ECC approves increase in premium for diesel imports

Published March 26, 2022
Finance Minister Shaukat Tarin (L) presides over a meeting of the Economic Coordination Committee (ECC) on Friday. — PID
Finance Minister Shaukat Tarin (L) presides over a meeting of the Economic Coordination Committee (ECC) on Friday. — PID

ISLAMABAD: For ensuring diesel availability in the harvesting season amid volatile international market, the government on Friday allowed an increase in premium charged to Pakistani importers by spot traders for three months i.e. April-June.

The decision to this effect was taken at a hurriedly called special meeting of the Economic Coordination Committee (ECC) of the Cabinet presided over by Finance Minister Shaukat Tarin. The single-point meeting of the ECC was called at a short notice in the morning to address a challenging market situation.

A senior government official said the ECC directed that there should be no shortage of product even if it was procured at a higher premium as a part of the impact of higher premiums would be adjusted within the inland freight equalisation margin (IFEM) by the regulator and remaining to be picked up by the government.

All petroleum prices, including high-speed diesel (HSD), have already been frozen for four months by Prime Minister Imran Khan.

Only three members, out of 14, of the ECC attended the meeting. They included Minister National Food Security & Research Syed Fakhar Imam and Minister for Privatisation Muhammad Mian Soomro.

An official statement said the summary, moved by Petroleum Division, was meant to “facilitate and provide level playing field to oil companies vis-à-vis PSO” and was approved with the direction to revise the premium on a fortnightly basis. “Therefore, its impact would increase or decrease depending on the international energy market,” it added.

Under the decision, the HSD price calculation would not be based on the premium being charged by Pakistan State Oil’s long-term supplier – Kuwait Petroleum Company (KPC) – but on an average of prevailing market-based premium.

The meeting was informed that under the existing pricing mechanism for HSD and petrol, the base price is fixed on the basis of 15 days average FOB (freight on board) prices of the Arab Gulf market (published in the Platts Oilgram). For this base price, PSO’s last available average import premium and Incidental charges (including bank charges for letters of credit, wharfage, port charges, etc) are added to arrive at C&F (cost and freight) prices for finalizing the local consumer prices.

The premium (freight and supplier’s margin) is a lump sum cost of the supplier/exporter, which is either negotiated or offered in a tender process. PSO, being a public sector company, is obligated to procure imports under the Public Procurement Regulatory Authority (PPRA) rules and regulations.

As per existing arrangements, PSO imports its petrol requirements entirely through spot tendering, while the bulk of its HSD imports is made from KPC on the basis of a long-term agreement, which is revised or reviewed biannually. The premium on a long-term basis is lesser than the tendered premium. Presently, KPC premium for PSO’s HSD cargoes for January-June is $2.40 per barrel. In case, KPC is unable to meet PSO’s HSD demand, the additional imports are procured from the spot market. When PSO procures from both sources (KPC & spot market), the weighted average of KPC and spot premium is used as a benchmark to calculate the consumer prices.

However, the Oil Companies Advisory Council (OCAC) had pointed to the government that HSD premiums for the industry had been historically higher than PSO, implying that the industry was importing HSD at a relatively higher premium as compared to PSO’s benchmark premium. Due to this, the remaining OMCs are at a disadvantage.

This difference has now risen significantly due to the prevailing geopolitical situation. PSO’s tender for the second fortnight of this month opened at $8.45 per barrel whereas premiums are even higher in the open market. The situation was such that PSO did not receive any offer in their HSD tender for the first fortnight of April.

Since the current HSD price was benchmarked on the basis of substantial imports by PSO from KPC ($2.4 per barrel), any oil marketing company importing at the PSO tendered premium ($8.45 per barrel) would incur a loss of up to Rs6.8 per litre, creating an unsustainable position for importers. “Therefore, the need for urgent review the benchmarking process to save the industry from collapse”, the Petroleum Division pleaded insisting that OMCs would be unable to import HSD leading to a potential shortage across the country.

The ECC approved the summary that KPC premium be excluded from price computation for the period from April to June and premium be benchmarked on PSO’s average tendered premium for the previous fortnight.

In case, there is no tender by PSO in a particular fortnight, the premium from the previous tender would be used for calculating HSD ex-refinery price.

As this arrangement may lead to some benefits for PSO and local refineries, this would be adjusted by Oil & Gas Regulatory Authority for recovery through the IFEM mechanism. This mechanism would be reviewed on the recommendation of the Oil and Gas Regulatory Authority on a fortnightly basis.

Published in Dawn, March 26th, 2022

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