Potential Pak-Russia oil deal runs into hitches

Islamabad seeking long-term supplies at a discount

ISLAMABAD:

Pakistan and Russia are unlikely to strike a long-term oil supply deal as talks between the two sides have run into hitches.

Sources told The Express Tribune that Pakistan and Russia had agreed that a special purpose vehicle (SPV) would be set up with the specific task of importing oil from Russia.

However, Pakistan has not yet initiated a process while the current coalition government has little time left in office as elections are due later this year.

There is another bottleneck as well. According to sources, Pakistan has asked Russia to execute a long-term oil transportation deal with attractive discounts. However, Moscow is reluctant to enter into a long-term agreement with concessions on oil supply.

“The two sides are clinging on to their positions, so there seems to be no possibility of inking a long-term agreement,” a source remarked. Furthermore, Russia quotes ex-India oil prices on the Platts index, which means Russian oil prices will vary with fluctuations on Platts and no permanent discounts can be offered.

According to officials, the government is also stuck between two formulas for a potential oil deal. First, the government will set up an SPV with the mandate of oil imports from Russia, indicating the state’s involvement in oil purchases.

Second, the oil industry can be allowed to clinch commercial deals with Russian firms. Under this mechanism, the oil industry will be responsible for profit or loss.

Recently, Pakistan Refinery Limited (PRL) imported 100,000 tons of crude oil from Russia. Of the total, it has refined 50,000 tons while the remaining is yet to be processed. The import was made as a test case to examine the economics of Russian oil.

Middle Eastern crude produces 45% of high-speed diesel (HSD) and 25% of furnace oil whereas Russian crude is said to have produced 32% of HSD and 50% of furnace oil.

Russian crude has higher volumes of furnace oil but its demand has gone down significantly in Pakistan as power plants have switched over to liquefied natural gas (LNG). Sources in the Petroleum Division revealed that PRL had earlier been blending 50% of Russian oil with Arabian crude. But now “it is blending 35% of Russian crude and 65% of Arabian oil, which leads to low production of furnace oil.”

This signals that Pakistan’s refineries can use Russian oil by blending it with Arabian crude. Otherwise, there is no market of Russian oil in Pakistan due to higher volumes of furnace oil produced by that crude.

In a recent consignment, Pakistan received Urals crude directly from Russia. PRL signed a contract for supply of 100,000 tons of Urals-grade crude oil, which was loaded at a Russian port and offloaded at an Oman port into two small shuttle vessels for onward delivery at Karachi Port.

According to the plan, both shuttle vessels arrived at Karachi Port and successfully delivered cargo. Urals crude is being processed at PRL and a comprehensive report will be submitted to the government after the completion of processing. Government officials insist the import of Russian oil was part of a strategy to boost diplomatic relations through oil diplomacy.

Pakistan has been banking on the Middle Eastern market for long but now Russian oil has opened an avenue for energy import from diversified markets.

Once PRL submits its report on the ratio of byproducts produced by Russian oil, then the government will make decision on a long-term deal, sources said.

Pakistani refineries have already been encountering problems in finding consumers of furnace oil after power plants shifted to LNG. They are concerned about disposing of heavy volumes of furnace oil and even shut down partially several times. Pak Arab Refinery Limited (Parco) and PRL also exported furnace oil at a loss of around Rs30,000 per ton.

Published in The Express Tribune, July 11^th, 2023.

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