Experts advocate increase in PDL on gas production
KARACHI (April 30 2008): With sharp increases in international price of oil, staggered fortnightly domestic price increases will neither fully address the problem of circular debt in the energy sector nor will these help reduce the growing fiscal deficit. The only option is to raise the Petroleum Development Levy (PDL) on domestic natural gas production, according to oil industry experts and analysts requesting anonymity.
At a meeting of the Oil Companies Advisory Committee (OCAC) held in Karachi, the oil experts pointed out that Pakistan is expected to import natural gas from Iran at $8 MMCF while the local price is under $3 MMCF. The government, therefore, has a cushion available in this differential to raise the PDL to not only clear the existing outstanding amount to oil industry of around Rs 76 billion but also continue to absorb/subsidise both diesel and kerosene.
Under the approved pricing formula, domestic sale prices are linked with international (Arabian Gulf) market product prices. They are determined and fixed by Oil and Gas Regulatory Authority (OGRA) on fortnightly basis. Since February 1999, crude oil prices have continuously escalated from $10 per barrel to almost $120 per barrel this month.
Since May 2004, the government has most of the time capped the domestic price and refrained from passing the international price rise to the consumers. In fact, between March last year and until late February this year, there had been a total freeze. Between May 2004 and mid-April 2008, Arabian Light crude price on average went up from $32.96/bbl to $99.73 ie by $66.77 or a 213 percent increase.
As a consequence, the ex-depot sale price of POL products in international market has gone up by over 200 percent. HSD in May 2004 was at the rate of $40.46/bbl. As of April 18 HSD abroad rose to $129.42 per bbl - up by $91.87 or 245 percent. Whereas in Pakistan, during the corresponding period, HSD price soared from Rs 24.37 per litre to Rs 47.13 per litre ie by Rs 22.46 or 93 percent only.
In order to shield the consumers from price hikes government has been absorbing this additional burden through reduction in collection of PDL and with cross product subsidies through price differential claims (PDCs) mechanism evolved with oil marketing companies (OMCs) and refineries.
According to industry estimates, PDCs collected by end of April would amount to Rs 175.5 billion. Out of which government has so far refunded Rs 99.619 billion based on audit claims of the industry. The outstanding PDCs still payable to oil industry is around Rs 76 billion.
The current PDC/subsidy rates (April 18 to 30th) on HSD, kerosene and LDO are: Rs 20.46, Rs 22.54 and Rs 17.36 per litre respectively. On current prices fortnightly PDC collection is said to be Rs 13.7 billion.
Besides enhancing the PDL on natural gas, government also needs to address the lopsided consumption of various POL products due to price distortions, says the oil industry.
Motor spirit (Petrol) consumption had come down due to people's strong preference for CNG and diesel on account of lower price. As a result, Pakistan now has surplus production of MS and has to export it at a loss because of highly subsidised rates of both diesel and CNG at the pumps.
Petrol is being sold at Rs 65 per litre while Diesel is sold at Rs 18 less ie Rs 47 per litre. Whereas CNG being consumed by car is sold at a 40 percent less price than petrol consumed by two wheelers - a vehicle mainly used by people from middle and lower classes.
Due to this price distortion the consumption ratio of diesel to petrol is 7:1. It is also leading to smuggling of diesel from Pakistan into Afghanistan. As a result, diesel consumption has gone up by 14 percent. Plugging of oil smuggling from Iran has helped somewhat in checking the falling consumption of petrol. Its sale has gone up by 30 percent.
On account of huge outstanding of PDCs, oil industry is suffering from severe financial constraints with some MNCs threatening to close down operations by end June. PDC payment outstanding to PSO is Rs 42 billion. The government has hurriedly arranged Rs 15 billion payment against sovereign guarantee from banks - yet to be disbursed - as the local oil giant faces default to meet its obligations against existing L/Cs due by May 8th.
Besides PDCs outstandings, Wapda owes Rs 12 billion to furnace oil supplies received from PSO. Pakistan International Airlines owes Rs 2 billion against sale of JP1 Aviation fuel. And, Hubco owes Rs 3 billion to PSO on account of furnace oil supplies.
Shell is said to have Rs 13 billion in receivables from the government against PDCs claim. OMCs point out that those complaining that OMCs are getting high margins in Pakistan also need to take into account the financial cost incurred due to inordinate delays building up to such huge receivables from the government.
OMCs are willing to have their margin capped if existing outstandings are cleared and timely PDC payments received. Defending the deemed duty payment to refineries the industry representatives point out that they were under obligation to incur $100 to 150 million in capital cost to reduce the sulphur content in their products from one to 0.5 percent. Engineering, design and procurement in this regard is already underway and PARCO the largest refinery, is said to be executing the sulphur content reduction plan in the next three months.
Business Recorder [Pakistan's First Financial Daily]
