Deregulating the oil sector — II

The two biggest risks are demand-supply manipulation, creating shortages and manipulate prices. Shortages can be countrywide by importing or procuring less or in inner locations. In OECD countries, there is a requirement of three months of storage, which is diligently maintained. Storage costs money both in terms of capex and operating and financial costs of maintaining inventories. All of this is passed on to the consumer and is reflected in prices. An optimum inventory requirement at various levels may have to be worked out and enforced; easier said than done. Competitive pricing pressures may resist storage costs.

International oil companies

Multinational oil companies like Shell, BP, Chevron, Exxon and others are withdrawing from low margin business of petroleum retail. One of the main reasons of winding up from Pakistan is, among others, this larger policy of withdrawal. One is not sure if, after deregulation, the purported argument of attracting foreign investment and companies would work. Good riddance — there is enough experience locally in the sector. Foreign investment is not free; it causes foreign exchange drain.

PSO

PSO (Pakistan State Oil), a government company, having a market share of almost 50-60%, is a major instrument of the writ of the government, all good and bad may be partially ascribed to this largest and listed company. Fortunately, being a listed company, there are many safeguards that are legally implemented. It is argued that due to the presence of PSO, price manipulation can be resisted, unless GoP becomes totally careless about it and its functionaries and government becomes beneficiaries of profiteering and loot. One has to be optimistic but the risk is always there. Besides, PSO privatization has been often talked about.

It is said that Oil Refineries (ORs) are leading the demand for deregulating the oil sector. Oil refineries are outdated and lack scale economies, which requires a minimum capacity of 200,000 bbl/day. Under various pretexts, ORs have been extracting concessions such as deemed duty. In the new proposed oil policy also, they insisted on tax holidays and deemed duty. In all fairness, ORs had to be protected like other industries by a reasonable margin, otherwise ORs cannot survive in the long run. It is a separate matter that under the recent market situation they made hay while sun shines. Gross margins crossed 40% as opposed to a normal of 15-20%.

Under deregulation, it is said that they expect higher margins and profits and have thus done away with erstwhile concession demands. Thus those who are dreaming of lower prices may be disappointed when reality arrives finally. On the other hand, this may not go uncontrolled. PSO may be a stabilizing market price leader. So long it is not privatised, it may continues to provide this function. In India, there is deregulation but market is controlled by three large public-sector companies. There is almost no difference in prices among the three public-sector companies, indicating some guidance or consensus-seeking process violating the spirit of true competition. The same may happen here with more frequency and intensity.

Is competition delivering in advanced countries — yes and no?

Will Petroleum prices come down under deregulation in Pakistan? What is the evidence from countries having open markets? Are prices being really determined there by real competition? Broadly and to a large extent; yes. There is considerable evidence of consensual and not a really competitive pricing. There may be price leaders which signal the sector if not outright conspiracy based price setting. Petrol pumps are charging more than they should. Let us quote from a recent U.K. publication:

Only one in 10 petrol stations are charging a fair price for fuel and small local forecourts are giving drivers a better deal than the big boys, new findings have shown. Recent falls in the oil price should mean that price at the pumps should be at least 10p-a-litre cheaper, around 174p-a-litre for petrol, and much lower than the country’s average 188p-a-litre.

https://www.thesun.co.uk/money/19275630/uks-cheapest-petrol-station-try-small-forecourts/amp

Independent petrol pumps

There are a number of business models governing the petrol distribution and selling business. Normal business models are: 1. COCO — oil Company Owned and Company Operated; CODO — Company Owned and Dealer Operated and DODO — Dealers Owned ad Dealers Operated. First and second kind of business models have a low prevalence due to investment amount and risks. Mostly, the DODO business model is practiced throughout the world. Under DODO, dealers are bound to buy from the OMCs (Oil Marketing Companies) and observe quality and safety practices as well. Dealers benefit from the reputation of OMCs and their infrastructure and stability of supply.

Independent petrol pumps (IPPs) are a new innovation in the petroleum sector. IPPs are independent of any Oil Marketing Company (OMC), as the name implies; they can buy petroleum from any source. They have low overheads. In Europe, there is a 20% market share of IPPs. In nuevo capitalist countries like Bulgaria, IPPs market is even higher at 64%; it is 56% in Czech Republic. The market share and acceptability of IPPs is on the rise, as they invariably sell at a lower price than OMC-related petrol pumps. OMCs in the free markets charge a lot of overheads in the form of QA, safety and royalty, etc., but not in Pakistan. In Pakistan, OMCs’ and dealers’ margins are fixed by the regulator. It would be useful to quote from a recent article from a UK publication on the subject:

“Independently owned fuel stations are more likely to offer fairer pricing that major retailers, according to the RAC….just 10% (407) of a sample of more than 4,500 UK forecourts are charging a ‘fair’ price for petrol and diesel, with the vast majority of these being independently owned sites rather than major fuel retailers……Weekly wholesale petrol prices have fallen by a massive 17p a litre, from a weekly average of around 152p at the start of June to just 135p this week. Yet average pump prices have reduced by a paltry 4p.”https://www.fleetnews.co.uk/news/car-industry-news/

In a lighter vein, our IPPs in Pakistan are the illegal petrol pumps. Reportedly, these have been closed down — difficult to believe? There were (are) 1,556 illegal petrol pumps (legal ones 8,000 +) which have all the business model characteristics of IPPs except that these are illegal and engage in many unhealthy practices. Can these be organized under an IPP scheme under special Ogra (Oil & Gas Regulatory Authority) rules? IPPs need not be restricted to these illegal pumps and bring bad name to the concept of IPPs which is expanding almost everywhere. IPPs are sometimes organized under voluntary business association or group bringing and promoting quality and image. Existing or a new petrol pump may be given the freedom and flexibility to become IPP or come out of it under rules and safeguard. Special Petrol Pumps for Motorcycles, which may have a price sensitive, may also be organized under IPPs. Options may be many.

Conclusion

There are varying opinions and positions of stakeholders on the subject of deregulating the oil sector. Some people are skeptic of the deregulation. Businessmen and professionals associated with oil sector generally lament that the sector could not expand due to deregulation. They admit that prices and profits may increase in the short-run but in the long run supply side will improve and industrial development will take place. Governments have been confused and even scared as the choices are put before them.

Open markets are the way to go forward in the world. However, petroleum is too risky and too large a sector. Open market is not a jungle world. There are rules that have to be made and abided by the sector. We have a Competition Commission of Pakistan (CCP). Unfortunately, however, its role has been marred by a parallel judicial process which undoes or delays the determinations and orders of this regulator. CCP has organisational problems as well. Ogra may have to be remodeled as well. In any case, there is considerable overlap and confusing roles issues. OGRA has been empowered under recent regulations.

As a World Bank report says, that while deregulating, new regulations have to be made. Considerable policy framework may have to be done before opening the floodgates of the open market. It may cause anarchy and market instability. Under the current circumstances, when there are so many challenges, especially, in the petroleum and energy sector, more risks and challenges cannot be added. However, there are those who say that the time window is always small in Pakistan usually.

(Concluded)

(The writer is former Member Energy, Planning Commission, author of several books on the energy sector)

The following table classifies 97 countries depending on

which of the three main retail fuel pricing methods they

apply. We used data from ministries, agencies and

market analyzes to categorize the countries.

======================================================================================

COUNTRY Retail Prices COUNTRY Retail Prices

======================================================================================

Afghanistan Market determined South Korea Market determined

Albania Market determined Spain Market determined

Andorra Market determined Sweden Market determined

Argentina Market determined Switzerland Market determined

Australia Market determined Taiwan Market determined

Austria Market determined Thailand Market determined

Bosnia and Herzegovi Market determined Turkey Market determined

Brazil Market determined Uganda Market determined

Bulgaria Market determined Ukraine Market determined

Canada Market determined United Kingdom Market determined

Chile Market determined USA Market determined

Croatia Market determined Belgium Price ceiling

Cyprus Market determined Cape Verde Price ceiling

Czech Republic Market determined China Price ceiling

Denmark Market determined Honduras Price ceiling

El Salvador Market determined Israel Price ceiling

Estonia Market determined Kazakstan Price ceiling

Finland Market determined Kenya Price ceiling

France Market determined Luxembourg Price ceiling

Georgia Market determined Macedonia Price ceiling

Germany Market determined Malawi Price ceiling

Greece Market determined Mexico Price ceiling

Guatemala Market determined Panama Price ceiling

Hong Kong Market determined Tanzania Price ceiling

Hungary Market determined Vietnam Price ceiling

Iceland Market determined Algeria Fixed price

India Market determined Angola Fixed price

Ireland Market determined Azerbaijan Fixed price

Italy Market determined Belarus Fixed price

Jamaica Market determined Bolivia Fixed price

Japan Market determined Costa Rica Fixed price

Kyrgyzstan Market determined Dominican Republic Fixed price

Latvia Market determined Egypt Fixed price

Lithuania Market determined Fiji Fixed price

Moldova Market determined Ghana Fixed price

Netherlands Market determined Indonesia Fixed price

New Zealand Market determined Jordan Fixed price

Nicaragua Market determined Kuwait Fixed price

Norway Market determined Malaysia Fixed price

Peru Market determined Malta Fixed price

Philippinnes Market determined Mauritius Fixed price

Poland Market determined Nepal Fixed price

Portugal Market determined Pakistan Fixed price

Romania Market determined Slovenia Fixed price

Russia Market determined South Africa Fixed price

Serbia Market determined Sri Lanka Fixed price

Singapore Market determined Swaziland Fixed price

Slovakia Market determined Zambia Fixed price

======================================================================================

==============================

Top Petrol Stations in Europe

by brand

==============================

Rank Brand Nr of stations

==============================

1 Total 8,250*

2 BP 8,200

3 Esso 6,050e

4 ENI 5,411

5 Shell 5,392e

6 Avia 3,000

7 Orlen 2,836

8 Aral 2,400

9 OMV 2,100

10 Lukoil 2,000

==============================

2019 data is the latest available

==============================

*2018 figure

==============================

=======================================

Top Petrol Stations

by country

=======================================

Rank Country Nr of stations

=======================================

1 Italy 20,800

2 Germany 14,459

3 Spain 1 1 ,609

4 France 1 1 ,068

5 UK 8,442

6 Poland 7,665

7 Greece 6,1 OO

8 Netherlands 4,142

9 Czech

Republic 3,991

1 O Switzerland 3,667

1 1 Bulgaria 3,200

1 2 Portugal 3,1 14

1 3 Belgium 3,096

1 4 Romania 2,200

201 8 data is the latest available

=======================================

===================================================================

2005-06 2006-07 2007-08 2008-09 2009-10

===================================================================

IOCL 40.8 44.2 44.95 46 46

BPCL 18.1 18.8 19.28 19.7 19.5

HPCL 16.2 16.3 17.11 17.8 17.5

Other PSUs 5.9 1.8 1.75 1.6 1.4

Private Parties 19 18.9 16.91 14.9 15.6

Total % 100 100 100 100 100

===================================================================

Source: Petroleum Planning and Analysis cell, 2010

===================================================================

===============================

Number of Petrol Pumps Pakistan

===============================

PSO 3500

Cynergico/Byco 982

Total 800

Shell 756

others 1462

——————————-

Total 7500

——————————-

illegal 1500

===============================

Source: Wiki,BR,PPDA