The new government has set the target of Rs 132 billion as petroleum levy in the upcoming federal budget for 2013-14, an increase of Rs 12 billion than last year’s target of Rs 120 billion and far higher than estimated collection of about Rs 100 billion in fiscal year 2013.

Setting aside the demand of the Washington-based International Monetary Fund (IMF) gradual phase-out of power subsidies, the economic managers initially have estimated power subsidy to set at Rs290 billion in budget for 2013-14 against Rs400 billion estimated to be released in FY13.

Thus, OMCs cash position is expected to be better in FY14 on the back eradication of circular debt by the new government, however, the Pakistan Muslim League-Nawaz government will face an additional subsidy burden.

As per sources, deemed duty for refineries will remain intact at 7.5 per cent on High Speed Diesel.

Government has reaffirmed its commitment for the resolution of circular debt by making one time payment of Rs500 billion and subsequently increase power tariff so further build up can be curtailed.

Expected injection of Rs500 billion to eradicate current stock of circular debt will provide much needed liquidity to the energy chain coupled with improved profitability. With the change on political canvas, numerous bottlenecks in the energy sector are likely to be removed. It is expected that liquidity problem for the energy chain to ease out during FY14.

In fiscal year, it is likely that country’s oil production will increase by 5 per cent, while gas production is expected to increase by 4 per cent. As per statistics, during 9MFY13, the sector’s oil production has shown an increase of 9 per cent while gas production has witnessed a minuscule decline.

Furthermore, steps to eradicate circular debt are likely to improve cash flows of state owned E&P companies (OGDC and PPL) and positively affect their exploration activity.

Budget will also reveal government FY14 dividend expectation from PSO that has been marred with circular debt. According to industry experts, PL and GST target would have no affect on OMCs or refineries as they are passing through items. Any increase in electricity tariff is likely to slow down the circular debt built-up.

According to experts, domestic GRMs (Gross refinery margins), a vital gauge for refinery sector profitability, has witnessed a slight resurgence in recent times while recent decline in global oil prices may lead to inventory loss for domestic refineries as well as reduce deemed duty in absolute terms.