Deregulation of oil pricing

[Lahore_Real_Estate]

No major change in pricing mechanism: analysts

By Moonis Ahmed

KARACHI: It is not likely that there will be any major change in the pricing mechanism soon as the deregulation of oil pricing is a complex procedure especially when local refineries and oil marketing companies (OMCs) are working separately unlike international practices which operate under one roof, analysts said.

The government was initially supposed to introduce this policy in the last budget but due to lack of consensus among major players in oil industry the decision was postponed, they said.

In order to surmount the prevalent petroleum product shortage, the Economic Coordination Committee could consider the deregulation of petroleum prices, with the exception of high speed diesel, in its meeting today (Tuesday). The step permits the domestic refineries of price fixation, allowing them to earn favourable margins that in turn will allow them to run at 100 percent of their capacity, Invest Capital analyst Nauman Khan said.

Analysts said that if the government implements deregulation policy there will be price variation of two paisas to Rs 2.5 per litre on various oil products from southern to northern regions of the country. The impact could vary depending upon the refineries efficiency and processing cost.

However, the major reason of price variation could be the abolishment of Inland Freight Equalisation Margin (IFEM), which is a tool to equate local oil prices throughout the country. IFEM is actually the transportation cost between refineries and the depots. The price variation could be higher in upper parts given the fact that out of five big refineries in Pakistan, three are located in the southern region while only two are in central and northern regions of the country.

The refinery operations and profitability are primarily hinged upon each refinery’s respective gross refinery margins (GRMs), which in turn are dependent on the international prices. International refineries have a cost advantage over the domestic refineries on account of superior product mix and 70 percent of the country’s petroleum demand is met through imports; the domestic refinery environment will continue to be subjugated to international pricing scenario as already in place in the prevalent mechanism.

The only area where prices can improve is gasoline where current pricing method provides little incentives to refiners to reformat (Rs 1 per litre rise in gasoline prices), KASB Research analyst Muhammad Fawad Khan said.

He said that in case the government does not notify upper limit under Independent Power Producer (IPP), the interplay of competition among refiners, regulation of end-consumer prices and ready import option for marketing companies would keep the ex-refinery prices close to the IPP.

According to industry sources, the government will not change the current diesel pricing mechanism. Diesel has a major share of 33 percent in the local energy products with relatively better margins, thanks to the deemed duty, which local refineries get as an incentive so that their margins will be protected. Moreover, furnace oil (FO) is already deregulated, which account for 32 percent of total oil production.

Thus, if diesel and FO are excluded, the deregulation would be of other oil products like petrol, kerosene and jet fuel (combined weight of 25 percent in overall energy oil product), the impact of deregulation would be merely significant.

However, one crude method to value the impact of deregulation of these products is to determine the processing cost of each refinery.

Though it is healthy for the overall market competition, however, it will be negative for those OMCs, which lack backup refinery. With the introduction of this, there will be more competition between OMCs to sustain market share. If the company’s policy would be to maintain market share then it has to sacrifice the margins.

They said that with PARCO, the country’s largest refinery, re-commissioning its operation on Friday, a normal petroleum supply is likely to be started soon. The development would ease supply constrain in country and surmount the prevalent petroleum product shortage faced by various regions of the country.