Oil industry seeks relief from bank guarantee, provincial cess

KARACHI: The oil industry on Thursday sought immediate withdrawal of bank guarantee requirements on POL products along with customs clearance of all import parcels without infrastructure development cess (IDC) to maintain adequate upcountry stocks.

Oil Companies Advisory Council (OCAC) in a letter to the Minister of State for Petroleum stated that Sindh and Baluchistan governments have been imposing IDC since 1994. The IDC law has been revised various times since 1994 and the latest revision was made applicable in 2017 through the Sindh Development and Maintenance of Infrastructure Cess Act, 2017.

“This imposition was challenged by industry members before the Sindh High Court (SHC) and an unconditional stay was granted by the court. However, later on SHC confirmed the chargeability of IDC and vacated the stay order in 2021 against which order the industry members filed appeals before the Supreme Court (SC),” the letter stated. The SC granted interim relief by suspending the order of SHC; however, it also instructed generally to continue the practice of submitting bank guarantees (as industries other than oil industry were providing bank guarantees).

Oil industry did not submit bank guarantees as per the past practice, which was also practically allowed by relevant authorities until recently, the OCAC claimed.

On similar lines, the Balochistan government had also imposed IDC vide Infrastructure Cess Bill 2021, this imposition was challenged by Cnergyico Pk Limited at the Balochistan High Court (BHC) and relief was obtained in terms of submission of insurance guarantees for all future consignments of crude oil.

It is worth mentioning that Punjab Revenue Authority (PRA) had also initiated recovery of IDC on petroleum products in 2016; however, the matter was taken up with MEPD and the issue was resolved by issuing exemption for petroleum products because the petroleum prices are regulated by the federal government.

Based on this requirement, the oil body believed that the industry would have to submit bank guarantees amounting to billions of rupees per month for clearing their POL cargoes from Customs, which was neither practically possible due to unavailability of such huge credit lines nor feasible / sustainable especially when the industry is operating on razor thin margins.

Furthermore, submission of bank guarantees adds to the cost of the industry (approximately Rs2.2/litre of OMC margin) and the cess guaranteed through this process is not recoverable through pricing, which will add to the industry’s financial woes and cash flow problems. Accordingly, cost incurred by industry either due to submission of bank guarantees or due to imposition of IDC will eventually have to be recovered from general public in pricing and allowed as a pricing component by the Oil and Gas Regulatory Authority (OGRA), it stated.

The OCAC stated that the country’s MS stock was enough for 14 days, whereas MS stock upcountry stood at 141,000 tonnes (inclusive of dead stock), which was enough for 7 days based on only current average daily sales of 12,000-15,000 tonnes per day at upcountry locations.

Supply constraints caused by imposition of this requirement would cause serious disruption in the product availability, it reiterated. Import cargoes are being discharged and an urgent resolution is needed because limited product movement to upcountry locations arising from the inability of industry to release import cargoes would lead to supply gaps in Punjab and Khyber Pakhtunkhwa.

Any disruption in supply chain will take around 2-3 weeks to normalise owing to transit time to upcountry locations, the oil body noted.

Given the urgency and potential serious disruption in product availability, an urgent resolution is needed to enable the release and movement of import cargoes to upcountry locations to avoid supply chain challenges, the OCAC urged.