Oil imports facing foreign exchange constraints

Oil imports facing foreign exchange constraints
ISLAMABAD: Amid rising subsidy allocations, the oil industry is now facing challenges in arranging international finances for import of crude and oil products.

Informed sources told Dawn that the Petroleum Division had informed the prime minister and finance minister that arrangements of oil imports were getting tough by the day as foreign banks were not providing financing against letters of credit (LCs) opened by oil marketing companies (OMCs) and refineries with the local banks.
A senior official told Dawn that except two large corporations — Pakistan State Oil (PSO) and Pak-Arab Refinery Limited (Parco) — all OMCs and refineries were struggling to arrange import of petroleum products and crude.
The sources said about six-seven cargos worth $50-75 million each ($350-500m cumulative) depending on size and product were held up at present because of the increased risk following some critical statements from the relevant ministries about the tough fiscal and foreign exchange position. They said Pakistani banks were opening LCs on behalf of the oil industry, but their partner banks were not extending credit cover.
“Unfortunately, the country’s fuel supply is now also being severely threatened by limited credit facilities, high inflation and increasing rupee-dollar parity,” stated an oil industry’s report sent by the Petroleum Division to the Prime Minister Office and the finance minister.
The oil industry has told the government that this financial predicament had left the oil industry extremely vulnerable and fragile, adding that this “may result in breakdown of the supply chain”.
The Oil Companies Advisory Council reported to the ministries of petroleum and finance that “immediate remedial measures are required to be taken across two targeted areas of concerns — reluctance of international banks to confirm LCs for oil imports and timely remittance of price differential claims”.
This situation was impacting both the refiners and OMCs and hence the downstream oil sector is seeking intervention at the highest level to avert the impending supply disruption facing the country.
The sources said the finance ministry and State Bank of Pakistan would have to use their good office with international partner banks with special allocation of $500m-1bn in foreign exchange. The government may also have to seek a one-time exemption for borrowing from the central bank, the sources said.
This is despite the fact that the prices of all products have been increased by Rs30 per litre with effect from May 27, but the amount of PDC (price differential claim) has not drastically come down. The sources said the Petroleum Division had moved a summary for approval of a supplementary grant of Rs72 billion for second half of May but was reduced to Rs62bn because of Rs30 per litre price hike. The grant was approved by the Economic Coordination Committee (ECC) of the cabinet last Saturday.
However, another Rs50bn worth of PDC estimate has been finalised by the Oil and Gas Regulatory Authority (Ogra) for first half of June. The sources said Ogra had originally estimated Rs81bn allocation for PDC for June 1-15, but this has been reduced to Rs49bn after taking into account the Rs30 increase.
These estimates, however, suggest that unless the government announced another price hike in a few days, it will have to continue providing Rs39.20 per litre subsidy on petrol, Rs54.40 on high speed diesel, Rs22 on kerosene and Rs38 on light diesel oil.
An amount of Rs228bn has already been accumulated as subsidy on petroleum products from March 1 to May 31 this year. Of this, about Rs100bn has been transferred to the Pakistan State Oil’s special assignment account for payments to oil companies and refineries, while Rs128bn is yet to be approved or passed on to the PSO.