Discounted Russian oil reaches Karachi

Two ships carrying 50,000 MT each will begin discharge today

ISLAMABAD:

The first cargo of discounted Russian crude oil arranged under a new deal between Islamabad and Moscow arrived in Karachi on Sunday, opening a new chapter of cooperative trade relations between the two countries.

The shipment had left Russia over a month ago and reached Pakistan via Oman. The discharge of the oil would begin on Monday (today), and the oil would be processed by the Pakistan Refinery Limited (PRL), officials said.

During its long journey, the cargo of 100,000 metric tons oil was split into two at Oman because the Karachi port was unable to handle the bigger ships. From Oman, the two smaller ships, carrying 50,000 metric tons oil each, set sails for Karachi.

With the arrival of the cargo, Prime Minister Shehbaz Sharif wrote on the micro-blogging website of Twitter that Sunday marked “a transformative day”, and stated that “I have fulfilled another of my promises to the nation.”

I have fulfilled another of my promises to the nation. Glad to announce that the first Russian discounted crude oil cargo has arrived in Karachi and will begin oil discharge tomorrow.

Today is a transformative day. We are moving one step at a time toward prosperity, economic…

— Shehbaz Sharif (@CMShehbaz) June 11, 2023

“We are moving one step at a time toward prosperity, economic growth and energy security and affordability. This is the first ever Russian oil cargo to Pakistan and the beginning of a new relationship between Pakistan and Russian Federation,” he tweeted.

Writing further on his twitter handle, Prime Minister Shehbaz commended all those who remained part of this national endeavour and contributed to translating the promise of Russian oil import into a reality.

According to sources, this Russian oil shipment would not be part of the oil pricing mechanism in the country. This, the sources added, meant that the PRL would enjoy the benefits or the losses of the Russian oil.

The sources further said that the shipment was a test case to examine the quality of the crude oil and the ratio of refined products, adding that a report would be sent to the federal government for future decisions regarding the long-term commercial oil deals.

Pakistan had placed the order for the first Russian crude oil cargo at a discounted rate of up to $18 per barrel. Islamabad followed the Platts crude oil prices, which meant Platts minus discount of $16-18 per barrel, the sources said.

Read Pakistan buys its first cargo of Russian oil

The sources said that Pakistan would examine the economics of the refined petroleum products based on the discounts. They added that Pakistan had received specifications of the Russian oil, which were not too good.

Additionally, the freight of the Russian oil was too high. According to the sources, Russia had offered the discount rates of $16-18 to match the quality and the freight of Arabian light oil, which the Pakistani refineries were currently processing.

In addition to the quality and freight, the ratio of refined petroleum products from Russian oil was also different, which could disturb the current economics of the petroleum products being produced from the Arabian oil.

The Arabian oil produces 45% high speed diesel (HSD) and 25% furnace oil, whereas Russian crude oil is stated to be producing 32% HSD and 50% furnace oil. “If we take such a ratio, Pakistan requires a higher discount from Russia,” a source said.

“Pakistani refineries have already been facing problems in consuming furnace oil after the country’s power plants shifted towards LNG [liquefied petroleum gas] fuel. The refineries are also concerned about disposing of the heavy volume of furnace oil.”

Pakistan started importing LNG for first time in 2015 during the then government of the Pakistan Muslim League-Nawaz (PML-N). However, the government, at that time, had not done due diligence regarding the usage of furnace oil.

Since that time, Pakistani refineries had always been in trouble and went on partial shut-downs several times after the power sector refused to lift the furnace oil. Some refineries also resorted to exporting the furnace oil at lower prices.

According to the sources, the Pak-Arab Refinery Limited (Parco) and the PRL had already exported furnace oil at around Rs30,000 per ton loss. Consequently, they added, the margins of the refineries spiked in the current year to help them survive.

“If the current situation continues and refineries face issue of low demand of furnace oil will force them to export, hence their profits will turn into negative,” said another source. “So, the Russian oil can be a problem for refineries if it contains high volume of furnace oil.”

Moreover, high freight charges would also disturb the economics of the Russian crude oil that took almost a month to reach Pakistan,” the source said, adding that the oil from Gulf countries barely took three days to reach Pakistan.

Payment

Russia has offered Pakistan to receive payments in three currencies – UAE dirham, Chinese yuan, and Russian ruble. However, the two countries have agreed to make the payment in Russian currency for the oil shipment from Russia.

Pakistan had opened the Letter of Credits (LCs) in the Bank of China to make the payment due to a shortage of dollar in the country and a row between the US and Russia over the Ukraine issue.