Pakistan's oil marketing companies (OMCs) and refineries are coming under mounting financial and operational pressure from repeated changes in the high-speed diesel (HSD) pricing mechanism, with the industry warning that another downward intervention could make diesel imports and crude procurement commercially unviable, lower refinery utilisation and ultimately disrupt petroleum supplies. Industry officials say the problem already exists under the current capped HSD pricing arrangement, which does not adequately reflect the actual cost of procuring imported crude and finished diesel cargoes.
Any further reduction in the pricing benchmark could deepen the mismatch and put both OMCs and refineries, the two critical components of the downstream petroleum supply chain, under greater stress. The Oil Companies Advisory Council (OCAC), in a September 8 letter to Energy Minister (Petroleum Division) Ali Pervaiz Malik, expressed deep concern over repeated changes made to the HSD pricing mechanism in recent months, the latest of which was introduced on August 20.
The council said reports are now circulating that the government is contemplating another intervention by reducing the HSD crack ceiling from $41.89 per barrel to $30 per barrel, potentially resulting in a further reduction of approximately Rs18-20 per litre in the domestic HSD price. For OMCs, a major concern is the widening gap between the import cost recognised in the pricing formula and the price at which physical diesel cargoes are actually available in the international market.
According to the OCAC, the existing HSD pricing formula reflects an Aramco premium of minus $2 per barrel for October, whereas physical cargoes are being offered and booked at premiums ranging between $15 and $20 per barrel. The council said this is already creating a significant challenge in booking October cargoes. Industry officials said the mismatch means OMCs could be required to procure diesel at substantially higher prices than the costs recoverable through the domestic pricing mechanism.
If importers are unable to recover the actual landed cost of cargoes, their ability and commercial incentive to arrange sufficient supplies could be seriously affected. Refineries face a similar challenge in procuring crude, with imported-crude refiners saying even the capped HSD price does not fully cover sourcing costs as suppliers demand higher premiums. Frequent changes to the pricing formula add to the uncertainty, making it difficult for refiners to assess whether crude cargoes booked weeks in advance can be recovered through product sales.
Industry officials warned that this uncertainty is putting refinery utilisation at risk. If imported crude becomes uneconomical, refineries could be forced to cut crude procurement and lower their throughput rather than increase production to meet seasonal demand. The OCAC has itself cautioned that an abrupt reduction in the HSD price could make high-premium cargoes uneconomical and force refineries to reduce throughput.
Such a development could create a double pressure on the country's fuel supply chain. Lower refinery runs will reduce domestic production of diesel and other petroleum products, requiring OMCs to arrange additional imports at a time when imported HSD cargoes are themselves attracting exceptionally high premiums and may not be fully covered by the pricing formula. Industry officials stressed that the issue therefore goes beyond the profitability of individual OMCs or refineries.
OMCs require recovery of realistic import costs to continue booking cargoes, while refineries need predictable pricing to procure crude and maintain economically viable utilisation rates. Pressure on either segment could ultimately translate into supply constraints for consumers. The OCAC also pointed out that OMC margins were last revised in September 2023 and have remained unchanged despite persistent inflation, escalating operating and compliance costs and increasing regulatory obligations.
It has sought the immediate notification and implementation of the pending Rs1.22-per-litre increase in OMC margins. At the same time, the refining sector is preparing investments of approximately $5-6 billion under the Brownfield Refining Policy. The council said investments of this magnitude require policy consistency, pricing predictability and financial stability.
The industry maintains that it has consistently supported the government during difficult periods but cannot repeatedly absorb the financial cost of policy interventions. The OCAC has urged the government to ensure consistency and continuity in the fuel pricing formula.