Smuggled diesel caused supply glut, reduction in uplift from refineries – Inside Financial Markets

Islamabad Policy Institute on Tuesday called on the government to
stringently curb smuggling of diesel into the country for dealing with low off-take of the fuel by
oil marketing companies from the local refineries.
The think tank, which works on energy sector, cautioned that wrong assessment of the
situation and ad hoc remedial measures by the relevant authorities wouldn’t address the
emerging crisis like situation, which could potentially disrupt oil supply chain the country.
It should be recalled that local refineries have earlier warned about impending shutdown with
their tanks filling up due to low uplifting of refined products especially diesel by the Oil
Marketing Companies.
“The situation, if not addressed urgently, could impact refinery throughput and affect local
crude fields also. It could soon start impacting furnace oil availability,” Dr Ilyas Fazil,
distinguished fellow at IPI said.
Refineries are finding themselves in the situation because their group OMCs and the companies
with whom they have long term arrangements are not lifting their products.
Resultantly, Ministry of Energy’s Petroleum Division, is forcing the OMCs, which do not have
local contracts, to cancel their import orders and buy from the local refineries.
“MoEPD seems to be playing the same card as in June, namely blame game rather than
proactively resolving issues,” Dr Fazil regretted.
The issue of lower uplifting of diesel is mainly because of the influx of smuggled Iranian diesel in
market, which resulted in significant variation from the planned sales and ultimately led to
supply glut. As the demand of diesel reduced in the market, the building up of inventories is
unavoidable.
Some quarters have begun suggesting that the situation emerged because of the new
fortnightly oil pricing mechanism, notwithstanding the fact that the new arrangement is good
for refineries, OMCs and the consumers alike.
Refineries and OMCs, IPI emphasized, had been facing the same risk of inventory losses under
previous monthly pricing mechanism. The revised pricing mechanism helped to address the
challenge of significant volatility in the oil products pricing in Pakistan and was mutually
beneficial for all stakeholders.
IPI proposed that the refineries should execute take or pay agreements with the OMCs for
establishing certain volumes for each supply period. Such an arrangement, it is believed. will
address the challenge of non-upliftment of product faced by the refineries and would
simultaneously tackle the issue of supply curtailment by refineries during periods when pricing
situation is not favorable for them.
IPI emphasized the need for a better understanding of market dynamics and avoiding
haphazard decision making which is done without taking in view all the pros and cons of the
situation.