KARACHI: Pakistan State Oil Company (PSO), the country’s largest public sector oil marketing company, is accused of succumbing to international oil mafia and vested interests, industry sources said.
According to details, PSO regularly conducts spot tenders for supply of motor gasoline and seasonal furnace oil cargoes which are supplied by a small group of globally influential international oil suppliers such as Gunvor, Enoc, Vitol, Petro China, OTI, BB Energy represented by highly powerful local indenting agents.
“The current PSO tendering process is designed in a fair way to encourage open participation from serious suppliers”, sources said and added that there is a bid bond of $300,000 for participation. Subsequently winners of the tender are to place a 10 percent performance guarantee of the value of the cargo which PSO can cash upon their failure. Payment is by 30 days or 60 days LC and there are very heavy late delivery penalties of $1/mt/day. These terms are highly stringent, tough and considered very risky for suppliers compared to any international oil trading terms including widely used Shell’s and BP’s standard terms and conditions, sources said. “For years this has meant that PSO and as a result Pakistan’s oil supply has been controlled by a small and highly profitable group of oil companies that continuously make profits whether oil prices go up or down,” they added.
Furthermore, these companies through their indenting agents and various lobbies had monopolised the Pakistan market by creating a “Euro II Pakistan spec” motor gasoline that is only used in Pakistan, sources said. While developing a network of supply, storage and shipping that created huge barriers of entry for new international oil trading companies to enter the Pakistan market and successfully capturing a high price premium (the premium is the cost of freight and suppliers margin on top of the daily market index of refined product prices such as Mean of Platts Arabian Gulf (MOPAG)), they said.
“Some of these companies have invested in our local private oil marketing companies, which was described as a great indicator of success for our oil industry,” they said. However, one only needs to look at how Hascol Petroleum’s local network has been ‘abused’ to be flooded and dumped with oil when it is in the benefit of these suppliers and completely dried up when oil was at an all-time low and cheap oil could benefit Pakistan, they added.
The strength of this mafia was witnessed most recently when there was a huge hue and cry and an attempt to create panic when the PTI government announced Pakistan’s switch to Euro V grade motor gasoline in August 2020, sources said. “In order to maintain the monopoly and advantage on the spec these suppliers created widespread fear and panic in the industry through claims such as the Euro V spec isn’t available in the Middle East Region, they claimed that improved spec would be more costly, and new specialised infrastructure including storages, ships would be required to handle the Euro V spec creating the fear of an oil shortage or as they prefer to call it an oil crisis,” they added.
“PTI Government stuck to its belief that Euro V being a more widely traded and environmentally friendly spec would result in benefit to the country, ordering PSO to tender for the new Euro V spec. As expected this same oil mafia participated in the tender and quoted all time high price premiums of $4.0-4.5/bbl. Where as the price premiums for Euro II Pakistan Specs were in the range of $3.5/bbl.
“However, 2 new UAE-based suppliers Max Energy and 1 Energin intervened and crashed the well-crafted plan of this oil mafia by being the lowest 2 bidders. These companies quoted prices in the range of $2.5-3.0/bbl which were even less than the price of the previous ‘Euro II Pakistan’ spec. Taken completely by surprise the existing suppliers and their local indenting agents resorted to discrediting these new suppliers claiming that they would not perform and that these are not real genuine suppliers and non performance from these new suppliers would lead to another oil crisis,” sources said.
“Although they had tendered for multiple cargoes, PSO succumbed to the pressure created by this lobby and only awarded Max Energy the first cargo while not awarding 1 Energin the second cargo hoping this would discourage the new entrant. However, in the subsequent tender 1 Energin bid the best number and left PSO with no choice but to award the contract,” they said.
“What followed was a textbook display of dirty tactics, intimidation, blackmail, and fear in which the subject oil companies used every card in the playbook to prevent these new entrants from performing on their contract with PSO and incurring losses that would drive them away from the market. They blocked supply lines, banking channels, drove up the prices of all the available ships. And of course exhausted all efforts to discredit these new companies in PSO and the Pakistan market by claiming these companies are ‘front companies’ supplying stolen and smuggled oil. A quick check will show that the reality is very different and that like in any industry these smaller companies not only compete but also regularly collaborate with the same large international oil suppliers in sourcing, shipping, storage and trading”.
Sources said the incumbent players were accusing these new companies of supplying ‘smuggled’ and ‘stolen’ oil. “After being blocked, delayed and blackmailed in the freight market 1 Energin had at double the market freight rates chartered a vessel MT Lia to deliver the Euro V Motor Gasoline cargo to PSO. The vessel MT Lia is owned and operated by none other than Clearlake Shipping which is ‘a wholly owned Gunvor entity’ as per the oil trading giants website. Similarly Max Energy also faced the same tactics, discrediting and blackmail from the wounded giants. However, both companies after some delays were able to successfully perform delivery of the cargoes fulfilling the quantity and quality requirements of PSO.
These new suppliers successfully broke the longstanding monopoly of the existing oil mafia which hasn’t seen a new entrant in years. And against all odds saved Pakistan from the obvious price manipulation that was planned by the incumbent suppliers. Recent tender results show that the same suppliers that initially bid above the $4.0/bbl levels have come down to the $3.0/bbl levels to compete with the new suppliers,” sources alleged.
“These new suppliers instead of being encouraged and supported by PSO have instead as per the terms and conditions of their contract been penalised by PSO to pay hundreds of thousands of dollars as late delivery penalties. Although much more than any profits on their cargoes they have honoured the terms of the contracts and paid the penalties in full, taking a long term business view. Justifying them as a cost of entry into a new market believing that they will get a fair chance as per the PSO tender process to successfully compete and capture a share in the growing Pakistan market,” they added.
“In a clear attempt to favour the incumbents and take out these 2 new suppliers from the picture PSO for the first time in their history instead of tendering for parcel sizes of 55,000 MT called for a tender of 100,000 MT cargo size to be delivered in 18-31 Oct, claiming that the larger parcel size would optimise economies of scale and bring about a decrease in premiums. However, it was clear that the hope was that by raising the stakes, the recently penalised new suppliers would be deterred by the increase in the bid bond, performance guarantee and potential late penalties. However, the spirit of free market and open competition prevailed and a new Singapore supplier named Epdesa entered the market and bid a premium of $3.80/bbl beating out the incumbents who once again bid above the $4.0/bbl levels. This time PSO would have had to award the full 100,000 MT cargo to the new supplier Epdesa, however, PSO once again gave in to the pressures of the monopoly and decided to scrap this tender as they claimed the premium was too high,” they added.
“Subsequently, PSO returned to its previous model of tendering for 55,000 MT cargoes. After delivering their first cargoes, these small suppliers have continued to participate and won and delivered successfully two further cargoes this time without any delays or problems. However, PSO succumbed to the lobbying and pressures of the oil mafia and on 19 October 2020 announced that they would do a pre-qualification for suppliers of POL products to assess the capability and capacity of suppliers. After 19 December only ‘pre-qualified suppliers’ will be able to bid and participate in PSO tenders. A closer look at the requirements and scoring of the pre-qualification shows that it is designed specifically to eliminate the same new suppliers and qualify the international giants that have monopolised and take advantage of Pakistan’s supplies. This show that instead of encouraging open competition and analytically looking at the benefits of PTI Government’s decision to introduce a cleaner, better and widely traded fuel. PSO has given in once again to the fear mongering of an oil crisis that is always looming large and strengthened the monopoly of the mafia that always has and will inevitability take advantage of our country,” sources said.