Pakistan to strike a golden deal with oil giants, reducing import reliance

June 06, 2023 (MLN): In a major breakthrough to unlock a potential solution to Pakistan's soaring import reliance, the Pakistani government is considering making a deal with foreign oil giants, allowing them to operate custom bonded storage facilities.

This visionary policy shift paved the way for a new era of energy security.

Accordingly, foreign suppliers will be empowered to establish their own Customs Public Bonded Warehouses near Pakistani ports, strategically positioning themselves to maintain extensive inventories of crude oil and petroleum products, well-informed sources told Mettis Link News.

The sources further stated that these oil giants are also looking forward to striking a deal with Pakistan.

This development, if materializes will help to alleviate the burden on local Oil Marketing Companies (OMCs), especially regarding dollar payments.

This will help to ease the pressure on OMCs particularly for dollar payments if OMCs are allowed to pay to the local subsidiary in PKR and the govt will guarantee a conversion to USD locked rate at a later stage.

Pertaining to the currency, with the consistent fast devaluation of PKR, the purchasing power of OMCs/working capital is reducing very fast, unless banks increase the PKR line while banks view risk in PKR terms and not always forthcoming.

So, the industry is quite cash-strapped with limited liquidity. They usually have to open LCs prior to loading at load port, this means 5-25 days prior to oil being discharged in Pakistan. Obviously, enduring a big burden.

If suppliers keep oil in Pakistan all this time is saved. Banks' exposures can go down too since they don’t need to consider additional lines to cover this requirement.

A much shorter working capital cycle is also easier to monitor and manage from the risk management point of view as OMCs will not have to take international oil price exposure in the same way as they do now.

But for now, the first stage is in progress where they allow the big oil giants to bring products into the country. It is a very positive development as savings will transfer to Pakistan and dollar outflow can also be managed.

Will the local refineries take a hit?

This major development has raised concerns for the local refineries as OMCs may prefer to buy oil from these consignees and not refineries.

However, this will not be the case. Since every month Ministry of Energy allocates a quota to OMCs for import to cover the shortfall of POL products that local refineries don’t supply to them.

The same quota can be used to either import or exbond. And without quota OMCs may not buy from this storage. This way refineries continue to remain protected.

How will this revolutionary strategy work in practice?

The plan spins around the establishment of warehouses that operate independently of foreign exchange remittances until the products are either sold to local buyers or re-exported.

Foreign suppliers will set up a registered subsidiary, known as the Consignee, in Pakistan, responsible for conducting operational and business activities on behalf of both the foreign suppliers and local purchasers.

To ensure seamless operations, the Consignee will develop dedicated storage infrastructures around port premises, strictly following the regulations laid out by the Oil and Gas Regulatory Authority (OGRA).

The sales process will involve the Consignee selling goods to Pakistan-licensed purchasers, such as refineries or OMCs, against the opening of Letters of Credit (LC) through scheduled banks.

It is pertinent to mention that the need for LC confirmation by international banks or advance payments will be eliminated, provided mutual agreement is reached on the currency (US Dollars or Pak Rupees) in accordance with applicable foreign exchange regulations.

Bulk buying by foreign suppliers would enable them to source goods at lower rates and reduce freight charges, benefiting both the suppliers and local customers.

Additionally, the government would not experience any revenue loss as foreign exchange repatriation, GD filing, and duty and tax payments would be required for goods cleared for home consumption.

Implementing this scheme in an automated and hassle-free environment would attract foreign investment in bulk warehousing, generate employment opportunities in the warehousing business, and contribute to the country’s energy security.

As of now, the summary has been authorized by the Prime Minister, who is also the Minister In-charge of the Petroleum Division, for submission to the Economic Coordination Committee (ECC) of the Cabinet.

The Ministry of Commerce will be responsible for notifying the proposed policy provisions in the Import and Export Policy Orders, while the Federal Board of Revenue (FBR), State Bank of Pakistan (SBP).

Meanwhile, OGRA will prescribe and monitor the procedures for regulating imports and exports under the proposed scheme.

Copyright Mettis Link News