THE issue of raising the margin of oil marketing companies (OMCs) to four per cent from two per cent has surfaced again, but the government, second time in six months, has turned down the request.
Only a month before the September 11 tragedy in the US, one of the leading OMCs caused a commotion in the industry by spreading news in the local and global media that the government had decided to raise the margin. But the very next day, petroleum ministry officials in Islamabad rejected the speculative move of that OMC.
Perhaps, the oil company had taken the lead from the assurance, two federal ministers gave to foreign investors last year in London, in a bid to attract investment in oil and gas sector. Later, the Petroleum Secretary, Abdullah Yousuf in a TV interview same year in August, further hinted at increasing the margins.
Last week, some market players of these OMCs again became active and spread news in the Karachi Stock Exchange about a possible increase in the margins anytime. But one more time, the petroleum ministry had to dismiss these manoeuvring techniques, terming it as a pure “speculative move.”
However, these recent reports about the commission hike had boosted stocks of the OMC like the Pakistan State Oil by about nine rupees. The ministry is of the view that the concept of raising the OMCs margin falls short of expectation under the prevailing situation when the oil industry is heading for a complete deregulation.
Most probably, the recent pressure exerted by the OMCs on government to raise the margin is considered a timely move to gain something for the long-run instead for short period.
The petroleum ministry is currently in the process of finalizing an “Oil Vision” which is expected to be announced before the sale of the PSO stakes. There are reports that the government may take some decision on margins in the announcement of Oil Vision but before that chances seem grim of any upward revision. The new vision is also expected to outline future planning for complete deregulation of various POL products.
President Pervaiz Musharraf’s approval for the privatization of the PSO last month has also revived the hopes, in oil industry, of a possible revision in margin in order to provide incentives to the local oil distribution company before inviting the expression of interest (EoI) next month in the PSO. The margin revision is also aimed at luring prospective buyers for the PSO.
People in the OMCs have now pinned hopes on the Oil Vision as they believe that their dreams of margin revision may get materialised in the upcoming vision statement. In case the decision of raising the margin gets delayed for the third time, foreign investors will definitely get jittery and become somewhat reluctant to take the oil giant PSO without any lucrative incentive.
The oil companies have been mounting pressures on the government to honour its five-year old commitment by raising the margin to four per cent from two per cent but the government has kept it frozen since 1995. Three days back, the French Company, TotalFinaElf has threatened to stop capital investment in Pakistan if margins are not revised. The OMCs feel that the if the government wants to see healthy buyers for the PSO followed by future investment in oil sector, it has to fulfil its outstanding commitment now.
The head of research, Invest Capital and Securities, Mohammad Sohail says that investors make a logical assumption that in order to offload the PSO at attractive price, there should be some incentives in the form of margin revision which are now stagnant since 1995.
He says that in Pakistan, non-energy products including lubes were deregulated and players are free to set their own margins based on the competition. Last year, however, the government has fully deregulated the furnace oil segment (with an annual demand of eight million tons out of total 18 million tons industry size). But the margin of the PSO, having around 90 per cent share in fuel oil market, is still capped amid government instruction, which the company, being an state-owned entity, has been following.
An increase in the margin means a sure improvement in profitability of these OMCs by at least 40 to 60 per cent. The margin revision and other expected announcement in the upcoming Oil Vision coupled with the recent acquisition of further 16 per cent stake in Shell Pakistan Limited by its parent company means that the life of the OMCs in Pakistan may not be difficult as have been assumed by many, Sohail says.
The deregulation and conversion to cheap fuel may affect the operational performance of these OMCs, but the government plan to boost the slow-moving privatization process may compensate for everything.
An official in a company says that the margin in Thailand, Malaysia, the Philippines and Singapore are three to four times higher as compared to Pakistan.
