March Issue 2015

Pakistan faced a severe petrol shortage during most of January. This was largely due to one of the conditionalities of the US$ 7.3 billion IMF loan agreement signed in July 2013 when the country’s foreign exchange reserves had dwindled to US$ 6 billion, which was not enough to meet even a six-week import bill. The shortage had hit the most populated province of Pakistan, the Punjab, and the country’s capital, Islamabad. And as the panic spread, speculative shortages also led to long queues at Karachi petrol pumps for a couple of days.

Under the IMF loan agreement, the government had promised the Fund that it would bring up the foreign exchange reserves (FERs) level to ‘x’ amount by ‘y’ date of ‘z’ year. And late last year, caught between the choice of meeting the urgent foreign exchange demands of a public sector petrol and furnace oil-importing entity and at the same time showing to the IMF that FERs were being maintained at the agreed level on the agreed date, the government felt compelled to ignore the first choice, setting off, in the process, a chain of events culminating in petrol pumps in the Punjab and Islamabad going dry for nearly four weeks.

Ironically, it was not the oil prices that had rendered it impossible to meet the import bill because the prices were already collapsing. It was, in fact, the circular debt that had made it impossible for Pakistan State Oil (PSO) to remain in business without a quick bailout by the Finance Ministry. But the ministry was unable to oblige because its FERs were hovering just around the ceiling imposed by the Fund.

The state-run PSO has a 49 per cent share of the country’s gasoline marketing business, ahead of major multinational players like Shell Pakistan and Caltex Pakistan. PSO has been importing 220,000 tonnes of petrol every month mainly because the monthly production capacity of the country’s refineries had remained at around 80,000 tonnes.

Earlier, on December 30, 2014, the former managing director of PSO, Amjad Pervez Janjua, in a letter to the secretary, Ministry of Water and Power said that “PSO’s power sector receivables stood at Rs 198 billion, while PSO incurred penalties of approximately Rs 250 million (for the period October 2014 to December 2014) on account of delayed payments of Rs 50 billion to banks, US$ 1.8 million as demurrages (from July 2014 to November 2014) and suppliers’ claims of about US$ 6.4 million for damages due to delay in the nomination of vessel and in the opening of Letters of Credit (LCs). However, in view of the situation described above, it cannot continue to do so and will have to stop further supplies of furnace oil to the power sector unless its above liabilities are discharged and its dues are cleared,” the letter said.

The managing director also said, “In view of the above situation, PSO is not able to open further LCs as its credit limits stands exhausted and LC lines of Rs 110 billion are blocked. PSO is therefore left with no option but to freeze its business with the power sector once the current supplies have been exhausted.” Moreover, all orders of furnace oil from PSO in the international oil market had been, in the meanwhile, cancelled.

The dramatic fall in global oil prices, which led to a monthly downward revision in domestic prices, acted like a giant tax cut to the consumers and they took advantage of the low prices  by spending more. Oil prices have fallen by more than 50 per cent since last June.

Meanwhile, tankers carrying fuel had missed their schedule, while weather conditions in the Punjab had adversely affected supplies. In spite of that, the countrywide buying of motor gasoline noticeably grew by 32 per cent, year on year, to 399,000 tonnes in January 2015. The demand for petrol, which was recorded at 12,300 tonnes/day in December 2014, surged to 15,500 tonnes/day in January 2015, settling at 16,500 tonnes/day in February.  However, no oil consignments had arrived at any port in Pakistan in the first two weeks of January. During a normal fortnight, six to eight ships, each carrying 65,000 tonnes of oil, arrive in the country.

A review meeting attended by Oil Marketing Companies (OMCs) ministry officials and other stakeholders held at the beginning of every month mulls over the estimated demand and the import requirement. And it is based on these numbers, that the supplies are managed. The ministry allows OMCs to keep a 10 to 12-day supply cover. In case of a crisis or emergency, the instant reaction should be to deal with it instead of passing the buck. The Oil and Gas Regulatory Authority (OGRA) also closely monitors the reserves and issues timely alerts.

Anticipating the crisis, the OMCs had reduced the supply of petrol to 50 per cent to the dealers, while the stock of furnace oil in the country dried up by January 13. Of course, the fall in domestic gasoline prices on January 1 had prompted a couple of million CNG-fitted vehicles to switch over to petrol, pushing up the demand at a time when supplies were dwindling. Meanwhile, it also transpired that many of the new OMCs did not have any storage facilities and were being catered to by the big fish like Shell and Caltex, who had stopped buying in a falling market. Meanwhile, one of the refineries chugged to a halt due to a technical fault.

The Finance Ministry knew what was happening and what lay ahead, but it kept playing the ostrich deliberately. All that it was interested in doing was to divert the public’s attention and pass the buck to someone else. And the easiest fall guy was the petroleum ministry. Intriguingly, the Minister for Petroleum, Shahid Khaqan Abbasi, took the rap seemingly willingly, apologising to the nation for causing so much inconvenience to the public at large.

The main culprit, apart from the finance ministry, was the ministry for water and power. Khawaja Asif should have been held responsible for not doing what he should have done by now, like replacing the old transmission lines with new ones to stop the massive leaks, amounting to as much as 30 per cent of power through transmission cables that are as old as Pakistan itself, and also for not ensuring that government departments paid their electricity bills. Furnace oil accounts for almost half of our fuel import bill. A third of all our electricity is generated by burning furnace oil. If 30 per cent of the power produced by the costly furnace oil is leaked, 20 per cent is pilfered, and unpaid bills account for another 20 per cent, there is no way one can ever resolve the circular debt crisis.

The entire problem is the result of a financial liquidity crisis in the state-owned PSO. The government is trying to pin the blame on other factors but mounting evidence indicates that the crisis is financial in nature. The federal finance minister and the federal minister for water and power should have been made accountable for the crisis. The government’s knee-jerk move to expel a number of key officials on the pretext that they were responsible for the gasoline shortage was grossly unfair.

This article was originally published in Newsline’s March 2015 issue.