POL prices cut won't hurt OMCs, refineries' profit

LAHORE - Reduction in petroleum prices, as is directed by the Supreme Court, the Oil Marketing Companies and refineries profit will not be affected since their margins have been linked to international oil prices.
However, the likely cut in oil rates in the country would lower govt’s tax collection, as the govt, apart from normal GST, is presently pocketing around Rs 11b a month under the head of Petroleum Development Levi on oil products. It is to be noted that a special commission formed by the Supreme Court of Pakistan has finally directed the government to reduce domestic oil product prices on war footings. Besides, this the committee has also raised some reservations over the refinery pricing formula.
Experts commenting on the issue said that if government reduced the fuel prices its impact would be neutral on Oil Marketing Companies and refineries because their margins are linked to international product prices.
The experts, however, suggested cautious stance for the investors, who have invested in the refinery sector since there has been a debate going on to rationalize refinery margins.
Farhan Mehmood, an energy analyst, observed that furnace oil, which retained the major chunk of oil sales, is currently witnessing a higher demand from power plants due to gas and hydel-electricity shortages. As a result, its sales rose by 5 per cent to 6.7 million tons during 10MFY09.
According to latest statistics, Pakistan reliance on FO has increased substantially over the last 2-3 years as 32% of the electricity is now generated through FO, compared to 16% 3 years ago.
He believed the FO demand will surge once rental power plants come online in the next 1-2 years. According to our estimates, 3,000MW of rental power plants would require 2.8-3.3mn tons of FO. This paints a favorable landscape for OMC’s in general and PSO in specific since it holds 87% share in FO marketing.