Energy crisis: Pakistan to seek free oil from Kuwait

Pakistan to request Kuwait to supply half of diesel for free, extension of credit period on remaining 50 per cent.

ISLAMABAD: A day after authorities refused to increase domestic oil prices in line with the international market, President Asif Ali Zardari is scheduled to visit Kuwait to find a solution to the matter - which may include seeking free oil from the Gulf state.

The president, who on Friday flew to Kuwait on a two-day visit, will request the Amir of Kuwait, Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah, to supply half of the diesel fuel it exports to Pakistan for free while extending the credit period on the remaining 50 per cent, according to sources at the petroleum ministry.

In 1998, Pakistan was granted a similar facility by Saudi Arabia in the aftermath of the country’s nuclear weapons tests, which resulted in economic sanctions from the United States and Europe. In 2008, however, the government’s attempts to seek such a facility from Iran were rebuffed.

The government faces a severe financial crunch, since international donor agencies have refused to grant any more aid to Pakistan until the government undertakes drastic reforms to the energy sector and tax collection mechanisms. The $11.2 billion loan facility from the International Monetary Fund (IMF) has been put on hold because of the government’s failure to deregulate energy prices – including oil – and levy the value added tax.

For the past three months, the government has refused to increase domestic retail oil prices owing to the growing unpopularity of the PPP-led administration, which feels that increasing fuel prices would be unpopular. During this time, international oil prices have risen by 16 per cent and are expected to continue rising as unrest in the Middle East continues. The decision to not increase oil prices has already cost the government Rs11 billion and is expected to take that cost to Rs24 billion in forgone petroleum taxes over the coming month owing to the president’s decision to hold domestic prices steady, despite the international rise.

Kuwait is the third largest exporter of oil to Pakistan, following Saudi Arabia and the United Arab Emirates. Imports from Kuwait constitute 19 per cent of the country’s total oil imports.

Pakistan imports roughly 3.4 million tons of diesel oil annually from Kuwait, worth $2.5 billion, approximately three-fourth of total domestic consumption. If Kuwait agrees to provide half of its exports for free, it will cost approximately $1.2 billion, at current rates, in forgone revenue to the government-owned Kuwait Petroleum Company.

According to an existing agreement that will expire on December 31, 2011, Pakistan imports oil from Kuwait on two months’ deferred payments. Islamabad has sought a 30 day extension in the credit period and also wants to sign a new agreement for a period of two years.

Published in The Express Tribune, February 26^th, 2011.