ISLAMABAD: Claim­ing over Rs130 billion stuck up funds against exchange rate and sales tax refunds, the country’s oil industry has asked the government for correction in ‘faulty’ oil pricing mechanism and for a significant increase in sale margins to save oil marketing companies (OMCs) from imminent collapse.

Both the associations of oil companies — Oil Companies Advisory Council (OCAC) and Oil Marketing Association of Pakistan (OMAP) — have written separate letters to the government conveying that a unilateral change in the oil pricing mechanism by the Oil and Gas Regulatory Authority (Ogra) was playing a havoc with the financials of their member companies and needed correction at the outset.

Both associations, which generally do not support each other because of conflicting interests, said the exchange rate methodology used for quarterly oil pricing was incorrect and unfair to the industry and suited only to state-run Pakistan State Oil (PSO) at the cost of their commercial and financial survival.

The OCAC, which represents more than three dozen large OMCs and all the refineries, demanded “to revert to the previous methodology (for exchange rate computation in oil pricing)” which was a simpler and clearer process. It said the exchange rate on the day of pricing was previously used for retail computation but was unilaterally changed by Ogra to an average of 15 days, despite opposition from the oil industry because of exchange rate exposure. It demanded reverting to the old mechanism as it would give a clear picture for the next fortnight, OCAC Secretary Syed Nazir Abbas Zaidi said.

Claims Rs130bn stuck due to unfair exchange rate methodology

The OMAP, another representative association of about two dozen smaller OMCs, also advocated a similar pricing mechanism, demanded a substantial increase in sale margins and raised a series of challenges, leading its members to the brink of collapse because of foreign exchange losses, OMC’s margins, sales tax dues, smuggling of Iranian diesel, and the faulty pricing mechanism.

OMAP Chairman Tariq Wazir Ali offered the government to investigate the issues raised by the industry through an independent organisation and take corrective decisions on merit to spark a sense of optimism in the entire industry, particularly OMCs.

He said the existing pricing covering local refining and imports of petrol and diesel had major flaws as it lacked visibility of benchmark tenure of letters of credit (LCs), unclear exchange rates were being used and caused heavy losses to the industry due to staggered recovery adjustments and no recoveries at all in case PSO did not have cargo for a specific fortnight.

It proposed the implementation of a pool system to compensate OMCs for their verifiable foreign exchange (FX) losses and demanded a comprehensive audit to carefully assess the distribution of these losses from 2020 onward. Any excess amounts disbursed should be promptly recovered and reallocated to the entities that genuinely merit reimbursement, thereby ensuring a just and transparent process.

The price mechanism of FX adjustments needed to be revised because of significant fluctuations. It said the actual FX gain or loss of each OMC should be adjusted in prices based on 60 days LCs instead of as a specific FX adjustment by PSO. Currently, a staggering amount of Rs70 billion is stuck in FX losses adjustment, the OMAP claimed.

It sought government support in facilitating their access to financial institutions by asking Ora to issue formal letters to OMCs detailing the pending amounts. This step would enable these amounts to be accurately represented in the balance sheets of OMCs, contributing to a more precise assessment of their financial health because OMCs credit limits had long been exhausted.

The OMAP claimed that the cost of OMCs had risen to approximately Rs14 per litre sold. Keeping in view a 15pc margin for the shareholders, OMAP proposed that OMC margin should be around Rs16 per litre instead of less than Rs9 per litre.

This revision will ensure the feasibility and survival of the OMCs. The increase in OMC margins will enable the companies to operate efficiently and provide quality services to their customers, as well.

Published in Dawn, March 23rd, 2024