OMAP raise concerns over severe operational issues & financial constraints faced by Pakistan's petroleum sector

OMAP raise concerns over severe operational issues & financial constraints faced by Pakistan's petroleum sector

By: Communicators - Business Team (July 16, 2024)

The Oil Marketing Association of Pakistan (OMAP) has raised concerns over severe operational issues and financial constraints faced by the petroleum sector. In a recent letter to the Oil & Gas Regulatory Authority (OGRA), OMAP demanded an increase in margins for petrol and high-speed diesel. They argue that these margins should be in line with licensing conditions, operational realities, and reasonable shareholder returns. OMAP has warned that without immediate action, the sector is on the brink of collapse, which could lead to significant chaos.

Financial impact of holding inventory and the costs associated with Letter of Credit (LC) confirmations for a oil marketing companies include:

1. Markup Rate Impact on Holding Costs:

   • A 22% per annum markup rate is applied.
   • Holding a 20-day stock costs about Rs. 3.45 per liter sold.
   • Holding a 10-day stock costs about Rs. 1.50 per liter sold.

2. LC Confirmation Costs:

   • There has been a 6-10% increase in LC confirmation costs over the past year.
   • This increase adds Rs. 1.61 per liter sold.
   • The calculation assumes a 60-day LC with an import value of Rs. 200 per liter.

To make this clearer, let's break down the costs involved:

Holding Costs

• 20-day Stock Holding Cost: Rs. 3.45 per liter
• 10-day Stock Holding Cost: Rs. 1.50 per liter

LC Confirmation Costs

• Increased LC Confirmation Cost: Rs. 1.61 per liter (based on a 60-day LC with Rs. 200 per liter import value)

Total Additional Costs

To find the total additional costs for holding stock and increased LC confirmation costs, you would add the holding cost per liter to the LC confirmation cost per liter. For example:

1. For 20-day stock:

   • Total cost = Rs. 3.45 (holding cost) + Rs. 1.61 (LC confirmation cost) = Rs. 5.06 per liter

2. For 10-day stock:

   • Total cost = Rs. 1.50 (holding cost) + Rs. 1.61 (LC confirmation cost) = Rs. 3.11 per liter

To provide a clear picture of the various costs affecting the industry on a per liter basis, here's a more detailed breakdown of these financial impacts:

1. Turnover Tax:

   • Rate: 0.5%
   • Cost Impact: Rs. 1.37 per liter

2. Demurrage Charges:

   • Cost Impact: Rs. 0.5 per liter sold

3. Operating Costs:

   • Contributing Factors:
     • Inflation
     • High energy costs
     • Utility expenses
   • Impact: These factors collectively increase the cost of selling, marketing, administration, and other operational expenses.

The combined financial impact per liter due to these factors would be Rs. 1.87 (Rs. 1.37 + Rs. 0.5) plus the additional, unspecified increase in operational costs due to inflation, energy, and utility expenses. This significantly affects the overall cost structure and profitability within the industry.

The liquidity crunch faced by petrol companies in Pakistan is primarily due to substantial funds being tied up in the Interbank Foreign Exchange Market (IFEM). Additionally, delays in sales tax adjustments and handling costs contribute an extra Rs. 2.15 per liter sold.

In response to these financial pressures, OMAP has proposed a revised margin of Rs. 19.52 per liter. OMAP argues that this adjustment is essential for the survival and efficient operation of petrol companies, ensuring they can continue to provide quality service standards for their customers