Pakistan has opened a Letter of Credit (LC) in the Bank of China for import of first oil cargo from Russia, which is expected to arrive in the last week of May.
According to sources, the LC has been opened in the Chinese bank in an attempt to make payment for the cargo – the first-ever purchase of Russian oil by Pakistan – in Chinese yuan. Russia will send a ship carrying 100,000 tons of crude oil.
At present, Pakistan is importing crude oil on a free-on-board (fob) basis, which means refineries will pay for the oil to be transported to the port.
However, Islamabad is importing oil from Russia on a cost, insurance and freight (CIF) basis, which means it will pay for the cargo after delivery at its port.
Though the payment for Russian oil will be in yuan, it will put a burden on Pakistan’s foreign exchange reserves.
Pakistan receives currencies like UAE dirham and Saudi riyal from the two countries, hence, it would have been easier to make payments in those currencies instead of yuan, officials said, adding that yuan was not available and the country would have to buy it.
Consequently, Pakistan will have to arrange US dollars to buy the Chinese currency at a time when it is struggling to ease the pressure on its reserves. Already, imports have been restricted to reduce the burden of arranging dollars.
Initially, Moscow offered the option of making payments in three currencies including the UAE dirham, Chinese yuan and Russian ruble. The decision to pay in yuan came in the wake of US sanctions on Russia.
Pakistan, which follows the Platts price index, is hoping to get a discount of $16 to $18 per barrel on Russian crude oil.
“Russian oil will be shipped to Pakistan Refinery Limited (PRL) for testing its quality and production of refined products,” a source said.
This way, the economics of petroleum products produced from the first Russian cargo will be assessed based on the discount offered. So far, the specifications have not been found to be too good. Additionally, the freight rate is very high.
The discount has been offered to match the quality and freight rate for Arab Light Crude which Pakistani refineries are currently processing.
In addition to this, the ratio of Russian oil-based refined products will vary, which can disturb the economics of petroleum products.
According to the source, the processing of Arab Light crude leads to production of 45% high-speed diesel (HSD) and 25% furnace oil while the Russian crude will produce 32% HSD and 50% furnace oil.
“If we take such a ratio, Pakistan will require higher discounts from Russia,” the source remarked.
According to sources, the government will make a final decision after PRL submits its test report including the production ratio of diesel, petrol and furnace oil.
Refineries have already been facing difficulties in disposing of furnace oil after the country’s power plants shifted focus to liquefied natural gas (LNG).
Where would the furnace oil go, sources asked, adding that low production of HSD would increase cost, eroding the incentives given by Russia. Of late, the refineries have started exporting furnace oil.
During the previous tenure of Pakistan Muslim League-Nawaz (PML-N), the government began LNG import for the first time in 2015. However, it did not conduct due diligence for the consumption of furnace oil. Since then, the refineries have been in trouble, facing partial shutdown several times over power sector’s refusal to lift furnace oil stocks.
Published in The Express Tribune, May 6th, 2023.
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