ISLAMABAD:
Pakistan’s oil industry has warned that another intervention in the petroleum pricing formula could disrupt fuel supplies, undermine refinery throughput and push oil marketing companies (OMCs) and refineries towards an increasingly unsustainable operating environment.
Industry sources said rumours of fresh changes to the pricing formula were circulating but neither refineries nor OMCs had been formally consulted. If implemented, the proposed move would amount to what industry officials described as the ninth intervention in the pricing formula since the Middle East crisis began.
“We have neither been consulted nor taken into confidence. As far as the industry is concerned, these are still rumours,” a senior industry source said. “But if they come true, this will be the ninth intervention in the formula.”
Member firms of the Oil Companies Advisory Council (OCAC) fear that any further reduction in the allowable cracks (margins) could prove disastrous for OMCs, refineries and the overall oil supply chain.
“Further reduction in cracks simply does not make commercial sense,” the industry source said. “There is a limit to how much the sector can absorb. If cost recovery is compromised, throughput will fall and the country could ultimately face disruptions in supply of essential fuels.”
Industry officials observed that the basic commercial equation could not be ignored. “No one can buy expensive and sell cheap indefinitely,” the source said. “If the formula does not reflect the actual cost of doing business, companies cannot be expected to keep absorbing losses simply to maintain supplies.”
The industry also questioned the rationale for considering a 10-year average for cracks, saying the comparison failed to recognise how dramatically business costs had increased over the same period. “The government needs to be sensible. You cannot use a 10-year average for cracks when the cost of doing business has nearly quadrupled over those 10 years,” the source said.
Industry players said the pressure was particularly difficult to justify when price differential claims (PDCs) from the government remained unresolved, leading to companies carrying legacy receivables while simultaneously facing further strain on their economics.
“The government has yet to resolve the outstanding PDCs and at the same time the sector is being squeezed further,” the industry official said. “This is not sustainable.”
Policy uncertainty dents investor confidence
A senior equity market analyst associated with investment banking said frequent changes to the petroleum pricing framework were sending a damaging signal to the existing and prospective investors.
“Pakistan’s policy inconsistency is pushing the country further behind in terms of investment,” the analyst said. “Investors cannot commit long-term capital when rules governing their returns are repeatedly changed.”
He cited international refining markets, saying diesel cracks in the United States at times exceeded $100, yet “authorities there do not intervene merely to artificially suppress the pricing mechanism”.
“When the world’s most powerful economy allows market economics to operate even if cracks rise sharply, Pakistan needs to think very carefully before repeatedly interfering with the commercial mechanism,” he said.
The analyst said the contradiction was particularly stark because the government was seeking approximately $6 billion in investments in Pakistan’s refining sector for modernisation.
“On the one hand, the government is looking for $6 billion of refinery investment. On the other, it is taking decisions that undermine investor confidence and commercial viability,” he said. “If this continues, the $6 billion investment ambition risks remaining an unfulfilled dream.”
Refining projects required billions of dollars in long-term capital, he said, and investors therefore needed confidence that the regulatory and pricing framework underpinning their investment would remain predictable.
Foreign OMC investors concerned
Concerns are also emerging among foreign investors that have recently entered Pakistan’s OMC sector. Industry sources said a couple of foreign players that had entered the market were already questioning their investment decisions in the face of regulatory uncertainty and repeated interventions affecting the oil sector’s economics.
“Foreign investors came into the OMC sector expecting a commercially sustainable and predictable framework,” the industry source said. “Some are now regretting those investments. Pakistan should send exactly the opposite signal at a time when it is trying to attract fresh foreign capital.”
Industry officials warned that the issue should not be viewed merely as a dispute over corporate margins.
If refinery throughput fell because domestic operations became economically unviable, they said, Pakistan could become increasingly dependent on imported petroleum products, exposing the country to greater foreign exchange requirements and international supply risks.
“This is ultimately about security of supply,” the industry official said. “You cannot keep squeezing every part of the supply chain and expect it to continue functioning normally.”
The industry has urged the government to consult OCAC, refineries and OMCs before making any further changes to the formula and to evaluate the impact on cost recovery, refinery throughput, fuel availability and future investment.
“Short-term price suppression should not come at the cost of long-term energy security. Once refineries are forced to cut throughput because the economics no longer work, the consequences will ultimately be borne by consumers.”
