Oil Sector on the Brink of Collapse: OCAC Warns Ogra and Energy Ministry

The Oil Companies Advisory Council (OCAC) has sent a warning to the Oil and Gas Regulatory Authority (Ogra) and the Energy Ministry that the oil sector is on the brink of collapse due to a massive rupee plunge over the last few days.^[0] In a letter to the Oil and Gas Regulatory Authority (OGRA) and Energy Ministry, the Oil Companies Advisory Council (OCAC) said that the “sudden depreciation” of the rupee has caused losses worth billions of rupees to the industry as their letters of credit (LCs) are expected to be settled on the new rates, “whereas the related product has already been sold”.^[1]

Pakistan is currently facing a balance of payments crisis, and the weakening value of the local currency is driving up the cost of imported goods.^[2] Energy accounts for a considerable portion of Pakistan's import bill.^[2] The country usually satisfies more than a third of its yearly power demand with imported natural gas, the price of which increased after Russia's invasion of Ukraine.^[2]

According to the OCAC, these losses not only have an effect on the sector's viability, which is already under great pressure, but also on its profitability, since some of these setbacks may exceed the “entire year's earnings for the sector”.^[3] The council also added that due to an increase in oil prices and successive depreciation of the Pakistani rupee over the last 18 months, the trade finance limits available from the banking sector to the industry have become inadequate.^[0]

The government has also restricted LCs due to dwindling foreign exchange reserves, which fell to USD 3,086.2 million as of January 27, just enough to cover only 18 days' worth of imports. The OCAC declared that it was essential to raise the trade finance/LC limits for the industry to guarantee a sufficient import of product into the nation, taking into account the current oil prices, exchange rate, and volumes handled by each firm.^[0]

The petroleum division was informed by Cnergyico, an oil refinery, that operations would be shut down for more than a week, hours after the letter was sent.^[4]

In the letter, it was mentioned that due to the rapid decrease in foreign exchange reserves (as of January 27, it was at USD 3,086.2 million, enough to fund imports for only 18 days), the government has established limits on LCs. The OCAC requested that the banking sector be immediately requested through the State Bank of Pakistan to enhance the limits of its member companies.^[3]

0. “Oil firms warn govt of ‘impending collapse' – Business – DAWN.COM” DAWN.com, 4 Feb. 2023, https://www.dawn.com/news/1735200

1. “Pakistan's Oil Industry Faces Collapse Amid Liquidity Crunc…” MENAFN.COM, 4 Feb. 2023, https://menafn.com/1105523702/Pakistans-Oil-Industry-Faces-Collapse-Amid-Liquidity-Crunch

2. “World News | Pakistan's Oil Industry on Verge of ‘collapse' Amid Reeling Economic Crisis” LatestLY, 3 Feb. 2023, https://www.latestly.com/agency-news/world-news-pakistans-oil-industry-on-verge-of-collapse-amid-reeling-economic-crisis-4795010.html

3. “Pakistan's oil industry on brink of collapse, says OCAC” Business Recorder, 4 Feb. 2023, https://www.brecorder.com/news/40224210

4. “Pakistan hits a new low as oil firms issue ‘on the brink of collapse' warning” Republic World, 5 Feb. 2023, https://www.republicworld.com/world-news/pakistan-news/pakistan-hits-a-new-low-as-oil-firms-issue-on-the-brink-of-collapse-warning-articleshow.html