Oil industry in Pakistan on verge of ‘collapse’ amid liquidity crisis

Oil companies in cash-strapped Pakistan have warned that the industry is on the "brink of collapse" as the dollar liquidity crisis persists and their cost of doing business balloons due to the rupee's devaluation.

The government removed the dollar cap to meet the International Monetary Fund's (IMF) demand which resulted in the Pakistani rupee falling to a historic low of Rs 276.58 in the interbank market, according to a Geo News report.

The IMF has set several conditions for resuming the bailout, including a market-determined exchange rate for the local currency and an easing of fuel subsidies, both conditions which the government has already implemented.

Also Read: Pak 'will have to agree' to IMF terms for bailout: PM

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 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", it said.

The government has also restricted LCs due to dwindling foreign exchange reserves, which fell to USD 3,086.2 million as of January 27, just enough to cover only 18 days’ worth of imports, the report said.

Pakistan is facing a balance of payments crisis and the plummeting value of the local currency is pushing up the price of imported goods.

Energy comprises a large chunk of Pakistan’s import bill. The country 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.

According to the OCAC, These losses 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 April 1, 2020, our other Member Companies are unable to recover their entire losses due to import profile differences with PSO," Geo News quoted the OCAC as saying.

"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 pass the impact of the exchange rates in one go and not stagger this compensation, the report said.

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 per cent, 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," it said.

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

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 February 2, 2023 and will restart production from February 10, 2023, in line with our Crude oil vessel arrival timeline," the statement added.