The Economic Coordination Committee (ECC) of the Cabinet has decided to revise the premium mechanism for import of high-speed diesel on a fortnightly basis to avert shortage of HSD in the country because OMCs would incur Rs6.8/liter loss.

A meeting of the ECC presided over by Finance Minister Shaukat Tarin on Friday was informed by the Petroleum Division that since the current HSD price is benchmarked on the basis of substantial imports by PSO from KPC (US$ 2.4/BBL), any OMC importing at the PSO tendered premium (US$ 8.45/BBL) would incur a loss of up to Rs6.8/liter creating an unsustainable position for importers.

The ECC was requested by the Petroleum Division that Kuwait Petroleum Corporation (KPC) premium should be excluded from price computation for period from April to June, 2022 and premium on HSD import may be benchmarked on the PSO’s average tendered premium for the previous fortnight.

The meeting also approved that in case, there is no tender by the PSO in a particular fortnight, the premium from previous tender may be used for calculating HSD ex-refinery price. However, this arrangement may lead to some benefits for PSO and local refineries, which may be adjusted by the OGRA for recovery through IFEM mechanism. This mechanism would be reviewed on the recommendation of the OGRA on a fortnightly basis.

The ECC approved the Petroleum Division’s summary with direction by the finance minister to revise the premium on a fortnightly basis.

Therefore, its impact would increase or decrease depending on the international energy market. The Petroleum Division, while giving back ground told the meeting that the parameters to determine ex-refinery/import prices of Mogas (Petrol) and IISD (Diesel) were approved in 2020 whereby, the base price is fixed on the basis of 15 days average FOB prices of the Arab Gulf market.

The PSO’s last available average import premium and incidental charges (LC/Bank charges, wharfage, port charges etc) are added to arrive at C&F prices for finalising the local consumer prices. And the premium (freight and supplier’s margin) is a lump sum cost of the supplier/exporter, which is either negotiated or offered in a tender process.

The PSO, being a public sector company, is obligated to procure imports in accordance with the PPRA rules and as per existing arrangements, PSO imports its Mogas requirements entirely through spot tendering, while bulk of its HSD imports are made from KPC on the basis of a long-term agreement, which is revised/reviewed biannually.

The premium on long-term basis is lesser than the tendered premium. Presently, KPC premium for PSO’s HSD cargoes for Jan-June, 2022 is US$ 2.40/bbl. In case, KPC is unable to meet PSO’s HSD demand, the same is imported from the spot market.

The story was originally published in Business Recorder on March 26, 2022.