OMCs seek margin increase amid industry challenges

KARACHI: Oil marketing companies (OMCs) in Pakistan have formally requested an increase in their margins for petrol and diesel, citing critical operational challenges and financial strain.

In a letter addressed to the Chairperson of the Oil & Gas Regulatory Authority (OGRA), the Oil Marketing Association of Pakistan (OMAP) emphasized the regulated environment in which OMCs operate. The association highlighted that current margins must align with licensing conditions, operational realities, and provide reasonable returns to shareholders.

The OMAP added that ongoing issues have brought the petroleum sector to the brink of collapse, and if these issues are not addressed efficiently, they could lead to catastrophic conditions in the sector.

Per the OMAP, the cost implications for maintaining stock levels are substantial. According to its assessment, with a markup rate of 22 per cent per annum, the cost of holding a 20-day stock is approximately Rs3.45 per litre sold. Moreover, mandatory minimum 10-day stock requirements further escalate costs by approximately Rs1.50 per litre sold.

The association also pointed out a significant rise in LC confirmation costs over the past year, ranging from 6-10 per cent on imports to Pakistan. This translates to an additional cost of about Rs1.61 per litre sold, based on a 60-day LC assumption with an import value of Rs200 per litre and 50 per cent imports.

Currently, the industry is burdened with a turnover tax of 0.5 per cent, adding approximately Rs.1.37 per litre sold to operational expenses. Additional costs include demurrage charges, which have risen due to fluctuations in FX rates, amounting to an estimated Rs. 0.5 per litre sold.

The OMAP added that industry also has to incur demurrage costs due to a number of factors. Due to an increase in foreign exchange rates and demurrage charges, the associated costs have increased to an estimated Rs0.5 per litre sold.

The OMAP highlighted that operating costs, including selling, marketing, administration, and other associated expenses, have significantly increased due to inflation, high energy costs, and utility expenses.

These costs, estimated at approximately Rs5.65 per litre sold based on the published CPI rate, further strain OMC operations.It added that substantial funds from OMCs are tied up in IFEM, leading to a liquidity crunch and an additional cost of approximately Rs0.75 per liter sold. Delays in sales tax adjustments and handling costs further compound financial pressures, contributing an additional Rs0.90 and Rs1.25 per litre sold, respectively.

The OMAP proposed a revised OMC margin of Rs19.52 per litre. The association argued that this adjustment is crucial for ensuring the feasibility and survival of OMCs in Pakistan. It emphasized that increased margins would enable OMCs to operate efficiently and uphold quality service standards for their customers.