Pakistan’s oil industry on brink of collapse, says OCAC

Oil Companies Advisory Council (OCAC), a representative body of the downstream oil industry, has warned authorities that the oil industry is on the brink of collapse as it sustained severe impact due to recent Pakistani rupee depreciation.

OCAC, in a letter sent to the Secretary Ministry of Energy- Petroleum Division, and Chairman Oil & Gas Regulatory Authority (OGRA), dated 30th January, a copy of which is available to Business Recorder, highlighted the severe impact of the recent currency depreciation and requested an urgent meeting with the industry to discuss a way forward.

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“As you are aware, the sudden depreciation of the rupee has caused a loss of billions of rupees to the industry, whose Letters of Credits (LCs) are expected to be settled on the new rates whereas the related product has already been sold,” read the letter.

OCAC said that these losses not only have an impact on the profitability of the sector but also on the viability of the sector since these losses in some cases might exceed the entire year's profit for the sector.

“It is requested that immediate steps to compensate the industry should be devised,” said OCAC.

The letter comes after the Pakistani rupee witnessed massive depreciation against the US dollar, and in a span of days jumped from 230 to over 270, amid government's decision to free-float the currency in its bid to appease the International Monetary Fund (IMF).

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OCAC highlighted that although compensation for foreign exchange losses is allowed for LCs up to 60 days using PSO as a benchmark as per Economic Coordination Committee (ECC) approval of 1 April 2020, its member companies are unable to recover their entire losses due to import profile differences with PSO.

“It is requested to urgently revise this mechanism and ensure that exchange losses of the sector are fully reimbursed if the viability of the industry and supplies to retail outlets are to be ensured,” said OCAC.

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Addressing OGRA, the body said that it is crucial that the regulator passes the impact of the exchange rates in one go for the sector and not stagger this compensation.

Moreover, OCAC pointed out that amid increase in oil prices and successive depreciation of PKR, the trade finance limits available from the banking sector to the industry have become inadequate.

“As a result of the recent devaluation alone, the LC limits have overnight shrunk by 15-20%. In order to ensure import of adequate product into the country, it is important to increase the trade finance / LC limits of the industry in line with the current oil prices, exchange rate and the volumes being handled by each company.

“It is requested that the banking sector be immediately requested through the State Bank of Pakistan to enhance the limits of our member companies,” it added.

“The industry is on the brink of collapse if immediate steps are not taken in respect of the above,” it said.

Earlier, it was reported that Pakistan could face a crunch in fuel supplies in February as banks have stopped financing and facilitating payments for imports due to depleting foreign exchange reserves, traders and industry sources said.

The South Asian nation is facing a balance of payments crisis and the plummeting value of the Pakistani rupee is pushing up the price of imported goods. Energy comprises a large chunk of Pakistan’s import bill.