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Reading: Pakistan’s oil sector is on the verge of collapse
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Pakistan's oil sector
PhotoNews Pakistan > Pakistan > Pakistan’s oil sector is on the verge of collapse
PakistanTop News

Pakistan’s oil sector is on the verge of collapse

Web Desk
By Web Desk Published February 3, 2023 3 Min Read
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Photo: MMNews TV
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Pakistan’s oil companies have warned that the sector is on the verge of collapse as the US dollar liquidity crisis continues and costs skyrocket due to the rupee devaluation.

The rupee dropped to a record low of Rs276.58 in the interbank market after the government lifted the dollar cap in response to the International Monetary Fund’s (IMF) demand.

In a letter to the Oil and Gas Regulatory Authority (OGRA) and Energy Ministry, the Oil Companies Advisory Council (OCAC) claimed that the “sudden depreciation” of the local rupee had cost the industry billions of rupees in losses because their letters of credit (LCs) are anticipated to be settled at the new rates, “whereas the related product has already been sold.”.

Due to declining foreign exchange reserves, which as of January 27 fell to $3,086.2 million and were only sufficient for 18.5 days, the government has also imposed restrictions on LCs.

Due to the rupee’s sharp decline in value, import prices are rising in Pakistan, which is experiencing a balance of payments crisis. Pakistan’s import bill is largely made up of energy. More than a third of Pakistan’s annual power needs are typically met by imports of natural gas, the cost of which skyrocketed after Russia invaded Ukraine.

The OCAC claimed that these losses affect the sector’s viability and already severely strained profitability because, in some cases, they may 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, or other Member Companies are unable to recover their full losses due to import profile differences with PSO. “.

According to the OCAC, “If the industry’s viability and supplies to retail outlets are to be ensured, it is requested that this mechanism be urgently revised and ensure that exchange losses of the sector are fully reimbursed.”.

In the letter, it was stated that OGRA had taken the practice of not passing along the full effects of the rupee’s depreciation and had instead placed a significant burden on the industry.

The OCAC stated it is essential that OGRA passes the impact of the exchange rates in one go and not stagger this compensation due to the difficulties still experienced by the sector due to prior exchange rate adjustments and the significant impact of the current depreciation.

The council also noted that the trade finance limits offered by the banking sector to the industry had grown inadequate due to rising oil prices and the successive depreciation of the Pakistani rupee over the previous 18 months.

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