Oil bonded warehouse policy’s impact on economy

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ISLAMABAD:

Recently, an oil bonded warehouse policy has been announced. This is one of the best and useful policies that one would have seen in recent years.

Petroleum Division is the author of this policy along with input from relevant agencies like the Federal Board of Revenue (FBR), Customs and commerce ministry, who deserve accolades.

The policy had been under discussion for the past few months and now it stands as an approved gazette policy. Bonded warehouse policies have been around for a long time, which were applicable to many sectors. However, for the petroleum sector, it is a new development.

Under this policy, an eligible importer or manufacturer can import the product or material without paying customs duty and sales tax and store it in a bonded warehouse, which is under the supervision of Customs authorities.

Also read Oil storage, trade policy sparks controversy

When the owner needs it for sale or use, he will pay the taxes and duties and get his items released, partly or wholly.

For the oil sector, it is a new and happy development. We will discuss here its salient characteristics and impact on the sector and the economy.

It is known that Pakistan is suffering from multifarious problems related to economy, finances and energy prices and supply. Energy is an important input under all circumstances, good or bad. It costs a lot of money both for the country and companies to import and for users to buy.

Energy supply chain has to function smoothly and any discontinuity is usually costly and disrupting, resulting in all kinds of implications.

Energy and especially oil storage form an important part of energy security policy in almost all countries, developing or developed. It is a separate issue that developed and rich countries keep large storages.

IEA recommends or requires its member countries to keep oil storage for three months. It is obvious that poor developing countries cannot have that much storage.

In Pakistan, the regulatory requirement for petroleum products storage is 20 days. In financially hard days, like these days, it may not be easy to maintain even this volume of storage.

Even if foreign exchange is available, one would like to spend it in other areas as well. In this context, the oil bonded warehouse policy is a welcome step.

Large international trading companies and countries keep storages of crude oil as well as petroleum products like petrol, diesel, kerosene and jet petroleum. When supplies are more than demand or prices are low, they store these products.

To reduce risks, these companies would like to diversify storage locations, especially, in areas where there is a large market and which are close to transport hubs.

If a country allows, encourages and facilitates oil storage, they are likely to utilise the facility. They may also sell out of storage locally or even export it. Thus, their capital is not tied up and is usefully utilised.

Host country gets the benefit of storage availability without involving huge finances. A company can build its own storages or hire the available ones. It would bear storage costs and charges it to customers.

One can readily see how such a facility and activity can boost energy security and economic activity. Storage building activity boosts the engineering industry and employment. It also develops the wholesale oil market.

It can boost investment in oil refining and trade and buying local companies or having JVs with them. Consequences are numerous and multifarious.

Pakistan consumes 17-22 million tons of petroleum products and crude oil per year. It has varied from $12 to $20 billion in the past depending on prices and quantity. One month of storage would involve $1 to $2 billion.

Foreign oil companies are going out of Pakistan for a variety of reasons. However, it is from retail operations. Wholesale market operations will remain attractive.

In India, the retail oil market is occupied by three public sector companies. Foreign companies do not come in there. However, Adnoc and Saudi companies have built storages there, although of crude oil.

India is self-sufficient in finished petroleum products. However, it imports most of its crude oil requirements, hence the international and regional interest in storage.

Admittedly, as oil is a regulated sector in Pakistan, there are complexities of sales and pricing. There are issues of financial and physical outflows. This requires a comprehensive policy.

Such a policy has been prepared recently. It appears that most of the issues have been taken care of. Nothing is perfect. There may be some dangling issues, which may be taken care of in consultation with stakeholders.

However, there are some stakeholders which are more of a vested interest, who would like to block market expansion and entry of newcomers. They have been lobbying against it.

In the oil sector, people have been talking of mafias, rightly or wrongly. But if they belong to public sector companies, it should be a matter of concern for the government. But unfortunately that those very circles, which are lobbying for deregulating and opening up of the oil sector, are the ones who are opposing the introduction of this policy.

In the long run, if market expands, most players benefit and share the fruits of expansion. In the short run, there may be a need for adjustments. That is what market is.

The policy should be able to attract Middle Eastern and other oil companies. It is an ideal project for SIFC. It is hoped SIFC would be able to consider it in its portfolio.

The writer is former member energy, Planning Commission and author of several books on the energy sector

 

 

Published in The Express Tribune, September 11th, 2023.

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