Government Increases Petroleum Levy on Petrol, Diesel: Positive for OMCs, Negative for E&Ps

What the petroleum levy change means

Pakistan's government recently announced an increase in the petroleum levy on both petrol and high-speed diesel. The levy on diesel was raised by PKR 6.57 per litre, bringing it to PKR 79.54 per litre, while the levy on petrol saw a smaller increase of PKR 0.39 per litre, reaching PKR 66.64 per litre. Notably, the levy on kerosene oil remained unchanged. This decision comes despite a reported fall in international oil prices. Instead of passing on the benefit of lower global crude costs to consumers through reduced retail prices, the government opted to keep petrol and diesel prices stable for the upcoming week, effectively absorbing the benefit of cheaper international oil through the higher levy.

Why it matters for oil and gas stocks

This policy decision has a differential impact across the oil and gas sector. For oil marketing companies, which operate on regulated margins, the stability of retail prices is generally favourable. When international crude prices fall, OMCs typically face inventory losses if retail prices are subsequently reduced, as they sell fuel purchased at higher costs. By keeping retail prices unchanged, the government's move helps these companies avoid such losses. Conversely, for oil and gas exploration and production (E&P) companies, the underlying fall in international crude prices is a key driver, as their wellhead prices (the price they receive for crude oil and natural gas extracted from wells) are linked to global benchmarks. A decline in international crude prices generally translates to lower revenues for E&P firms.

Which stocks, and why

For oil marketing companies, the government's decision is generally positive. Companies like Pakistan State Oil, Attock Petroleum, and Shell Pakistan benefit from the stability in retail prices. Their regulated margins, which are a fixed component of the retail price, remain intact. More importantly, by not reducing retail prices in line with falling international crude, the government's action prevents these OMCs from incurring inventory losses on fuel stocks purchased at higher prices. This helps maintain their profitability in the short term. This impact is considered medium influence and short longevity, with a positive direction, as it directly affects their operational profitability by mitigating a potential negative.

On the other hand, the news explicitly mentions a fall in international oil prices, which is a negative development for oil and gas exploration and production companies. Firms such as Oil & Gas Development Company, Pakistan Petroleum, Pakistan Oilfields, and Mari Petroleum derive a significant portion of their revenue from the sale of crude oil and natural gas, with prices often indexed to international benchmarks. When global crude prices decline, their wellhead prices also tend to fall, directly impacting their top-line revenue and profitability. This is an indirect impact via the crude-oil driver, with a negative direction, medium influence, and short longevity, reflecting the immediate effect of lower commodity prices on their earnings.

What to watch

Investors should closely monitor the trajectory of international crude oil prices, as these will continue to be a primary determinant for the E&P sector. For OMCs, the government's weekly fuel price review and its approach to adjusting the petroleum levy in response to global price movements will be crucial. Any future decisions to pass on international price changes to consumers, or further adjustments to the levy, could alter the current dynamics for these companies. The stability of regulated margins for OMCs will also remain a key factor to watch.