an additional premium of $6 per barrel.
To enhance the supply and import security, the petroleum division advocated adopting a mechanism for actual premium settlement.
ISLAMABAD:
As the government just set an upper ceiling of premium at a maximum $15 per barrel, which may burden the consumers with an additional Rs10 per litre of diesel and petrol, a default-like situation in Pakistan would cost fuel users heavily.
Currently, the suppliers are adding a $6 per barrel surcharge to imports of gasoline and diesel.
According to sources, the conflict between Russia and Ukraine had made the oil market unstable and unpredictable, and suppliers had begun including country-specific risk factors in their premium quotations, such as L/C confirmation fees and bank charges, in light of the default-like circumstances that had been occurring in Pakistan since July 2022.
Officials from the petroleum division claimed that this could be shown by comparing the spot premiums charged by Pakistan State Oil (PSO) for Mogas imports from March through October 2022 with actualized premiums announced in the Arab Gulf (AG) market.
They noted that over the previous four months, suppliers had tacked an average of $6/BBL in surcharges. A similar comparison for HSD revealed that the average C&F premium published in the AG market from March to October 2022 was rough $9/BBL.
The upper limit of $15/BBL seemed appropriate for price computation to ensure sustainable HSD imports by the OMCs by imposing a national risk factor of $6/BBL, according to the officials.
According to the petroleum division, the ECC recently approved the parameters to be used to calculate the ex-refinery/import prices of Mogas (petrol) and HSD (diesel) in July 2020 using the 15-day average prices of the Arab Gulf market (as published in the Platts Oilgram).
The C&F prices were then added to the PSO’s most recent average import premium and incidental costs, such as LC/bank fees, wharfage, and port fees, to arrive at the ultimate consumer rates. The premium, which included freight and the supplier’s margin, was paid in one single sum by the exporter or supplier and was either negotiated or put out in a tender procedure.
Being a public sector organisation, the PSO was required to purchase imports in compliance with PPRA laws and regulations. According to the current arrangements, the PSO purchased all of its Mogas needs via spot tenders, while the majority of its HSD imports came from Kuwait Petroleum Corporation (KPC) in accordance with a long-term deal that was updated/reviewed every two years.
On a long-term basis, the premium was lower than the premium that was tendered. In the event that the KPC was unable to satisfy the PSO’s HSD demand, the same was imported from the spot market. The KPC premium for PSO’s HSD cargoes for July-December 2022 is currently $8.50/BBL.
The weighted average of the KPC and the spot premium was utilised as a benchmark when the PSO purchases from both the KPC and the spot market.
From the KPC, the PSO had scheduled all of its HSD imports from November through December. The market premiums were larger than the benchmark premium obtained through pricing, which put the remaining importers at a disadvantage.
The present premium was at a level of $14–16/BBL, which translated into a loss of more than Rs10/liter, creating an unsustainable position for the importing OMCs other than the PSO. This disparity had now increased dramatically as a result of the current geopolitical scenario.
In order to prevent the oil sector from collapsing, OCAC and the oil industry urged that this issue be quickly reviewed and that the benchmarking process be adjusted properly.
According to the petroleum division, a situation similar to this one was encountered previously this year, and to make imports viable, the KPC premium was removed from the price computation and substituted with the PSO’s average tendered premium for the prior two weeks.
The ECC made that arrangement, which will be in effect from April to June 2022, in response to the strong demand for HSD during the harvesting season. However, the PSO had no additional HSD import intentions for the 2022 sowing season than the KPC.
Therefore, the current situation precluded the use of this solution. According to the Oil and Gas Regulatory Authority (Ogra), the OMCs other than the PSO intended to ship around four cargoes in November 2022 due to the high demand for HSD during the sowing season.
Since L/C re-confirmation fees, which are now between 5% and 6.5% in Pakistan, have made other OMCs’ import prices more expensive, they may be prevented from doing so under the current benchmark, which could result in widespread opposition to the HSD.
In order to guarantee supply and import security, the petroleum division advocated adopting a method for the payment of actual premium.
It was suggested that the PSO’s weighted average premium, which includes KPC and spot tender, might continue to apply for the computation of the HSD price in accordance with applicable federal government policy guidelines, in order to ensure pricing uniformity across the nation.
The premium shall be based on the Arab Gulf daily average Euro-V published Platts premium for the number of days in the pricing period in the event that the importing OMC pays a higher average HSD premium. To be admissible for the price period is the Average Freight Rate Assessment (AFRA), which is higher than Platts premium.
It also suggested that the L/C fees imposed by banks on each OMC be factored into the calculation of the premium for importing OMC. The amount subject to a $15/BBL cap will be taken into consideration as the maximum permitted premium on HSD.
The importing OMC may receive reimbursement from IFEM for the differential HSD premium. This settlements would be calculated based on the volume of imports that each importing OMC made during the price period. The applicable supporting import costs and bank L/C confirmation fees would be provided by the importing OMCS.
If no imports were made by OMCs other than PSO during a price period, the weighted average premium for the industry as a whole would be applied, and no modification would be requested. It will be possible to use this method in November and December.
The ECC took into account the Petroleum Division’s summary about “High Speed Diesel (HSD)/Gas Oil Premium” and permitted a premium on HSD for import by OMCs other than PSO for the months of November and December 2022, subject to a maximum capping of $15/BBL.
