Pakistan oil regulator in crosshairs of refineries, marketing firms over ‘take or pay' clause

Arab News

11-03-2025

ISLAMABAD: The Oil and Gas Regulatory Authority (OGRA) said this week it would mediate between refineries and Oil Marketing Companies (OMCs) to reach a 'mutually agreeable' resolution on differences over the authority's proposal to impose a 'take or pay' clause in purchase agreements with refineries, which OMCs argue would unfairly burden them.
Pakistan has five oil refineries that process crude oil to produce refined petroleum products. Around 30 OMCs are licensed by the Oil and Gas Regulatory Authority (OGRA) to ensure the availability of petroleum products in the country.
A conflict emerged between local oil refineries and OMCs over OGRA's proposal to include a take or pay clause in Sales Purchase Agreements (SPAs), with OMCs strongly opposing the move fearing liquidity crises, supply disruptions and potential market exits. Under the new contracts, oil marketing companies would have to pay at least cost to refineries if they are unable to pick up their allocated quantities of product.
The chairman of the Oil Marketing Association of Pakistan (OMAP), a body representing two dozen small and medium-sized Oil Marketing Companies (OMCs), wrote a letter to OGRA Chairman Masroor Khan this week to formally oppose the proposed clause, saying it would serve the interests of refineries and large OMCs at the expense of smaller players, further consolidating the monopolistic control of big fish in the oil sector.
OGRA spokesperson Imran Ghaznavi told Arab News refineries and OMCs had been asked to enter into written sale and purchase contracts.
'The take or pay clause means if an OMC does not buy the contracted quantity, it will still have to pay the purchase price or a penalty and vice versa,' he said.
OMAP chairman Tariq Wazir Ali told Arab News on Monday the body had 'expressed our grave concerns regarding the proposed imposition of the take or pay clause in the SPAs between refineries and OMCs as it poses significant risks to the financial sustainability of OMCs.'
He said imposing a take or pay clause would hamper competition, discourage new entrants, and ultimately harm the overall efficiency of the petroleum supply chain. He also said the proposed clause overlooked refineries' opportunistic behavior as they often withheld supply when prices were expected to rise, forcing OMCs into costly imports, and offloaded maximum stock when prices fell, causing financial losses to OMCs.
Given these circumstances, it was unreasonable to expect OMCs to bear inventory losses while refineries remained insulated from the market's volatility, Ali said.
'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,' he added, urging OGRA to convene an inclusive consultative meeting with equal representation of all stakeholders, including small and medium OMCs, before finalizing a decision.
'MUTUALLY AGREEABLE CONTRACTS'
The conflict has emerged after five leading oil refineries wrote a letter to the OGRA chairman, arguing that OMCs had frequently failed to pick up agreed quantities of High-Speed Diesel (HSD) and Motor Gasoline (MOGAS), which had disrupted refinery operations and threatened supply chain stability. The refineries said while they maintained commercial agreements with OMCs, it was OGRA's responsibility to enforce compliance with these contracts.
The refineries pointed to Rule 35(g) of the Pakistan Oil (Refining, Blending, Transportation, Storage, and Marketing) Rules 2016, which mandates that local production must be prioritized before allowing imports. Keeping this in mind, they have supported OGRA's suggestion of introducing a take or pay clause to ensure product uplift but say it should be implemented through mutual agreement and strict regulatory oversight.
'The engagement sessions with the OMCs will start soon,' OGRA spokesperson Ghaznavi said, 'and OGRA will, in the best national interest and for achieving efficiency in the oil supply chain, mediate between refineries and OMCs for a mutually agreeable sale and purchase contracts.'