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Govt, stakeholders in dispute over oil storage mechanism

Updated July 20, 2018

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Under the current policy, oil companies are required to maintain 20-day stocks for their respective sales volume.
Under the current policy, oil companies are required to maintain 20-day stocks for their respective sales volume.

ISLAMABAD: The government, the oil sector regulator and the oil industry have been unable to put in place a mechanism for setting up of oil storage infrastructure, retail outlets and stock build up for more than three years now amid massive capacity shortfalls.

The issue has been lingering on since the historic supply chain disruption of January 2015 that caused severe transportation problems across the country.

“The Oil and Gas Regulatory Authority (Ogra) has put a ban on development of retail outlets without mandatory storage capacity for at least 20 days of sales while storage capacity expansion is hampered by delayed clearance for infrastructure,” said an industry executive explaining that the country’s consumption of petroleum products is increasing every year without proportionate increase in outlets and storage.

Last year, Ogra stopped more than a dozen oil marketing companies (OMC) from expanding their retail outlet networks due their inability to develop proportionate storage capacity required under the government policy. Every OMC is required to ensure product-wise storage capacity as well as stocks for a minimum of 20 days.

In May this year, the federal government on the request of defence authorities ordered immediate suspension of unauthorised operations at two key oil installations at Keamari in Karachi and Machike near Multan being carried out by the OMCs without prior security clearance.

In a fresh communication to Ogra, the oil industry has complained that restricting development of retail sites in newly developed areas was causing inconvenience to the general public as well as the marketing companies and hampering competition and improved service standards.

“Current ban by the Ministry of Defence on development of new storages at Keamari and Machike must be taken into account to review the issue,” said a letter by Oil Companies Advisory Council (OCAC) — an umbrella forum of more than two dozen refineries and OMCs.

Under the existing rules, the day-coverage is considered as the capacity of storage depots and retail outlets and companies are required to maintain 20 day stocks for their respective sale volume.

The oil industry wants these rules to change. “Ogra should review stocks’ days-cover policy while taking into account the storages across the supply chain”. This means all stocks from depot to retail site including leased/rented storages, pipelines, transit stocks on the move on tankers and third party hospitality arrangements should be calculated for days-cover as all these storages add to the overall stock cover in the country.

It said that Ogra currently reviewed days-cover at provincial level which was contradictory to the inland freight equalisation margin (IFEM) principles; intra province movements other than approved routes cannot be made in order to avoid dry-outs. Also, the stock days-cover policy approval by the regulator should also be executed on product level for high-speed diesel and petrol separately.

Moreover, all OMCs had multiple projects in the process for new retail sites and currently at various stages of completion which could not be abruptly halted because of serious operational and financial implications. The OCAC called for an urgent discussion on the subject for its resolution at the earliest.

An Ogra official confirmed that the regulator had received the communication from OCAC but it had been asking for long to develop storage infrastructure before expanding retail outlets.

The OCAC also complained that even when the OMCs planned to build additional storage capacity, the Ministry of Defence imposed a ban on new storages at Keamari and Machike with no approvals being given for new storage tanks.

“Under such circumstances, no OMC can add new storage even if it wants to,” it said, adding that a ban on retail outlets on top of the storage ban would create more problems for the consumers who get the tanks of their vehicles filled at the outlet and not at the depot.

The Petroleum Division of the Ministry of Energy has already asked Ogra to take action in the matter as the defence ministry had been showing “serious concern over the operations of the unauthorised terminals.”

The Ministry of Defence had written letters about the unauthorised activities by oil companies without security clearance in February last year and then followed up in June 2017. As the operations continued unabated, the defence secretary called a meeting of stakeholders on March 1 this year and told the officials concerned in clear words that this could not be allowed to go on.

Therefore, the Ogra directed a few firms “to immediately stop any unauthorised operation/activity, if carried out, at the (Keamari) storage terminal, failing which action will be taken.”

Published in Dawn, July 20th, 2018