Oil industry fears 'collapse' as cash constraints tighten

KARACHI/ISLAMABAD: The local oil industry has rung alarm bells and said that it was verging on "collapse" as the massive rupee devaluation has multiplied its operational costs — resulting in losses worth "billions of rupees".

To meet the International Monetary Fund's (IMF) demand, the government removed the dollar cap, resulting in the rupee falling to a historic low of Rs276.58 in the interbank market.

In a letter to the Oil and Gas Regulatory Authority (OGRA) and Energy Ministry, the Oil Companies Advisory Council (OCAC) said that the "sudden depreciation" of the local rupee has caused losses worth billions of rupees to the industry as their letters of credit (LCs) are expected to be settled on the new rates, "whereas the related product has already been sold".

The government has also restricted LCs due to dwindling foreign exchange reserves, which fell to $3,086.2 million as of January 27, and are enough for just 18.5 days.

Pakistan is facing a balance of payments crisis and the plummeting value of the rupee is pushing up the price of imported goods. Energy comprises a large chunk of Pakistan’s import bill. Pakistan typically meets more than a third of its annual power demand, using imported natural gas, prices for which shot up following Russia’s invasion of Ukraine.

These losses, the OCAC said, not only have an impact on the profitability of the sector — which is already under severe pressure — but also on its viability since these setbacks in some cases might exceed the "entire year’s profit for the sector".

"Although compensation for foreign exchange losses is allowed for LCs up to 60 days using PSO as a benchmark as per ECC approval of 1 April 2020, our other Member Companies are unable to recover their entire losses due to import profile differences with PSO."

"It is requested to urgently revise this mechanism and ensure that exchange losses of the sector are fully reimbursed if the viability of the industry and supplies to retail outlets are to be ensured," the OCAC told the authorities.

The letter mentioned that OGRA has adopted the practice of not fully passing on the impact of the rupee depreciation and instead putting an immense burden on the sector.

Due to the challenges still being faced by the sector of previous exchange rate adjustments and the enormous impact of the current depreciation, the OCAC said it is crucial that OGRA passes the impact of the exchange rates in one go and not stagger this compensation.

The council added that due to an increase in oil prices and successive depreciation of the Pakistani rupee over the last 18 months, the trade finance limits available from the banking sector to the industry have become inadequate.

As a result of the recent devaluation alone, the LC limits have overnight shrunk by 15-20%, the OCAC said.

"In order to ensure the import of adequate products into the country, it is important to Increase the trade finance/LC limits of the industry in line with the current oil prices, exchange rate and the volumes being handled by each company."

"The industry is on the brink of collapse if immediate steps are not taken in respect of the above," the associate added.

Hours after the letter was sent, Cnergyico — an oil refinery — informed the Petroleum Division that it will shut down operations for over a week.

"This is to inform your office that Cnergyico refinery shall go for shutdown from 2 February, 2023 and will restart production from 10 February, 2023, in line with our Crude oil vessel arrival timeline," the statement added.