The dilemma of OMCS
The issue of circular debt is in the limelight again. The earlier suspension of seven Oil Marketing Companies by the Oil and Gas Regulatory Authority on the shortage of fuel at stations and the ongoing dissatisfaction of the OMCs even on the raise in selling margins refers to the year-long battle between the OMCs and the government. The spiralling circular debt lies at the bottom of the continuing shortage of petroleum products in the country. The estimated circular debt as of May 31st, 2011, after the payments made to PSO and the accumulations of April and May, stood at about Rs. 152, 516 million.
Askar, Hascol, Admore, OOTCL, Bakri, Byco and Total Parco were among the suspended OMCs. The companies termed the suspension as illegal and HASCOL filed a petition against the move which was soon annulled. According to oil industry sources, because of the quagmire of circular debt, all refineries and OMCs are under severe pressure and not able to fulfill the rising demands of furnace oil, petrol and diesel in the country, which become the basis for power crisis for industries and the domestic sector. Under cash-strapped circumstances, it becomes difficult for OMCs to conclude new import deals as well, resulting in shortage of petroleum products.
The energy mix in Pakistan is also blamed for the crisis, as oil has the largest share in overall energy consumption. The odd dependence on oil for generating electricity has forced the country to borrow more oil from international donors to stay viable in the international market and to avoid default. Oil borrowing at tonnes of volume has created a situation where the government owes billions to the OMCs against the price differential claim that has accumulated over a long period. The petroleum ministry has been pressurizing the finance ministry to release the piled up amount against the PDC to the OMCs so that they are able to maintain oil reserves and ensure the fuel supply chain under proper regulation.
Amidst the circular debt crisis, the government has taken initiatives to ease liquidity constraints for OMCs by increasing profit margins. For instance, the recent increase in margins will improve Pakistan State Oil’s annualized earnings by Rs. 4 to Rs. 5 per share.
But the OMCs are not considering this step as sufficient enough to remove their grievances. According to Kaleem Siddiqui, the CEO of Byco Petroleum, the government is persistent over the building of storage tanks for maintaining the fuel supply chain, which requires billions of rupees for investment. Thus, as a following step, the government is also taking part in establishing oil storage terminals with the assurance of their functioning in near time. The arrangement of necessary funds for oil storage facilities by the government may lessen the burden for OMCs, along with the liquidity ease. A regulated supply of petroleum products is significant for the revival of energy based industrial sector and harmonized domestic life