Upper limit of premium raised to $15/barrel: OMCs allowed to recover Rs10/litre on HSD for 2 months

ISLAMABAD: The government has allowed Oil Marketing Companies (OMCs) to recover Rs10 per litre on High-Speed Diesel (HSD) for the next two months (November-December 2022) by increasing the upper limit of premium to $15 per barrel.

The ECC meeting presided over by Finance Minister Ishaq Dar has allowed this on Friday on a summary moved by the Ministry of Energy (Petroleum Division). The ministry sought by loading the country’s risk factors of $6 bbl, with the upper limit premium of $15 to the OMCs for price computation to ensure sustainable high-speed diesel imports for the months of November-December 2022.

The ministry added that owing to the war between Russia and the Ukraine, the market has become volatile and unpredictable and consequently, suppliers have started loading country-specific risk factors such as letter of credit (LC) confirmation, bank charges etc in their premium quotations, keeping in view the default-like situation witnessed in Pakistan since July 2022.

According to the summary, this can be seen from a comparison of actualised cost and freight premiums published in the Arab Gulf (AG) Market and the PSO’s spot premiums for mogas imports during March-October 2022. It shows that, on average, suppliers have loaded about US$ 6 bbl in their premiums during the last four months. Similar comparison for the HSD shows an avenge cost and freight (C&F) premium of around US$ 9 per barrel, published in the Arab Gulf market during March-October, 2022.

Oil rate cut may not benefit consumers if PL adjusted

The ECC was requested that by loading country risk factor of US$ 6 per barrel, an upper limit of US$ 15 per barrel for price computation for ensuring sustainable HSD imports by the OMCs may be considered and approved as the OCAC and oil industry have requested urgent review and revise the benchmarking to save the industry from collapse. The premium (freight and suppliers margin) is a lump-sum cost of the supplier/exporter, which is either negotiated or offered in a tender process. The PSO, being a public sector company, is obligated to procure imports in accordance with the PPRA rules and regulations.

As per existing arrangements, the PSO imports its mogas requirements entirely through spot tendering, while bulk of its HSD imports are made from Kuwait Petroleum Corporation (KPC) on the basis of a long-term agreement, which is revised/reviewed biannually.

The premium on a long-term basis is lesser than the tendered premium.

Presently, the KPC premium for PSO’s HSD cargoes for July-December, 2022 is US$ 8.5 per barrel.

The Oil Companies Advisory Council (OCAC) has now conveyed that the current HSD pricing’ regime benchmarks PSO’ weighted average, the remaining importers are at a disadvantage as the market premiums are higher than the benchmark premium received through pricing.

The ministry added that this difference has now risen significantly due to the prevailing geopolitical situation and current premium is at a level of US$ 14-16 per barrel, which translates to a loss of more than Rs10 per liter, thereby, creating an unsustainable position for importing OMCs other than PSO. Therefore, the OCAC and oil industry have requested an urgent review and revise the benchmarking process to save the industry from collapse.

The Ogra has also stated that in view of the HSD demand during the sowing season, about four cargoes are planned during November 2022 by the OMCs other than PSO.

Since the LC re-confirmation charges being charged by foreign banks in the case of Pakistan are now between 5-6.5 per cent, which has further compounded the price disadvantage to other OMCs, to import HSD under the existing benchmark.

Copyright Business Recorder, 2022