Pakistan’s plan to import crude oil from Russia has hit a roadblock due to the slow progress on the Pakistani side, disappointing Moscow.
Sources revealed to The Express Tribune that Russia had already expressed doubts over Pakistan’s initiative to import crude oil from Russia and had asked Pakistan to import one crude oil cargo first to indicate its seriousness.
However, in a recent development, Russia was frustrated to learn that Pakistan had not started the process it committed to Moscow to start the first shipment of crude oil. Pakistan had committed that it would set up a new Special Purpose Vehicle (SPV) company that would be responsible for the import of Russian oil to Pakistani refineries. This state-run company would also handle all matters regarding the import and payment of oil. Islamabad, however, had not yet started work on this plan and had not registered the SPV, which irritated Moscow.
Pakistan had agreed to import one cargo of crude oil from Russia next month, but due to the delay in setting up the SPV, the first shipment was now expected to arrive in May.
Crude oil pricing
One of the most critical issues in the crude oil pricing negotiation with Russia is the G7 Oil pricing cap mechanism, which the United States has recently reminded Pakistan to follow to negotiate the best possible price. Sources say that there have been many complications in finalising crude oil pricing with Russia.
Arabian crude oil produces more diesel and less furnace oil, while Russian crude oil produces more furnace oil and less diesel, which will erode the incentives offered by Russia on crude oil trade. Pakistani refineries are already facing problems in consuming furnace oil after the country’s power plants shifted towards LNG fuel. Pakistan requires crude oil that produces higher diesel oil, which will increase costs and erode incentives on crude oil from Russia.
“Arabian oil produces 45% high speed diesel (HSD) and 25% furnace oil,” sources said, adding that, “Russian crude oil will produce 32% HSD and 50% furnace oil. If we take such a ratio, Pakistan will require higher discounts from Russia.”
Pakistani refineries are already facing problems in consuming furnace oil after the country’s power plants shifted towards LNG fuel.
“Where will the furnace oil go?”, asked the sources adding that low production of HSD will also add to the country’s cost, eroding the incentives on crude oil from Russia.
Sources have revealed that the federal government had not taken the oil industry on board to discuss this issue, suggesting instead that the oil industry be taken on board to finalise crude oil pricing with Russia.
If both countries sign a deal, Russia will emerge as Pakistan’s second-largest crude oil supplier after Saudi Arabia, exporting around 100,000 barrels of crude oil per day.
Since Pakistan faces a dollar crunch, it could be a challenge for the country to pay for Russian crude oil in the same currency. Earlier, a foreign company had offered a Pakistani refinery to import Russian crude oil, but the Pakistani banks had refused to make the payment. Russia has now agreed to receive payment in three currencies – Russian rubble, Chinese yen, and UAE dirham against the supplies of crude oil to Pakistan. Sources say that the State Bank of Pakistan (SBP) and the Russian counter bank are pondering over a payment mechanism for oil import in three currencies other than dollars.
Since the beginning of the Russia-Ukraine war, the World witnessed a shocking surge in the price of oil, with European Union countries facing a threat of petroleum product shortage during the current year.
Recently, almost all the sectors in Pakistan were confronted with the issue of opening of LCs. Experts say that it would be a significant relief for Pakistan if the country is successful in striking an oil deal with Russia and making payment in currencies other than the dollar.
In conclusion, Russia’s frustration over the slow progress on Pakistan’s side to start the process of importing crude oil from Russia has become a concern. The delay in setting up the SPV and the complications in finalising crude oil pricing with Russia have created difficulties in the process. It is essential for Pakistan to take the oil industry on board to finalise crude oil pricing with Russia and work towards striking an oil deal to benefit both countries.
Published in The Express Tribune, March 28th, 2023.
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Originally published at tribune.com.pk