The oil marketing companies (OMCs) and petroleum dealers have demanded withdrawal of the decision of fixed margins on petroleum products and have asked for the restoration of the previous mechanism, where margins were calculated in percentages ranging from 3.5% to 4% rather than in rupee terms.

Analysts see high chances of materialisation of the increase in margins rather than reverting to the previous formula, though timing of the actual decision was uncertain.

According to a BMA Capital research note, rumours surrounding the issue suggest the increase will be in the vicinity of Rs0.5 to Re1 per litre for motor spirits (MS) and Rs0.5 to Rs0.8 per litre for high-speed diesel (HSD). “

We believe that the hike will be lower as it will be very difficult for the outgoing government to approve any hefty increase just two months ahead of the elections,” said BMA Capital analyst Furqan Punjani.

Following the recommendation of the judicial commission on pricing of petroleum products, the Economic Coordination Committee (ECC) approved fixed margins for OMCs and dealers. The mechanism was implemented from December 1, 2010.

Petroleum products traders used to get commissions and margins as a percentage of the product price since 2002. The variable margins were, however, replaced by absolute margins following Supreme Court’s intervention after protests by consumers over skyrocketing fuel prices and profits of the oil sector.

Presently, the dealers are getting Rs2.3 per litre on petrol and Rs2.2 on high-speed diesel (HSD) as commission. On the flipside, margins of the OMCs are Rs1.58 per litre on petrol and Rs1.75 per litre on HSD.

The industry demands margins revision as rupee devaluation, 14% since last margin revision in August 2011, added to the cost of local and foreign players. Secondly, it lowered the dollar profitability of foreign players by a similar amount. Moreover, higher inflation and adverse tax regulations hurt earnings of small players.

This led some foreign players to consider winding up their businesses in Pakistan.According to a senior official, the Secretary Petroleum Abid Saeed held a meeting with the representatives of OMCs and dealers, on Wednesday, who sought restoration of the former oil pricing formula.

“This is just an initial consultation and no conclusion has been reached yet,” an official said, adding that the OMCs and the dealers said during the meeting that cost of doing business is unbearable in the current scenario. They proposed that margins should be linked with the rate of inflation in case the government does not want to restore the percentage formula.

In 2012, US-based Chevron operating under the brand name Caltex in Pakistan announced its exit from the market, where brokerage houses cited squeezing margins as the reason despite consistently climbing petroleum product prices in the country. “From a government’s perspective, the exit of Chevron Pakistan is a wakeup call,” said Foundation Securities analyst Fawad Khan.

Since the pricing formula was converted to fixed margins, OMCs and dealers had been pressing the government to withdraw its decision. The petroleum minister had earlier forwarded the proposal to the ECC for approval, but progress was stalled due to hearings on the compressed natural gas (CNG) and oil prices case.

The judicial commission had also recommended abolishing the 7.5% deemed duty on HSD, which was not heeded by the government. Resultantly, the oil refineries have generated over Rs150 billion on account of deemed duty since 2002.

Since the industry’s focus was primarily on diesel and petrol, companies with higher contribution in their total volume mix will drive the maximum benefit if margins are revised upwards. With the Pakistan State Oil, Attock Petroleum and Shell Pakistan drive 42%, 52% and 80% volumes sales from these two products respectively.

Analysts believe Shell and PSO will be the key beneficiaries of future upward margin revision. PSO is the largest player and has a 55% cumulative share in HSD and MS markets.