Full compensation sought for all companies: Oil industry suffers Rs50bn losses due to forex issues

LAHORE: The oil industry has suffered a loss of Rs 50 billion on account of foreign exchange losses between July 1, 2018 and February 28, 2020.

In a letter written to Minister for Finance and Revenue Ishaq Dar, Oil Marketing Association of Pakistan demands that government should evolve a mechanism which will ensure full compensation to all oil marketing companies without any discrimination.

“The mechanism ensures full compensation of FX losses to PSO but does not cater to import profile differences of other OMCs due to which full recovery to OMCs cannot be ensured,” the letter says.

The letter further says, although FX losses of 60 days are covered, if PSO opens shorter LCs or settles its LCs before 60 days and leaves the balance for GoP to settle through G2G arrangements, it leaves both OMCs and the GoP at the receiving end of FX losses rather than passing it in the prices.

After a significant devaluation of the PKR since June 2022, FX Losses should have been passed on in the prices. However, to protect the public, PSO was asked to stagger the recovery of these losses. This coupled with subsequent devaluation impacts have resulted in a massive backlog. It is estimated that if the same is to be recovered by OMCs, it will require an FX adjustment of approximately Rs 100 per litre prices of MS and HSD. This also implies that the OMCs’ working capital has been depleted by these amounts and they are facing shortage in opening LCs due to this reason as well.

Furthermore, the abrupt ban on import of HSD on OMCs, other than PSO, will also prevent recovery of even the staggered amounts, effectively wiping the same from the profits of the OMCs.

As pet the letter in the past, OMC margins have been revised at the same time as dealer margins. The industry had been working with OGRA and MoE (Petroleum Division) for the revision with the focus on following points which includes ECC had approved in December 2021 that certain cost heads of OMCs such as demurrages, turnover tax, stocks/line fill in White Oil Pipeline and digitization should be reviewed by OGRA and includes in the oil prices. However, this review was not undertaken by OGRA.

In July 2022, OGRA was reiterated the above decision with direction to conduct the review by 10 August 2022 and present to the ECC for implementation wef. 1 September 2022.

Despite the industry working with the Petroleum Division and OGRA and finalizing the revised OMC margin of Rs 6 per litre, no notification has been made for more than last one and a half months.

The impact of above matters has a direct impact on the liquidity of the industry and in particular, any misstep on account of FX losses has the potential to cause existential challenges to OMCs. It is requested that OGRA should be instructed to immediately address the issue of FX losses and revised OMC Margins should be immediately announced so the industry can survive and continue to invest in the energy needs of the country.

It is pertinent to mention that the above matters are burning issue since long and are badly denting the working capacity & eco system for OMCs. We have taken this matter up to almost all the available forums and requested multiple time for its early redressal, but all in vain.

We request an urgent intervene and redressal of our boiling issue which on contrary will lead OMCs to collapse. We also request your good self to allocate time for meeting at your suitable convenience, for a personal hearing.

It is pertinent to mention here, that various discussions have been held on the above subject with OGRA, MEPD and MoF, before the announcement prices of petroleum products on 30 September 2022.

Adjustment of Foreign Exchange Losses between 1 July 2018 and 28 February 2020, the oil industry suffered FX losses of approx Rs 50 Billion on account of Foreign Exchange losses since the same were not passed on in the prices in line with ECC Decision of 14 September 2012.

Finally, wef 1 March 2020, a new mechanism was put in place whereby actual FX Losses / Gains incurred by PSO on LCs of up to 60 days were to be built into the prices thereby saving the industry from significant losses. This new procedure would have significantly hedged OMCs from FX Losses but due to the way it has been implemented and a considerable devaluation of the PKR, OMCs have been racking up FX losses without any reprieve.

Copyright Business Recorder, 2022