Another oil crisis

Jun 23 2020

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Pakistanis recently witnessed a repeat of the 2015 petroleum shortage. The reason was, once again, the falling global prices and the attempt by the oil industry to avoid inventory losses.

The difference this time was that the crisis developed over a period of time, persisted too long and saw a far poorer response from the government. There was no sign the authorities concerned, regulators and market players had learnt any lesson from the January 2015 crisis.

It also transpired, meanwhile, that the supply chain had always been dependent on smuggling — by some companies and dealers — from Iran with around 5,000 tonnes daily imports or 150,000 tonnes monthly supplies.

As the Pakistan-Iran border was closed more than three months ago, the shortage started to build up. According to an official estimate, Pakistan is losing about Rs300 million per day (Rs110 billion per annum) on account of sales tax and petroleum levy owing to the smuggling of petrol, diesel and liquefied petroleum gas (LPG) from Iran.

The oil industry always tends to minimise losses when prices fall and maximise inventory gains as they move upwards. Businesses rarely follow principles, but the repeat crisis this year confirmed the governance structure is no better than it was five years ago.

Stakeholders attributed the fuel shortage to a sudden surge in consumption. This is confirmed by neither official record nor circumstantial evidence

The oil industry had slowed down its imports and local production as the price decline hit the market in December-January. But red flags were already up when the coronavirus led to lockdowns by the end of March and consumption dropped. The wheat harvest was just around the corner when local refineries started to close down for limited offtake by oil marketing companies (OMCs).

It was quite clear by the end of March that OMCs were not maintaining mandatory stocks for the 20-day consumption cover as per the rules and licence conditions. The strategic reserves necessary for security purposes had already been compromised. The supply chain disruption was nationwide and affected all major cities and towns in Punjab, Balochistan, Azad Jammu and Kashmir and Gilgit-Baltistan. Khyber Pakhtunkhwa officially said its 77 petrol stations had completely dried out.

By the first half of April, all stakeholders were fully aware of the initial shortages. The Oil and Gas Regulatory Authority (Ogra), the Petroleum Division and the oil industry were making friendly communications to show file work.

Ogra asked the director general of oil (Petroleum Division) to enforce its decisions on the industry to arrange imports and uplift the local product. The director general reminded the regulator to exercise its relevant power and enforce mandatory stock requirements on all OMCs. “Despite lockdowns across the country, higher sales of petroleum products have been witnessed since April 1,” said a Petroleum Division note in the first week of April.

The rationing of oil products came into play around Eid in the third week of May. Some unfriendly correspondence is also on the record, suggesting the minutes of meetings were changed to favour the companies of choice to benefit from the increase in prices that followed a few days later. While a few made billions of rupees in inventory gains and windfall earnings in the petroleum levy, others protested.

There were some calls for a change in the pricing mechanism to a quarterly or weekly basis. In fact, when the priority should have been maintaining the stocks through administrative, regulatory and policy response to the shortage, the institutional debate was focused on hedging against global oil prices.

No wonder it was the supply chain that was managed like a Ponzi scheme. For a large country like Pakistan, it is not an easy job to move stocks from the port to upcountry. Ironically, the world was suffering from storage constraints owing to a price crash while Pakistan went through one of the worst oil shortages, with many consumers being forced to pay double prices.

As the crisis peaked in the first week of June, the industry along with the regulator and the government in its public discourse attributed the shortages to a sudden upsurge in consumption in June. It quoted consumption of 850,000 tonnes in the month against the usual monthly consumption of around 650,000 to 700,000 tonnes.

That was corroborated by neither their record nor circumstantial evidence given the fact that most major cities are far from resuming normal business and educational activities.

The official record put the actual average consumption of petrol in the first 19 days of June at 24,000 tonnes per day. At this rate, the monthly consumption would not go beyond 720,000 tonnes. Also, the Product Review Meeting (PRM) attended by all OMCs, refineries, Ogra and the Petroleum Division on May 13 estimated total demand for petrol in June at 651,747 tonnes. The PRM under the DG Oil is a forum that jointly finalises consumption estimates for the next month and allocates responsibilities to each company for imports or local production.

Interestingly, an extraordinary PRM presided over by the secretary of petroleum on June 4 did not make any material change to the demand estimate that was put at 683,000 tonnes — just a difference of 33,000 tonnes or 5pc.

More surprisingly, the government appointed a seven-member probe committee led by the same officers and under the supervision of those offices that should have been subjected to a probe for acts of omission and commission and a conflict of interest. The result was not unexpected: blame the industry. Separately, the regulator sent show-cause notices to nine OMCs for not maintaining mandatory stocks and finally imposed absurdly low fines on six of them.

This is despite the fact that in meetings with the prime minister, Ogra blamed the DG Oil. The regulator took the stance that its responsibility was limited to building the physical storage infrastructure while the Petroleum Division was required to get these tanks/depots filled by OMCs with stocks for minimum 20-day consumption. Yet no one questioned it how it imposed fines on OMCs in that case.

While the stocks in Punjab, Khyber Pakhtunkhwa and Balochistan still remain limited to three to five days of consumption, shortages are likely to recede as the Pakistan-Iran border opened for trade last week. Also, the exchange rate has already come under pressure as the companies gear up for the revival of imports for inventory gains with the expectation of about Rs17-20 per litre increase in the price on July 1.

Published in Dawn, The Business and Finance Weekly, June 22nd, 2020