Frequent HSD pricing changes put OMC supplies, refinery operations at risk

Pakistan’s oil marketing companies (OMCs) and refineries are facing growing financial and operational challenges due to repeated changes in the high-speed diesel (HSD) pricing mechanism, with industry stakeholders warning that another downward adjustment could make diesel imports and crude procurement commercially unviable.

 

Industry officials said further intervention in the pricing formula could discourage OMCs from arranging adequate diesel supplies, while imported-crude refineries may be forced to reduce operating rates, potentially creating risks for the country’s petroleum supply chain.

 

The Oil Companies Advisory Council (OCAC) expressed concern in a letter dated September 8 to Energy Minister (Petroleum Division) Ali Pervaiz Malik over frequent revisions to the HSD pricing mechanism, including the latest change introduced on August 20.

 

The industry is also concerned about reports that the government may lower the HSD crack ceiling from $41.89 per barrel to $30 per barrel. Such a move could potentially reduce the domestic HSD price by around Rs18-20 per litre.

 

According to the OCAC, the existing pricing formula already fails to fully capture the cost of sourcing imported diesel. The formula currently uses an Aramco premium of minus $2 per barrel for October, while physical diesel cargoes are reportedly being offered and booked at premiums of $15-$20 per barrel.

 

The resulting gap between the benchmark used in domestic pricing and actual international procurement costs is making it increasingly difficult for OMCs to secure October cargoes.

 

Industry officials warned that if importers have to purchase diesel at prices substantially above the amount recoverable under the domestic pricing mechanism, their ability and incentive to maintain adequate supplies could come under pressure.

 

Refineries are facing a similar issue with crude procurement. Refiners dependent on imported crude have reportedly found that even the existing HSD price ceiling does not fully compensate for higher sourcing costs, particularly as suppliers demand increased premiums.

 

Frequent changes to the pricing mechanism are also creating uncertainty for refiners that book crude cargoes weeks ahead. If the eventual product prices do not allow them to recover procurement costs, refiners could face pressure to reduce crude purchases and lower throughput.

 

The OCAC has warned that an abrupt cut in the HSD price could make high-premium cargoes uneconomical and encourage refineries to reduce production instead of increasing output ahead of seasonal demand.

 

A decline in refinery utilisation could further tighten the domestic fuel market by reducing local diesel production and increasing the need for imported supplies. However, higher international premiums could simultaneously make imported HSD more expensive and difficult to recover through the existing pricing formula.

 

Industry representatives argue that the issue extends beyond the profitability of OMCs and refineries, as both segments require predictable pricing to maintain supplies. OMCs need sufficient cost recovery to continue booking imports, while refineries require pricing stability to procure crude and sustain economically viable production levels.

 

The OCAC has also called for the immediate implementation of the pending Rs1.22 per litre increase in OMC margins. The industry body noted that OMC margins were last revised in September 2023 and have remained unchanged despite rising inflation, operating expenses, compliance costs and regulatory requirements.

 

Meanwhile, the refining industry is preparing investments of around $5-6 billion under the Brownfield Refining Policy. Industry representatives said investments of this scale require a stable policy environment, predictable pricing mechanisms and financial certainty.

 

The OCAC maintained that the industry has supported the government during challenging periods but cannot continue absorbing the financial impact of repeated policy interventions.

 

It has therefore urged the government to ensure consistency, continuity and predictability in the HSD pricing mechanism to safeguard fuel supplies and support investment in the downstream petroleum sector.