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Lessons from the petrol crisis
By: Dr Abid Qaiyum Suleri

The ongoing power crisis should not distract the government from resolving petrol crisis on a permanent basis.

After the initial firefighting on petrol crisis, the Prime Minister is giving serious attention to the energy sector management. That has lead to a gradual improvement in petrol supply in many parts of Punjab. However, one needs to put some jigsaw puzzles together to get the larger picture of why this crisis occurred and what needs to be done to avoid a similar crisis in future.

First things first, declining oil prices over the recent months. This trend is predicted to prevail for a few more months before stabilising at a certain price. The PSO, with a 47 per cent petrol market share, was hit by its financial and logistics problems and ran out of stocks.

On the other hand, the rest of the oil marketing companies (OMCs), to avoid any inventory loss (buying at high price and selling at reduced price), were maintaining a bare minimum petrol inventory. The stockists and dealers, too, were not interested in maintaining large inventories for the same reason. This, apparently a rational business decision, led to a situation where there were no buffer stocks of petrol in the country.

Lesson 1: The government should stop making political announcements that they would reduce petroleum products’ prices by “X” amount in the coming month. The benefit of price reduction in the international market should be passed on to the domestic consumers. However, announcing price reduction in advance would have negative implications on the oil inventory.

Second, the role of Oil and Gas Regulatory Authority (OGRA). OGRA is mandated to ensure 20 days fuel stocks with the OMCs. It receives a daily stock position from these OMCs and has hundreds of field inspectors for physical verification of those stocks. The regulatory authority failed to assess that petrol inventories in the country were at dead level.

Lesson 2: Regulatory authorities should be independent in the true sense. Unfortunately, like all other regulatory authorities in Pakistan, OGRA, too, has turned into a parking lot for retired bureaucrats. The member oil position in OGRA is vacant for some time. Taking this opportunity, the Prime Minister should restructure OGRA. Appointment of competent members with relevant oil and gas industry experience may be the first step to enable this organisation to work effectively.

Third: Product Review and Coordination Committee: PCC meeting is chaired by DG Oil of Ministry of Petroleum. This meeting is periodically conducted to make futuristic assessment of fuel consumption in the country, anticipated supplies, any deficit in the supply, and how that deficit would be met. Despite the fact that these meetings were regularly held, PCC failed to gauge that in the context of reduced prices and as an alternative to CNG, the consumption of petrol will increase in the country.

Lesson 3: The culture of evidence-based decision-making needs to be inculcated in the ministries. Such failures are bound to happen when the decisions are based on perceptions and not on the actual data.

Fourth: Pak Arab Refineries’ closure: PARCO, one of the suppliers of petrol to OMCs remained closed for a few days due to the tripping of 11 KV power transmission. This resulted in interruption of  oil supplies for 4-5 days.

Lesson 4: In the absence of plan “B” such things are bound to happen. We should prepare for alternative diesel source for the Upper Punjab and KPK from April 2015. The Attock Oil refinery, which supplies diesel to these parts of Pakistan, will be closed down for upgradation and maintenance from April 2015 for at least 3 months.

Fifth: Consumer’s behaviour. The uncertainty that petrol may not be available for an extended period of time forced people to buy beyond their immediate needs in panic mode. The stockists exploited this situation and sold the petrol up to Rs. 300 per litre.

Lesson 5: Abundance of government and less governance provides opportunity to the hoarders for exploiting their consumers. Many of the indirect consequences of petrol shortage could have been avoided had the district administration taken an interest in curtailing the hoarding.

Sixth: Pakistan State Oil (PSO). PSO is a trillion plus Rupees company, with Rs42 billion profit as per its last balance sheet. It holds 47 per cent market share of petrol supply and is the only oil marketing company of the country which could afford to fuel government power generation plants, PIA, Pakistan Railways, and many others on deferred payment basis. However, PSO is cash strapped, facing not only the financial issues but huge management and human resources issue, too.

For the last 20 months, the organisation was headed by an acting Managing Director, who was initially appointed for a 3-month period. The MD and many of his senior managers were not in talking terms as all of them were contenders for a permanent MD position. Major decisions were getting delayed and one of such decision was revising the freight charges of Pakistan National Shipping Corporation (PNSC).

As per the agreement between PSO and PNSC, this revision was due in January 2014, but both the PSO and PNSC could not agree on a figure and the matter became subjudice. Both parties are working with each other under court’s directive now. The delay in injection of petrol (around 8-10 days requirement) in the supply chain proved to be the last straw on camel’s back and triggered the crisis.

Lesson 6: Strategic institutions, such as PSO, cannot be run on ad-hoc basis. Government needs to find a full-time Managing Director with hands on experience of oil industry. No grudges against the newly appointed acting MD, but he, too, is not from the oil industry and should be immediately replaced by a full time MD.

Lesson 7: PSO should not rely on any single shipping company. The agreement binding PSO to use PNSC’s services only should be reviewed to give flexibility to both sides to avoid any future logistic disaster.

Seventh: PSO’s financial position. Despite being a trillion plus rupees company, PSO is actually cash-strapped. Till last week, it had to receive Rs200 billion. Out of which Rs176 billion are owed by the power sector. National Transmission and Distribution Company (NTDC) owes Rs99.3 billion to PSO; HUBCO Rs58 billion; KAPCO Rs13.6 billion; KESC 3.8 billion; Saba Power and Southern Electric Rs759 million.

Lesson 8: None of the business model in which products are bought on borrowed money, and sold on indefinite credit may sustain when the timely payments had to be made to original lender.

PSO takes the brunt of weaker coordination between the ministry of petroleum and natural resources, ministry of water and power, and ministry of finance. Learning a lesson from the current crisis, we need to have a realistic provision of energy related subsidies in the next budget. This amount should be released to NTDC and generation companies who should make an upfront payment to PSO for furnace oil. The price of electricity supplied to each province may be partially adjusted upfront from the payment to that particular province under NFC award.

Eighth: Circular debt. There are at least a dozen entities involved in circular debt. There are Oil and Gas Development Corporation (OGDC) and Pakistan Petroleum (PPL) that provide crude oil to refineries. There are five refineries, i.e., Pak Arab Refinery (PARCO), Pakistan Refinery (PRL), National Refinery (NRL), Attock Refinery (ARL), and BYCO who sell oil to Pakistan State Oil (PSO) and at times to Gencos.

There are power distribution companies that buy from GENCO and distribute to power consumers. Power generation companies are unable to recover their cost of production. Refineries don’t pay in time to OGDC, PPL, and GoP and this cycle continues. Thus, it is important to take some radical measures if we want to permanently get rid of circular debt issue in the medium to long term.

Final Word: We get sensitised to a crisis and while still doing some symptomatic dressings on that crisis, get hit by another crisis of a different nature. This crisis distracts our attention from the first one and the cycle goes on. It is about time we started talking about these crisis simultaneously. The current petrol crisis should not divert policymakers’ attention from the Peshawer tragedy, and the ongoing power crisis should not distract them from resolving petrol crisis on a permanent basis.

Source : http://tns.thenews.com.pk/crisis-management-lessons-from-the-petrol-crisis/#.VMZ86S66Ykp

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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.