OCAC raises red flags over ability to sustain POL stocks

Khalid Mustafa
Thursday, Mar 30, 2023

ISLAMABAD: The oil industry’s operating capacity has diminished further because of IFEM (Inland Freight Equalisation Margin) as it impacted cash flow of the oil marketing companies, Oil Companies’ Advisory Council (OCAC) said in a letter.

The OCAC in its letter to the state minister for Petroleum Division raised red flags about the appalling financial situation of the oil industry. “Maintaining the 20-day stock cover for motor fuels might not be possible for the industry with the current borrowing rate and the cost of the products,” it said. More importantly, the high credit letter confirmation charges followed by high demurrage costs have multiplied the financial miseries making the industry unable to operate.

It asked the government to immediately disconnect the negative IFEM in the next price change on April 1, 2023, and make the demurrage costs and LC confirmation charges part of the pricing of motor fuels to keep the industry viable.

In the letter written on March 27, 2023, the representative body of OMCs and refineries pinpointed that the negative IFEM was severely impacting OMCs’ cash flows that have virtually eroded the oil industry’s capacity to operate. The OCAC argues that instead of getting reimbursed for freight charges being incurred which is the actual purpose of IFEM, the OMCs are effectively reimbursing the consumer for adjustments that are being recovered by OMCs after a significant delay.

The industry asked the government to “declutter IFEM” by removing unrelated adjustments, and asked to discontinue negative IFEM in the next price change as OMCs are financing an indirect subsidy to consumers for more than six months.

The letter also mentions the oil industry’s inability to finance the cost of mandatory stocks of motor fuels arguing that the 20-day stock of POL products is a significant financial challenge with the current borrowing rate and cost of the product. The Industry asked the government to immediately increase the OMCs margin to Rs7/litre in line with the dealer’s margin. “This will help lead to partial mitigation.”

Mentioning the recovery of the demurrage cost, the industry mentions in the letter that the process around LC confirmation is leading to the disruption in berthing schedules causing higher demurrage costs. These are the significant costs and in most cases, they are not in any way related to inadequate planning on part of importers. The OCAC suggested to the government that these are evaluated on a case-to-case basis and reimbursed as a pass-through cost by being included as a line item in the fuel pricing. About the LC confirmation charges, the letter informed the minister that the current economic scenario has increased the country’s risk and has led to high LC confirmation charges, which are impacting the industry’s viability. And that is why the industry demanded the government to add the LC confirmation charges as a separate line item in motor fuel pricing.