Petrol crisis in June: 'Government's allegation of hoarding by OMCs does not hold water'

ISLAMABAD: A former chief executive officer (CEO) of the Oil Companies Advisory Council (OCAC), challenging the federal government and the Oil and Gas Regulatory Authority (Ogra) inquiry reports, said that the government allegedly gave name of hoarding to mandatory stock of 21-day maintained by oil marketing companies (OMCs) during petrol shortages in the first week of June 2020.

He said that allegation of hoarding by the OMCs does not hold water because under their license conditions they are required to maintain a minimum of 21-day stock.

There were hardly any OMCs, which had substantively higher stocks than the minimum requirement.

The Islamabad Policy Institute (IPI) on Tuesday blamed mismanagement of the fuel supply chain by the government as a major reason behind the petrol crisis witnessed last month.

This was stated in a report - 'The Petrol Crisis of June 2020' - launched by the think tank at a media conference here.

The report looked into the various dimensions of the crisis by examining the industry data and trends, analysed the role of the various stakeholders and considered the issues faced by the country's downstream oil sector.

The report has been authored by the IPI's distinguished fellow Dr Ilyas Fazil, who has a vast experience of working in the petroleum sector and has in the past served as CEO of the OCAC and also as Member (Oil) at the Ogra.

According to the findings of the report, the petrol crisis experienced during the first fortnight of June this year had roots in Petroleum Division's abrupt decision of March 25, 2020 to halt imports of petrol and crude oil following a 40 percent reduction in demand due to the Covid-19 pandemic because of which the refineries had high crude and furnace oil stocks - forcing most of them to shut down their operations.

The report said that the Petroleum Division's directive for the cancellation of the import orders by the Oil Marketing Companies was not a well-thought out one, because of which it had to be reversed 14 days later.

The refineries, despite their high stocks, were not in a position to meet the high national demand for too

long.

More importantly the refineries were themselves dependent on uninterrupted supply of crude, 78 percent of which is imported, for their continued operations.

Dr Fazil, in his report, contended that those who took the decision about the

cancellation of the imports failed to take into account the time needed for the imports to restart and reach Pakistani ports and the complexities involved in the process.

The real impact of the disruption in the chain was, however, felt in June 2020, when a sudden surge in demand was witnessed partly due to substantial lowering of oil prices and also because of resumption of economic activity after the Covid-19 lockdown and Ramzan slowdown.

The report said that many OMCs increased their sales during the first 10 days of June 2020, when their cumulative daily sale crossed 26,000 MTD as against the average of 17,000 MTD.

However, they failed to keep pace with the rising demand and petrol pumps of some OMCs ran dry.

The allegation of hoarding by the OMCs does not hold water because under their license conditions they are required to maintain a minimum of 21-day stock.

There were hardly any OMCs, which had substantively higher stocks than the minimum requirement.

The report noted that the flawed pricing formula in the country under which the prices of the petroleum prices are fixed was to be blamed.

The prices, it should be recalled, are fixed on the basis of the import cost of the state-owned petroleum company.

By the time oil imports were allowed to resume, the oil prices in the international market had started increasing.

Therefore, the OMCs had to buy costlier oil.

In this situation, the OMCs were faced with the difficult choice of either buying product at a loss, and selling it to meet the customer demand; or avoiding heavy losses by letting their sites dry up.

Senior Fellow IPI Faran Rizvi said the disruption occurred due to the government's decision on not allowing OMCs to build up their stocks and most importantly buy alongside PSO i.e. at the same time as their benchmark price was being established.

A prudent approach, he said, would have been to adjust the pricing formula, while taking into account the new price realities.

"This would have allowed the standard margin to the OMCs and at the same time avoided the supply issues faced by the country," he maintained.

Executive Director IPI Prof Sajjad Bokhari, speaking on this occasion, said the petrol crisis not only underscored the fragility of the oil supply chain in the country,

but more importantly highlighted lapses in managing the situation on part of those who had been entrusted with this task.

It was at the same time regrettable that instead of looking for mistakes and fixing them to avoid its recurrence in future, a blame game and search for a scapegoat started, he added.

Copyright Business Recorder, 2020