THE government plans to tax consumers for raising Rs100 billion required for building national strategic oil reserves but has no intentions to cut domestic oil prices until April 2007 despite about 32 per cent reduction in the international oil market – from a peak of $79 per barrel in July to less than $54 now. The strategic stocks to cover 45-60 days of consumption would, however, be meant only for security of supplies and not for price stabilization operations.

The government has sought advice from the World Bank to improve oil pricing mechanism that has been under criticism for over six years now because of its reported tilt towards oil companies and refineries. In the initial discussions, it has been proposed to reduce or remove deemed duty on petroleum products that is estimated to cut rates by about 40 paisa per litre. In the hindsight, this reduction is likely to be overshadowed by the tax for the development of storages for the strategic reserves.

It, however, appears that the government would reduce petroleum prices well before next year general elections to secure political mileage, as indicated by the unanimous demand by the Punjab Assembly led by ruling PML (Q).

According to secretary finance Tanvir Ali Agha, the government has still Rs13 billion arrears – down from Rs42 billion a few months ago - to pay to the oil marketing companies and refineries as price differential claims.

At current rates, the lower international market yields a windfall of Rs1.5 billion every fortnight that is paid to the companies. The government had announced in the budget 2006-07 that it would neither earn profit from oil prices nor inject money. It will clear the dues of oil companies before adjusting prices to the international rates.

A senior government official who has been part of deliberations with the oil industry and the World Bank said the money required for the strategic reserves may even exceed Rs150 billion given the fact that the entire programme would involve development of storages, building stocks and its recurring cost.

The current reserves are mostly held by the oil companies to maintain their supply chain across the country. It would not be easy for the government to ask multinationals to maintain reserves for the national security needs. The Pakistan State Oil (PSO) is to be privatised. Many in the industry still remember how the Attock Oil’s uninterrupted oil supplies during the 1965 war helped overcome the problems arising from outside blockade.

Will the proceeds of the privatisation of PSO match the additional requirement of investment in building storages and raising reserves, is a question that nobody in the government is ready to answer. Many, however, believe that PSO proceeds could be easily diverted towards developing new infrastructure for oil reserves, instead of further burdening the consumers. They also question as to why the government did not use billions of rupees collected as petroleum development levy to construct storages.

This new tax for strategic reserves will be in addition to 18 existing components of oil pricing currently being recovered from the general public on various petroleum products.

At present, retail oil pricing comprises average rates in the Arab-Gulf market, a premium for transportation and commission for the middleman, marine insurance, financial charges, ocean losses, wharfage, exchange rate conversion cost, deemed duty, excise duty, petroleum development levy, sales tax, price differential claims, inland freight equalisation margin, distribution margin to companies and dealers’ profit.

Secretary Petroleum Ahmad Waqar told Dawn that Pakistan has sought World Bank’s assistance for further improvement in the oil pricing mechanism that would submit its report on new mechanism within the current calendar year. He, however, hastened to add that it was not necessary for the government to accept the Bank’s recipe in full but hopefully a revised pricing mechanism would be in place by early next year. He did not indicate the proposed reduction in deemed duty on petroleum products, saying the question should be referred to the Central Board of Revenue (CBR). The government currently charges deemed duty at 6-10 per cent on four products which are mainly produced locally to protect refineries while high speed diesel is also imported under a similar custom duty.

The World Bank has let its views known to the petroleum ministry that the refineries charging deemed duty as a premium from consumers to make themselves competitive with the imported products. This is at the expense of consumers, who, implicitly, pay more to the refineries. “The refineries are rather old and depreciated and giving them a protection is questionable under the circumstances”.

The bank had proposed that the products that required the committee’s review should be done away with. Competition remained the best approach that required deregulating Pakistan’s petroleum markets. This, the bank said, would require the refineries and the Oil Marketing Companies (OMC) to take market risks.

The petroleum ministry is currently in the process of appointing a consultant to look into implications of constructing new storage facilities, its infrastructure, its location and regulatory and financial aspects. Financial implications like capital and operating cost, cost of dead inventory and levy on consumer would be decided after the consultant has completed the feasibility report.

The bank was also critical of the government for charging higher ocean losses and handling charges from the consumers. The World Bank which has been critical of the government for the last three years for a faulty oil pricing mechanism, has now been involved by the petroleum ministry to prepare terms of reference for the consultant’s study.

There is also a proposal to convert obsolete and uneconomic refineries into full fledged storages. Another proposal from state-run Pakistan Mineral Development Corporation (PMDC) to utilise excavated Khewra salt mines near Attock for storage of oil reserves has not moved forward, although all the scientific reports confirmed that such an underground capacity could be used for oil storage with minor investments.

Pakistan’s total operating stocks are sufficient for 21-28 days of national consumption for different products compared with 90-days minimum in most of the European countries. With an annual consumption of about 15 million tons, petroleum products account for about 37 per cent of energy consumption. Of these, about 90 per cent in the form of high speed diesel and fuel oil.

Only 15-20 per cent of the liquid fuel supplies are met from local sources and the balance is imported in the form of either crude oil or finished products. Over the past three years, gross imports of liquid fuels have averaged 13 million tons (MMT) per annum.

Currently, different petroleum products have their specific markets and unique consumption pattern and require varying level of strategic stocks to offset the impact of any unforeseen disruption.

The current petroleum products pricing structure does not include any margin for carrying such inventories. A number of issues are currently under discussion among various stakeholders, ranging from imposition of a tax to generate funds for the storage capacity and the stockpile build up, operations of these stocks; whether the stocks be maintained by oil companies or by the government or by a new strategic stocks entity and how the entire operation be regulated.

Since the infrastructure facilities of PSO are assumed to be no more available, a new professional spreadsheet would be prepared to augment product flows through port jetty, major storages, cross-country pipelines, rail wagons, road tanker fleet and distribution depots and compute product- wise costs and construction programme for new storages. Likewise, an overall framework would be developed for strategic stock, separate from commercial stocks to be maintained by OMCs to ensure how these stocks would be recycled or refreshed and how the risks and rewards could be shared by the oil companies.