Petrol crisis unleashed by mismanagement: IPI Report

Petrol crisis unleashed by mismanagement: IPI Report

ISLAMABAD/KARACHI, July 21, 2020:
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,
analyzed the role of the different stakeholders and considered the issues faced
by the country’s downstream oil sector.

The report has been authored by
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 Oil Companies
Advisory Council and also as Member (Oil) at Oil and Gas Regulatory Authority.

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% reduction in demand due to
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% 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 ten 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
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.