Committee established to set up SPV after Russia raises concerns
As the government approaches the completion of its tenure, it has now formed a committee to expedite the establishment of the SPV for oil trade with Russia. photo: reuters
Pakistan has taken a crucial step towards establishing a Special Purpose Vehicle (SPV) for oil trade with Russia after facing serious questions about its commitment from the latter. The agreement to set up the SPV for long-term oil trade was previously made between the two nations. However, the Pakistani government’s lack of action on this front prompted Russia to raise concerns about Pakistan’s seriousness.
As the government approaches the completion of its tenure, it has now formed a committee to expedite the establishment of the SPV for oil trade with Russia. The petroleum division recently submitted a summary to the Economic Coordination Committee (ECC) seeking approval for a long-term oil trade deal with Russia without providing details on the existing crude oil imports from Russia.
Unfortunately, the ECC, as the economic decision-making body, rejected the proposal for the long-term oil trade deal due to a lack of due diligence and concerns about recent crude oil imports by Pakistan Refinery Limited (PRL), said sources. The government was accused of pressuring PRL to import Russian crude oil without obtaining ECC approval, which could have resulted in significant losses. Fortunately, PRL managed to generate profits of $7 to $8 per barrel through its Russian crude oil imports, which brought some relief.
Sources indicate that Pakistan stands to benefit from regular imports of Russian crude oil, but finalising a long-term oil supply deal with Russia remains uncertain due to several hurdles.
“Now, the committee will table a summary before the ECC on Monday seeking long term oil import from Russia,” sources said.
One of the primary sticking points between the two countries is the issue of long-term discounts. Pakistan requested long-term discounts from Russia, but the latter is not willing to offer them for oil trade. As a result, both sides find themselves at odds, making it difficult to reach a consensus on a long-term oil deal.
Furthermore, Russia is quoting Ex-India oil prices on Platts, implying that its prices would vary with Platts’ price fluctuations, and there would be no permanent discounts. The Pakistani government is also caught between two formulas to strike an oil deal with Russia, complicating the negotiation process.
To examine the economics of Russian oil, Pakistan Refinery Limited (PRL) conducted a test case, importing 100,000 metric tonnes of crude oil from Russia. Arabian oil produces 45% high-speed diesel (HSD) and 25% furnace oil (FO), while Russian crude oil is said to produce 32% HSD and 50% FO. The ratio of by-products from Russian oil will play a crucial role in determining its feasibility for long-term trade.
Sources say, in order to meet local demand, PRL has been blending 50% Russian oil with Arabian crude oil imported from the Gulf market. The blending strategy has allowed PRL to produce low FO, which is in demand in the local market. However, Russian oil contains a higher volume of FO, limiting its market potential in Pakistan unless blended with Arabian crude oil.
Pakistan procured URALS grade crude oil directly from Russia, signing a contract for the supply of 100,000 tonnes of crude oil. The imported Ural crude is currently being processed successfully at PRL, and a comprehensive report will be submitted to the government after the completion of the processing.
The import of Russian oil is part of Pakistan’s strategy to enhance diplomatic relations through oil diplomacy. The country has heavily relied on the Middle Eastern market for energy, and the import of Russian oil offers an opportunity to diversify energy sources.
However, Pakistani refineries have faced challenges in consuming FO after the power plants shifted to imported LNG fuel. This shift led to problems for local refineries in disposing of a heavy volume of FO, resulting in partial shutdowns and financial losses.
As the government faces the decision of balancing production of petrol, high-speed diesel, and furnace oil to work out the economics of Russian oil, it also grapples with the issue of payment currency. Russia offered Pakistan the option of receiving payments in UAE Dirham, Chinese Yuan, or Russian Ruble, but both countries agreed to use the Chinese Yuan for oil shipments from Russia, considering the ongoing dollar shortage and tensions between the US and Russia over the Ukraine issue.
Published in The Express Tribune, July 29th, 2023.
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