Oil marketing companies warn of collapse over forced refinery quotas

• Reject ‘Take or Pay’ clause, say it benefits refineries at their expense
• Move comes as fuel prices expected to see major cut this weekend
• Under new rule, OMCs must buy assigned fuel quotas from refineries or pay penalties
• Clause aimed at reducing imports, protecting local refining capacity

ISLAMABAD: Indicating a substantial cut in prices of petroleum prices by this weekend, the oil marketing companies (OMCs) have opposed the forced signing of ‘Take or Pay’ agreements with local refineries, arguing that the clause would unfairly burden them with financial risks.

The dispute comes amid reports that price of petrol could decrease by Rs12 per litre and of high-speed diesel (HSD) by Rs8 per litre, as estimated by Tariq Wazir Ali, chairman of the Oil Marketing Association of Pakistan (OMAP) — a body representing two dozen smaller and medium-sized OMCs.

OMAP has formally opposed the new ‘Take or Pay’ clause proposed by the Oil and Gas Regulatory Authority (Ogra), under which OMCs would be required to either lift their allocated petroleum product quotas from local refineries or pay penalties for failing to do so.

“In such a situation, it is unreasonable to expect OMCs to bear inventory losses while refineries remain insulated from the market’s volatility,” Mr Ali said in a letter to the chairman and members of Ogra, and the petroleum division.

He argued that the new arrangement would shift the entire burden of market price fluctuations onto OMCs, many of whom are already struggling financially.

Ogra has recently asked all the OMCs to sign fresh sale and purchase agreements (SPAs) with local refineries under ‘Take or Pay’ conditions, which meant that if they are unable to uplift their allocated quantities from refineries for any reason, they should pay at least the cost of those quantities.

Ogra introduced the new mechanism following repeated complaints from local refineries that excessive fuel imports were undermining domestic production, leading to reduced capacity utilisation and financial losses. Some OMCs and refineries had accused Ogra of favouring a specific OMC by approving petrol and diesel imports despite sufficient local stock availability.

As the criticism mounted, Ogra proposed that a new ‘Take or Pay’ clause should be introduced in SPAs between refineries and OMCs. Interestingly, the ‘preferred OMC’ is also a member of the OMAP.

The OMAP expressed “grave concerns regarding the proposed imposition of the ‘Take or Pay’ clause in the SPAs between refineries and OMCs”, Mr Ali said, adding that the proposal posed “significant risks to the financial sustainability of OMCs already struggling under the burden of multiple unresolved issues, awaiting redress from the regulator for an extended period”.

The association termed it “extremely concerning that Ogra, as the custodian of fair regulatory practices, was considering implementing such a binding clause without taking into account the ground realities and the precarious financial conditions of OMCs”.

The ‘Take or Pay’ arrangement will only serve the interests of refineries and large OMCs at the expense of smaller players, further consolidating the monopolistic control of the big fish in the oil sector. Such a step will severely hamper competition, discourage new entrants and ultimately harm the overall efficiency of the petroleum supply chain, the OMAP warned.

It claimed that the proposed clause did not address the critical issue of refineries’ opportunistic behaviour, which had been a long-standing grievance of OMCs and alleged it was a well-known fact that refineries routinely refuse to supply the product when price increases are anticipated, thereby forcing OMCs to resort to costly imports.

Conversely, when prices are expected to decline, refineries attempt to offload maximum stocks to OMCs, resulting in financial losses for the OMCs. This practice not only distorted the market but also violated the principles of equitable treatment among stakeholders.

The OMAP also lamented that another critical factor impacting the market through the persistent cross-border influx of petroleum products could not be controlled by the government agencies and Ogra for a prolonged period.

“This uncontrolled influx has severely dented the demand for locally sourced products, further amplifying the financial hardships faced by OMCs. Any regulatory framework must take this reality into account to ensure fair competition and protect the legitimate interests of all stakeholders,” the OMCs demanded.

The OMAP also claimed that imposing a binding obligation on OMCs to uplift pre-committed quantities without addressing the exploitative practices of refineries will only exacerbate the current imbalance.

The association demanded that “the proposed mechanism must be accompanied by a robust enforcement framework ensuring that refineries adhere to the same rules of fair play and supply commitments, regardless of market price trends. Otherwise, this one-sided arrangement will unfairly shift the entire burden of market volatility onto OMCs, many of whom are already on the verge of financial collapse”.

It said that forcing smaller OMCs, operating on thin margins, to uplift committed quantities without regard to market demand will significantly increase their financial exposure, potentially leading to defaults, supply disruptions and eventual market exits. This will not only undermine the government’s objective of promoting competition but will also create supply bottlenecks, jeopardising energy security.

Meanwhile, all five refineries in the country have backed the ‘Take or Pay’ condition, stating that the clause is necessary to protect domestic refining capacity. However, the refineries also stressed that any changes to supply agreements must be agreed upon by all stakeholders and enforced through a clear regulatory mechanism monitored by Ogra.

Published in media, March 10th, 2025