Oil Marketing Companies (OMCs) have opposed the forced signing of ‘take and pay’ agreements with local refineries, indicating a significant reduction in petroleum product prices by the end of this week, saying the clause would unfairly burden them with financial risks.
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Oil Marketing Association of Pakistan (OMAP) Chairman Tariq Wazir Ali estimates that petrol prices could fall by Rs12 per litre and high speed diesel (HSD) prices by Rs8 per litre.
OMAP has formally opposed the new ‘take and pay’ clause proposed by the Oil and Gas Regulatory Authority (OGRA), under which OMCs will either have to collect their allocated quota of petroleum products from local refineries or face penalties for not doing so.
In a letter to the OGRA chairman, members and the Petroleum Division, he said that in such a situation, it is unreasonable to expect that OMCs will bear inventory losses, while refineries will be protected from market fluctuations.
He argued that the new arrangements will shift the entire burden of market price fluctuations to the OMCs, many of which are already struggling financially.
OGRA has recently asked all OMCs to sign new sale and purchase agreements (SPAs) with local refineries on ‘take and pay’ terms, which means that if they fail to increase their allocated quantities from the refineries for any reason, they will at least pay for those quantities.
OGRA introduced the new mechanism after repeated complaints from local refineries that high fuel imports were affecting domestic production, leading to reduced capacity utilization and financial losses.
Some OMCs and refineries had accused OGRA of favoring a particular OMC by approving imports of petrol and diesel despite the availability of sufficient local stocks.
Following mounting criticism, OGRA proposed to introduce a new ‘take and pay’ clause in the SPA between refineries and OMCs. Interestingly, the ‘preferred OMC’ is also a member of OMAP.
OMAP expressed serious concerns over the proposed implementation of ‘take and pay’ clause in SPAs between refineries and OMCs, with Tariq Wazir Ali saying that the proposal “poses serious threats to the financial stability of OMCs already burdened by multiple unresolved issues, which are awaiting resolution by the regulator for a long time.”
Terming it as highly worrying, the association said that OGRA, as the guardian of fair regulatory practices, is considering implementing such a binding clause without taking into account the ground realities and the precarious financial conditions of OMCs.
The ‘take and pay’ arrangement will only serve the interests of refineries and large OMCs at the expense of smaller companies, further strengthening the monopoly control of big fish in the oil sector.
OMAP warned that such a move would adversely affect competition, discourage new entrants and ultimately harm the overall efficiency of the petroleum supply chain.
The association claimed that the proposed provision does not address the key issue of opportunistic behavior by refiners, which has been a long-standing complaint of OMCs, and the fact that refiners regularly refuse to supply products when prices are expected to rise, forcing OMCs to resort to expensive imports.
Conversely, when prices are expected to fall, refiners try to offload as much stock as possible to OMCs, resulting in financial losses to OMCs, a practice that not only distorted the market but also violated the principles of equal treatment among stakeholders.
OMAP also lamented that another major factor affecting the market through the continuous cross-border influx of petroleum products cannot be controlled by government agencies and OGRA for a long time.
According to the association, this uncontrolled influx has adversely affected the demand for locally sourced products, further increasing the financial difficulties faced by OMCs. Any regulatory framework must take this fact into account to ensure fair competition and protect the legitimate interests of all stakeholders.
OMAP also claimed that imposing a binding obligation on OMCs to increase the pre-determined quantity without addressing the exploitative practices of refineries will further increase the existing imbalance.
The association demanded that the proposed mechanism should be accompanied by a strong enforcement framework to ensure that refineries adhere to the same principles of fair play and supply commitments regardless of market price trends, otherwise this unilateral arrangement will unfairly shift the entire burden of market volatility onto OMCs, many of which are already on the verge of financial ruin.
The association’s statement said that forcing small OMCs operating on low margins to increase committed quantities without regard to market demand would significantly increase their financial investment, potentially leading to default, supply disruption and eventual market exit.
This would not only undermine the government’s objective of promoting competition but would also create supply disruptions, thereby jeopardizing energy security.
Meanwhile, all five refineries in the country have supported the ‘take and pay’ clause, saying that the clause is necessary to protect domestic refining capacity. However, the refineries also stressed that any changes in supply contracts should be agreed upon by all stakeholders and implemented through a clear regulatory mechanism under the supervision of OGRA.
