ISLAMABAD, April 10: The government is considering enforcing compulsory stock obligations (CSOs) on all oil refining and marketing companies for defence supplies and imposing a military surcharge on oil products to raise strategic defence storages up to 90 days.
Official sources told Dawn that this was being seen as the only option to address concerns raised by the military authorities that a privatized Pakistan State Oil (PSO) controlled by a foreign strategic investor would have access to information regarding the quantity of product and location of deliveries made to the military. The nationality of the strategic investor would be the main factor to ascertain the level of concern and sensitivity, these sources said.
“This information could be passed on to the parties outside Pakistan for interpretation and potentially be worked out the reason for military activity in a particular area,” a senior government official said, referring to military objections to the privatization of PSO. The state-run oil giant is scheduled for privatization before September 2002, and is currently in the final stages of restructuring process.
The only possible solution to the military concerns in the wake of PSO privatization is to establish its own supply chains and instruct PSO and other oil marketing companies to deliver product to a central stocking point or several points from which the military would use its own transportation to deliver products to secret storage locations, said the official.
These sources said that advisers on privatization of PSO had told the government that Pakistan’s national interests would not be compromised as the United States, Europe, Thailand, Brazil and the Philippines had privately run oil sectors and none of these countries’ strategic national interests had been undermined.
“The army and the country as a whole will have higher product storage levels as a result of compulsory stock obligations. Supply capacity would be increased more efficiently if PSO is privatized and the downstream markets are liberalized,” the official quoted the financial adviser as telling the government.
The military authorities had expressed the fear that its supplies could be disrupted if payments for products were not made to the private companies in the case of emergency. Two mechanisms would be put in place to mitigate this concern. A military surcharge would be placed on POL retail prices to ensure that army always had sufficient funding to pay for its fuel requirements. Secondly, the government would also provide oil companies with evergreen guarantees under which they would be guaranteed payment by the government if the armed forces failed to pay for the supplies.
The official said the government also had wide ranging powers within the constitution of Pakistan to deal with emergency situations. In 1965 and 1971 Pakistan-India wars, two pieces of legislation placed restrictions on the sale, export or other disposal of petroleum products or their use or consumption in a form and manner as specified by the Chief Petroleum Officer or Area Rationing Authority.
The financial advisers believe that security reserves could be better maintained through CSOs of private sector particularly the foreign firms because of their integrated system and ability to exchange, reschedule, make swap arrangements and reallocate oil supplies to meet the commitments.
In contrast, the national companies focus on securing long- term supplies rather than using the markets to obtain the most commercially advantageous supplies which meant that known sources and routes were more vulnerable for the enemy. Besides, they don’t have the depth of supply chain overseas to trade products or to refine their own crude to ensure continuity of supply.
Another question under consideration is that any stock which the government wishes an OMC (oil marketing company) to hold as percentage of total sale volume over and above the amount the OMC really needs to hold to meet its commercial supply requirement should be either funded directly by the government or through the pricing mechanism.
Power generation companies like Wapda and KESC would also be required to maintain CSOs through electricity prices and CSOs for armed forces would be funded through budgetary allocations or direct taxation on POL and electricity supply, these sources explained.
The armed forces had stated that they wanted to see POL inventories increased to 90 days of annual consumption to bring Pakistan’s average storage levels more in line with other countries throughout the world. This would be required to be done through a gradual process over a number of years to allow sufficient storage facilities to be funded and built. Pakistan’s existing storage capacity is just 20 days.
The CSO requirements would be set keeping in mind the demand patterns of various sectors and different fuel specifications like gasoline, middle distillates like diesel and fuel oil. The CSOs for the armed forces would most probably be constructed by national logistics cell and frontier works organization in remote locations, hidden from terrorists and potential invaders and secure from any air strikes and would be accessible only to armed forces.
