Staff Report
ISLAMABAD: Petroleum Division’s Director General (DG) Oil has urged the Ministry of Interior and the Federal Board of Revenue (FBR) to swiftly implement strict measures to combat the widespread smuggling of petroleum products plaguing the country.
In response to the Oil Companies Advisory Council’s (OCAC) letter dated April 9, 2024, addressed to the National Coordinator of the Special Investment Facilitation Council (SIFC) and the Prime Minister’s Office, DG Oil has issued an office memorandum urging the Ministry of Interior and FBR for immediate action to tackle the pressing issue of smuggled petroleum products, which poses a significant threat to the refineries’ upgrading project.
According to DG Oil’s office memorandum, this illicit activity not only bleeds the economy but also jeopardises the opportunity for substantial investments in refinery upgradation. The ramifications extend beyond the refinery sector, impacting the profitability of oil marketing companies, dealers and disrupting the White Oil Pipeline operations.
Moreover, currently refineries are carrying huge stock of High-Speed Diesel (HSD) due to availability of smuggled fuel in the market leading to reduction in refineries throughput/production of other petroleum products as well, reads the memorandum.
This situation is disturbing the entire oil supply chain and needs immediate correction, said DG Oil’ s Office Memorandum on April 25, 2024.
“Ministry of Interior and FBR are therefore, requested for appropriate and immediate action o address this critical issue as highlighted by the Oil Companies Advisory Council,” reads DG Oil’s letter.
DG Oil’s most immediate letter has been forwarded to Secretary of Ministry of Interior and Chairman of FBR through fax.
The OCAC, in a letter dated April 9, 2024 with subject “Threat to Refineries Upgradation Projects from Rampant Influx of smuggled Petroleum Products”, said that besides causing billions of rupees revenue loss to the government and forcing the local refineries to operate at unavailable lower throughputs, this menace of unabated smuggling seemingly under the patronage of official authorities is now reached to an extent that it may jeopardise opportunity of the forthcoming huge investment in refineries expansion and upgradation projects under the Oil Refining Policy for Upgradation of Brownfield Refineries, 2023 (As amended in February 2024).
“We now look up to SIFC as one window investment facilitation institution for unwavering support to aggressively combat and dismantle the smuggling networks, reclaim control of market and restore the momentum of the struggling oil industry. Failure to promptly address this issue will have catastrophic consequences for the energy security and economic stability of the country,” said OCAC letter.
It is relevant to note that Attock Refinery Limited (ARL), National Refinery Limited (NRL) have already given consent to sign the upgradation agreements with Oil and Gas Regulatory Authority (OGRA) envisioning an investment of US$3 billion. PARCO and Cnergyico are also likely to join after getting board approval and settlement of government levies respectively taking the total investment to $ 5-6 billions.
According to OCAC, feasibilities of these upgradation projects are based on optimum capacity utilization of refineries. The smuggling of petroleum products if continued would, therefore, seriously question the viability of these projects forcing the prospective investors to review their decisions.
The refinery policy which took four years in the making, with its final approval in February 2024 has presented a golden opportunity not only to bring in huge investment but also substantially increase production of deficit products and meet environment friendly Euro-V specifications. It would, therefore, be most unfortunate if the planned upgradation projects are delayed or abandoned due to continued illicit activity which is already bleeding the economy and has disrupted the entire supply chain of petroleum products; adversely affecting the refinery health, White Oil Pipeline operations; and the profitability of Oil Marketing Companies (OMCs) and dealers.
“We have raised this issue at various forums but unfortunately no concerted effort has been undertaken to stop this menace,” said OCAC letter to SIFC.
It is pertinent to mention that OCAC had earlier requested the government to extend support to aggressively combat and dismantle the smuggling network, reclaim control of the market and restore the momentum of the struggling oil industry.
In a letter dated March 25, 2024 to Secretary Petroleum, Chairman OCAC, Adil Khattak had drawn attention to the issue that poses a severe threat to the oil industry, and consequently jeopardizes the stability of government revenue streams. The staggering influx of 4,000 MT of smuggled fuel daily into Pakistan, as confirmed by the Oil and Gas Regulatory Authority (Ogra), is bleeding the nation of approximately $35.6 million per month. This national crisis demands swift and aggressive action.
According to OCAC letter to Secretary Petroleum Division, the sales trend of MS (Motor Spirit) and HSD (High Speed Diesel) during the fiscal year 2022-23 starkly resembles the figures recorded during the tumultuous period of the COVID-19 pandemic in FY 2019-20. While the decline in GDP growth rate from 6.11% in FY 22 to 0.29% in FY23 may partly explain this downturn however, unfortunately, the Year To Date sales of MS and HSD have further plummeted by approximately 6.5% (July-February FY 23-24 vs. FY 22-23), casting doubts on the veracity of projected GDP growth rate of +1.7% for FY 24. Similarly, the Monthly To Date (MTD) sales figures of MS and HSD in March 2024 exhibit an alarming variance of -12% and -21% respectively, against the forecasts established in the Product Review Meeting for the harvesting season. Such high negative variances signify product glut, lower refinery throughput, choking of WOP and restrained sales volumes.
The OCAC maintained that the illicit trade has disrupted the entire supply chain of petroleum products adversely affecting the refinery health, White Oil Pipeline operations, and the profitability of Oil Marketing Companies (OMCS). The significant price disparity between legitimate and smuggled fuel coupled with widespread availability and weak border controls, is causing irreparable damage to legitimate businesses.
Any hindrance to local POL production necessitates increased imports, resulting in substantial financing costs for OMCs as they operate on razor-thin margins.
The oil industry continues to lose business to the illicit trade; simultaneously, the government continues to lose revenue from Petroleum Levy, Customs Duty, Corporate Tax, Super Tax, etc. Reportedly, the Petroleum Dealers of retail outlets have also raised grave concerns about the unabated surge in fuel smuggling to Pakistan, causing them sales and revenue losses.
The unchecked proliferation of substandard smuggled petroleum products not only drains the government revenue, but also fuels a shadow economy, making it increasingly challenging to monitor and regulate illicit activities.
The detrimental effects of substandard smuggled petroleum products on the environment, vehicle engine, and safety standards should not be left unattended anymore. The influx of fuel through illicit channels will gravely impact the foreign direct investment required for the upgrade and modernization of refineries under the Brownfield Refinery Policy.
OCAC also submitted following recommendations for implementation without delay: (i) implement robust enforcement measures to control the expansion of the illicit sector (border control);(ii) conduct well-coordinated, regular nationwide crackdowns in collaboration with federal and provincial authorities;(iii) declare smuggling a grave crime, categorized as a punishable offense. Propose legislation to Parliament, advocating for corporal punishment to deter smuggling and safeguard corporations from its detrimental effects. The federal/provincial authorities / Chief Secretaries must mobilize their teams and intensify efforts to curb cross-border movements, ensuring stringent penalties including imprisonment for offenders;(iv) shut down illegal petrol pumps, immediately and take punitive action against them; and (v) launch comprehensive anti-smuggling campaigns to raise public awareness and support.
