The government has decided to shelve plans for a long-term oil import deal with Russia under a government-to-government (G2G) arrangement and has allowed refineries to strike direct commercial agreements with companies of the European nation.
Earlier, Pakistan and Russia agreed to set up a Special Purpose Vehicle (SPV) with the objective of crude oil imports as part of a G2G agreement. However, the establishment of SPV, whose task was to import oil and then ship it to local refineries for processing, suffered delays.
Following the recent visit of a Pakistani delegation to Moscow, it was decided to put the plan of setting up the SPV on the back burner.
Earlier, a vessel carrying Russian oil was brought by Pakistan Refinery Limited (PRL), which took around one month to reach Pakistan.
“The import of Russian crude via SPV involves high risks,” an official said, adding that was why Pakistan’s government decided to abandon the plan.
Private-sector refinery Byco also imported an oil consignment of 100,000 tons from Russia. It was another reason that prompted the government to stay away from any G2G deal.
According to sources, Pakistan’s oil refineries were holding direct talks with Russian companies for crude oil imports purely on a commercial basis.
Before the delegation left for Russia on October 10, Pakistan had decided to negotiate a long-term oil supply agreement while remaining within the price cap of $60 per barrel.
Pakistan wanted Russia to set free-on-board (fob) price at $60 per barrel in the long run. Fob means the actual price charged at port.
Later, the Petroleum Division dropped the proposal and decided that local refineries would import crude oil from Russia on commercial terms without involvement of the government.
Russia also paid the freight on shipment of the cargo of 100,000 tons that took a month to reach Pakistani waters. PRL processed that crude, which was cheaper by $7 per barrel.
The United States has already given an indication that it will allow Pakistan crude oil import from Russia at the price cap announced by the rich Group of Seven (G7) countries and the European Union last December.
Washington and its allies imposed the price ceiling as they felt that Moscow was pumping its oil revenue into the war with Ukraine. The cap was aimed at curbing Russian revenues but at the same time avoiding disruption to oil supplies.
According to experts, oil imports from Russia were like a gamble as no due diligence had been conducted by the previous government. They called it luck when PRL made a profit of $7-8 per barrel on Urals crude import from Russia.
Experts emphasise that Pakistan can benefit from Russian crude if it decides to make regular purchases. The oil import by PRL was just a test case to examine the economics of Russian crude.
Arabian crude oil produces 45% of high-speed diesel (HSD) and 25% of furnace oil whereas Russian crude is believed to produce 32% of HSD and 50% of furnace oil. It came when PRL blended 50% of Russian oil with an equal ratio of Arabian crude imported from the Gulf market.
Later, PRL blended 35% of Russian crude with 65% of Arabian oil, which gave better results as it produced a lower quantity of furnace oil.
There is still some demand for furnace oil in Pakistani market, therefore refineries could use Russian oil by blending it with Arabian crude. Otherwise, there would have been no market for Russian oil owing to production of a higher quantity of furnace oil.
Pakistan has so far been relying on the Middle East for oil supplies but the import of Russian oil has opened an avenue for diversifying energy sources.
Published in The Express Tribune, October 18th, 2023.