Prime Minister Imran Khan has sought an explanation from the Petroleum Division in the wake of complaints from ministers for railways and maritime affairs over failure of Pakistan State Oil (PSO) to utilise services of state units for oil transport.
During discussion in a cabinet meeting last week, the railways minister said that PSO had discontinued transport of POL products through Pakistan Railways.
The minister for maritime affairs pointed out that, despite repeated directives of the cabinet, the first right of refusal was not being sought from Pakistan National Shipping Corporation (PNSC) for transporting POL imports. He added that engaging foreign shipping companies resulted in the use of precious foreign exchange reserves.
While exhorting that the national entities must be given priority, the prime minister directed the Petroleum Division secretary to submit a report on reasons as to why services of Pakistan Railways and PNSC were not being utilised by PSO.
The Petroleum Division briefed the cabinet that PSO was a public sector limited company under the administrative control of the Ministry of Energy. It was governed by the Marketing of Petroleum Products (Federal Control) Act, 1974, which provided that the federal government may set up a board to control, manage and direct the affairs of the marketing company.
The current board of PSO was constituted on February 21, 2019, including the Power Division secretary as its ex-officio director. However, on January 25, 2021, the Power Division secretary tendered his resignation from the board, owing to his official commitments, with the request for reconstitution of the board by replacing his nomination with “representation of the Power Division not below BS-20”.
PSO was importing LNG from Qatar, which was mainly supplied to power plants. The company was also the largest supplier of furnace oil to various power plants across Pakistan to meet their requirements.
In the event of shortage of alternative fuels and upon demand from the Power Division, PSO had to import furnace oil on an emergency basis to overcome power shortage in the country.
The demand and supply of these fuels as well as their prices directly impact the power sector.
PSO was also at the receiving end in the case of circular debt due to be paid by power sector companies, which at present stands at approximately Rs180 billion.
These issues could be addressed in a better way through close coordination and liaison between PSO and the Power Division.
In order to ensure representation of the Power Division on the PSO board, the Petroleum Division proposed that the nomination of Power Division secretary may be treated as “Power Division secretary/ representative not below BS-20”.
Keeping this in view, the Petroleum Division sought approval of the cabinet. The cabinet considered the summary and approved the proposal.
The cabinet directed the Petroleum Division secretary to submit a report, explaining reasons as to why services of Pakistan Railways and PNSC were not being utilised.
PSO officials said that the company is already transporting petroleum products through Pakistan Railways at present as per the ongoing agreement signed in 2017 for the transportation of two million tons of product per year (subject to demand placed by the Ministry of Energy/ generation companies/ IPPs).
PSO has been transporting petroleum products, mainly fuel oil, through railways for decades and is the only OMC utilising railways for POL transportation.
PSO used to transport over one million tons of fuel annually through railways. However, owing to the shift in the government’s policy, fuel demand has reduced significantly, which has severely affected railways transportation business for this product.
To support Pakistan Railways, PSO increased high-speed diesel transportation through the said entity.
It is pertinent to mention here that Pakistan Railways’ limited infrastructure poses a significant challenge as tank wagon loading facility is only available at Mehmood Kot and unloading facilities are only available at Chakpirana, Tarujaba and Sihala.
Product movement at these locations represents around 12% of PSO’s total diesel primary movement, however, the infrastructural constraints restrict the quantum of diesel movement.
PSO has gone one step ahead to give priority to the national flag bearer – Pakistan Railways, and enhance their transportation volumes by offering other OMCs the option of utilising PSO’s infrastructure at Tarujaba for the movement of diesel.
A committee comprising OMC officials and railways was also formed in 2019, however, no OMC is using PSO’s infrastructure for railways transportation.
Moreover, PSO, vide letter dated July 14, 2021 requested railways to initiate development and rehabilitation of their infrastructure at different locations for transportation of diesel through railways.
Regarding PNSC, officials said that PSO explored shifting transportation to PNSC on FOB under the Contract of Affreightment (COA) from year 2012-18, however, they faced the following issues.
First, PNSC does not take in-transit quality responsibility of product as per the law of the land ie Ogra rules.
In Pakistan, refined petroleum import cargoes have to be tested and cleared by HDIP at Karachi ports before offloading as per Ogra rules. In case of cargo quality failure, there is no recourse available to PSO but to de-berth and return the cargo.
There was also an issue of past delays in vessel provision and lack of commitment. There were more than 70 cases of delays in provision of vessels (2012 to 2018) by PNSC including January 2015 dry-out of petrol.
PNSC is not ready to assure timely provision of vessels and bear penalties and responsibility in case of delays for which PSO is fully covered under current cost and freight (C&F) imports.
The officials also said that as PNSC is acting as a middleman relying primarily on chartering, there is no actual foreign exchange savings as there is foreign exchange outflow of freight in US dollars while PNSC’s commission is added in cost of freight of the cargoes as administration expenses.