ECC changes formula to determine HSD price

Finance Minister Shaukat Tarin presided over a special meeting of the ECC that took up a single-point agenda. A Finance Ministry hand-out showed that only two ministers, National Food Security Minister Fakhar Imam and Privatization Minister Muhammadmian Soomro, attended the meeting.

The Petroleum Division showed urgency after the oil marketing companies threatened that they could not supply adequate diesel during the coming months, if the pricing formula was not revised. “The chair, after deliberation, approved the summary and directed for revising the premium (on high-speed-diesel) on a fortnightly basis,” according to the Finance Ministry. It said the financial impact of the decision would increase or decrease depending on the international energy market.

The ECC summary showed that the incremental subsidy due to change in the price calculation formula would cost Rs656 million for the first fortnight of April, or Rs1.3 billion a month. The ECC approved the replacement of the benchmark actual premium cost with the average premium of cargos purchased by the Pakistan State Oil (PSO).

In July 2020, the ECC had approved the parameters to determine ex-refinery prices of petrol and high-speed diesel whereby the base price was fixed on the basis of 15 days average FOB prices of the Arab Gulf market (published in the Platts Oilgram). To the above base price, the PSO’s last available average Import premium and incidental charges were added to arrive at C&F prices for finalising the local consumer prices.

As per the existing arrangements, the PSO imports its petrol requirements entirely through spot tendering, while bulk of its HSD imports are made from the Kuwait Petroleum Corporation (KPC) on the basis of a long-term agreement, which is revised biannually.

The Petroleum Division stated that the premium on a long-term basis was lesser than the tendered premium. Presently, the KPC premium for PSO’s HD cargoes for Jan-June 2022 is 2.40/bbl. In case, KPC is unable to meet PSO’s HSD demand, the same is imported from the spot market.

When PSO procures from both sources (KPC & spot market), the weighted average of KPC and spot premium is used as a benchmark to calculate the consumer price. Now, the ECC has allowed the revision of the premium calculation method. Oil Companies Advisory Council had stated that HSD premiums for the Industry have been historically higher than PSO, implying that industry was importing HSD at a relatively higher premium as compared to PSO’s benchmark premium.

Due to this, the remaining OMCs are at a disadvantage. This difference has now risen significantly due to the prevailing geo-political situation. The PSO’s tender for the second fortnight of March 2022 opened at $8.45/BBL whereas premiums are even higher in the open market.

The PSO did not receive any offer in their HSD tender for first fortnight of April 2022. Since the current HSD price is benchmarked on the basis of substantial imports by the PSO from Kuwait Petroleum Company at the rate of $2.24per bbl premium, any OMC, importing at the PSO tendered premium, would incur a loss of Rs6.8 per litre, creating an unsustainable position for importers, according to the OCAC.

Therefore, the OMCs have been requested to urgently review this matter and revise the benchmarking process accordingly to save the industry from collapse. The council took the position that under the present volatile market condition due to a war between Russia and Ukraine as well as high demand for HSD in the forthcoming harvesting season, March-May 2022, the existing benchmarking appeared unsustainable and the OMCs would sustain substantial losses and might be unable to import HSD, leading to potential shortages of HSD across the country.

The Petroleum Division had proposed that the Kuwait Petroleum Company premium should be excluded from price computation for the period from April to June, 2022. Accordingly, the premium on HSD import might be benchmarked on PSO’s average tendered premium for the previous fortnight. In case, there was no tender by the PSO in a particular fortnight, the premium from previous tender might be used for calculating the HSD ex-refinery price.