Karachi, June 19, 2023: The Oil Companies Advisory Council (OCAC) has expressed its opposition to the proposed guidelines for the import of petroleum products on a foreign supplier’s account through Customs Bonded Storage Facilities.
In a recent communication with the Ministry of Energy – Petroleum Division, the OCAC stated that the ministry had presented a summary before the Economic Coordination Committee (ECC) of the Cabinet, seeking approval for policy guidelines related to import on a foreign supplier’s account through customs bonded storage facilities.
READ MORE: Pakistan Slashes Petroleum Subsidy by 47% for FY24, Impacting Business and Industry
The OCAC had previously submitted comments on the subject policy on December 21, 2022, which are now being reiterated. The council’s concerns and objections include the following points:
1. Exposure to foreign payments: The guidelines state that remittance for imports will not be allowed at the time of importation. However, the outflow of foreign exchange will still occur, as importers will have to transfer forex based on supply arrangements, which will have no positive impact on the country’s forex reserves.
READ MORE: Pakistan’s Petroleum Import Bill Plunges by 22%
2. Anti-Competitive Regime: Foreign suppliers have the option to hedge their products, which gives them an advantage. This creates an uneven playing field for importing Oil Marketing Companies (OMCs) who are not allowed to use any hedging options.
3. Threat to Local Production: The supply from local refineries will be disrupted, which can have significant economic effects on the oil industry and the overall economy of the country. Import and local supply planning will also be compromised.
4. Port Congestion: Existing importers already face challenges due to port congestion, particularly during the agricultural season. The proposed arrangement will further add to these difficulties, as imports and exports by foreign suppliers will have to be accommodated using the current port infrastructure. Managing port congestion will become an even bigger challenge.
READ MORE: Pakistan Expected to Raise Petrol Prices from July 2023 to Boost Revenue
5. Penetration Pricing: OMCs will have to let go of their existing contracts to participate in this recommended arrangement. Importers may bring in products using a penetration pricing strategy to disrupt existing supply contracts, creating an opportunity for price increases. This poses a significant risk, especially in the current market conditions where re-entering supply contracts at previous rates may not be possible.
6. Risk of Supply Chain Continuity: Relying on a single source for approximately 50% of imports/deficit requirement exposes the country to a high risk of supply chain breakdown. Importers may choose not to import or declare force majeure, resulting in supply disruptions and potential violation of competitive laws.
7. Sanctioned Product: Compliance with U.S Treasury’s Office of Financial Asset Control (OFAC) regulations is crucial, considering the price cap on Russian-sourced oil products. Violations could lead to possible sanctions.
READ MORE: Pakistan Customs to Auction Confiscated Smuggled High-Speed Diesel Oil
8. Absence of Regulatory Framework: The proposed guidelines do not ensure guarantees on the consistent availability of products. Allowing re-exports undermines the purpose of the arrangement and compromises quality parameters.
9. Impact on White Oil Pipeline Input: No defined structure is in place for molecules imported by foreign suppliers to be included in the White Oil Pipeline (WOP). This can negatively impact the usage of the WOP in case priority for WOP input is unavailable.
10. Non-Compliance of Current Legal Requirements: The draft policy guidelines contradict various rules and policy orders of the country, including import policy, oil regulations, and customs laws.
The OCAC strongly believes that the proposed mechanism is not beneficial for the country and may have serious ramifications for the oil industry as a whole. Therefore, they do not recommend its implementation.
The Ministry of Energy – Petroleum Division will need to consider these objections and concerns raised by the OCAC before proceeding with the proposed guidelines.
