme under special Ogra (Oil & Gas Regulatory Authority) rules? IPPs need not be restricted to these illegal pumps and bring bad name to the concept of IPPs which is expanding almost everywhere. IPPs are sometimes organized under voluntary business association or group bringing and promoting quality and image. Existing or a new petrol pump may be given the freedom and flexibility to become IPP or come out of it under rules and safeguard. Special Petrol Pumps for Motorcycles, which may have a price sensitive, may also be organized under IPPs. Options may be many.

Conclusion

There are varying opinions and positions of stakeholders on the subject of deregulating the oil sector. Some people are skeptic of the deregulation. Businessmen and professionals associated with oil sector generally lament that the sector could not expand due to deregulation. They admit that prices and profits may increase in the short-run but in the long run supply side will improve and industrial development will take place. Governments have been confused and even scared as the choices are put before them.

Open markets are the way to go forward in the world. However, petroleum is too risky and too large a sector. Open market is not a jungle world. There are rules that have to be made and abided by the sector. We have a Competition Commission of Pakistan (CCP). Unfortunately, however, its role has been marred by a parallel judicial process which undoes or delays the determinations and orders of this regulator. CCP has organisational problems as well. Ogra may have to be remodeled as well. In any case, there is considerable overlap and confusing roles issues. OGRA has been empowered under recent regulations.

As a World Bank report says, that while deregulating, new regulations have to be made. Considerable policy framework may have to be done before opening the floodgates of the open market. It may cause anarchy and market instability. Under the current circumstances, when there are so many challenges, especially, in the petroleum and energy sector, more risks and challenges cannot be added. However, there are those who say that the time window is always small in Pakistan usually.

The following table classifies 97 countries depending on which of the three main retail fuel pricing methods they apply. We used data from ministries, agencies and market analyzes to categorize the countries.

======================================================================================
COUNTRY                Retail Prices           COUNTRY               Retail Prices
======================================================================================
Afghanistan            Market determined       South Korea           Market determined
Albania                Market determined       Spain                 Market determined
Andorra                Market determined       Sweden                Market determined
Argentina              Market determined       Switzerland           Market determined
Australia              Market determined       Taiwan                Market determined
Austria                Market determined       Thailand              Market determined
Bosnia and Herzegovi   Market determined       Turkey                Market determined
Brazil                 Market determined       Uganda                Market determined
Bulgaria               Market determined       Ukraine               Market determined
Canada                 Market determined       United Kingdom        Market determined
Chile                  Market determined       USA                   Market determined
Croatia                Market determined       Belgium               Price ceiling
Cyprus                 Market determined       Cape Verde            Price ceiling
Czech Republic         Market determined       China                 Price ceiling
Denmark                Market determined       Honduras              Price ceiling
El Salvador            Market determined       Israel                Price ceiling
Estonia                Market determined       Kazakstan             Price ceiling
Finland                Market determined       Kenya                 Price ceiling
France                 Market determined       Luxembourg            Price ceiling
Georgia                Market determined       Macedonia             Price ceiling
Germany                Market determined       Malawi                Price ceiling
Greece                 Market determined       Mexico                Price ceiling
Guatemala              Market determined       Panama                Price ceiling
Hong Kong              Market determined       Tanzania              Price ceiling
Hungary                Market determined       Vietnam               Price ceiling
Iceland                Market determined       Algeria               Fixed price
India                  Market determined       Angola                Fixed price
Ireland                Market determined       Azerbaijan            Fixed price
Italy                  Market determined       Belarus               Fixed price
Jamaica                Market determined       Bolivia               Fixed price
Japan                  Market determined       Costa Rica            Fixed price
Kyrgyzstan             Market determined       Dominican Republic    Fixed price
Latvia                 Market determined       Egypt                 Fixed price
Lithuania              Market determined       Fiji                  Fixed price
Moldova                Market determined       Ghana                 Fixed price
Netherlands            Market determined       Indonesia             Fixed price
New Zealand            Market determined       Jordan                Fixed price
Nicaragua              Market determined       Kuwait                Fixed price
Norway                 Market determined       Malaysia              Fixed price
Peru                   Market determined       Malta                 Fixed price
Philippinnes           Market determined       Mauritius             Fixed price
Poland                 Market determined       Nepal                 Fixed price
Portugal               Market determined       Pakistan              Fixed price
Romania                Market determined       Slovenia              Fixed price
Russia                 Market determined       South Africa          Fixed price
Serbia                 Market determined       Sri Lanka             Fixed price
Singapore              Market determined       Swaziland             Fixed price
Slovakia               Market determined       Zambia                Fixed price
======================================================================================
==============================
Top Petrol Stations in Europe
          by brand
==============================
Rank   Brand    Nr of stations
==============================
1      Total            8,250*
2      BP                8,200
3      Esso             6,050e
4      ENI               5,411
5      Shell            5,392e
6      Avia              3,000
7      Orlen             2,836
8      Aral              2,400
9      OMV               2,100
10     Lukoil            2,000
==============================
2019 data is the latest available
==============================
*2018 figure
==============================
=======================================
            Top Petrol Stations
                by country
=======================================
Rank       Country       Nr of stations
=======================================
1          Italy                 20,800
2          Germany               14,459
3          Spain               1 1 ,609
4          France              1 1 ,068
5          UK                     8,442
6          Poland                 7,665
7          Greece                6,1 OO
8          Netherlands            4,142
9          Czech Republic   3,991
1 O        Switzerland            3,667
1 1        Bulgaria               3,200
1 2        Portugal              3,1 14
1 3        Belgium                3,096
1 4        Romania                2,200
     201 8 data is the latest available
=======================================
===================================================================
                 2005-06    2006-07    2007-08    2008-09   2009-10
===================================================================
IOCL             40.8       44.2       44.95        46           46
BPCL             18.1       18.8       19.28      19.7         19.5
HPCL             16.2       16.3       17.11      17.8         17.5
Other PSUs        5.9        1.8        1.75       1.6          1.4
Private Parties    19       18.9       16.91      14.9         15.6
Total %           100        100         100       100          100
===================================================================
Source: Petroleum Planning and Analysis cell, 2010
===================================================================
===============================
Number of Petrol Pumps Pakistan
===============================
PSO                        3500
Cynergico/Byco              982
Total                       800
Shell                       756
others                     1462
-------------------------------
Total                      7500
-------------------------------
illegal                    1500
===============================
Source: Wiki,BR,PPDA
===============================

(Concluded)

Copyright Business Recorder, 2022

Syed Akhtar Ali

The writer is former Member Energy, Planning Commission and author of several books on the energy sector

Comments

Comments are closed.

Usman Aug 24, 2022 11:27am
There is only way to fix the economy i.e Privatize all SOE(s) with the exception of few, Deregulate and liberalize all Businesses.
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