Talks between Pakistan and Russia for a long-term oil supply deal have encountered hurdles, making it unlikely for an agreement to be reached, sources have revealed. The initial plan involved setting up a special purpose vehicle (SPV) to facilitate oil imports from Russia, but Pakistan has yet to initiate the process, and with impending elections later this year, time is running out for the current coalition government. Another challenge arises from Pakistan’s request for attractive discounts in a long-term oil transportation agreement, which Russia is hesitant to provide.
Sources suggest that the two sides are at an impasse, making the prospect of a long-term agreement unlikely. Additionally, Russia’s pricing of oil based on the Platts index, which is influenced by global fluctuations, means that permanent discounts cannot be offered. The Pakistani government is also grappling with two potential approaches for the oil deal: establishing an SPV for state involvement or allowing the oil industry to pursue commercial deals, assuming responsibility for profits and losses.
While Pakistan has recently tested the economics of Russian oil by importing 100,000 tons, with 50,000 tons already refined, the demand for furnace oil produced from Russian crude has significantly decreased due to the country’s shift to liquefied natural gas (LNG) in power plants. Pakistani refineries have been blending Russian oil with Arabian crude to optimize production. However, the market for Russian oil in Pakistan remains limited due to higher volumes of furnace oil produced by that particular crude.
The recent import of Urals crude directly from Russia was seen as a step toward diversifying energy imports and strengthening diplomatic relations. Once Pakistan Refinery Limited (PRL) submits a comprehensive report on the byproducts produced from Russian oil, the government will make a decision regarding a long-term deal. Pakistani refineries, already facing challenges in finding consumers for furnace oil, are concerned about managing the excess volumes and have even resorted to partial shutdowns. Parco and PRL have exported furnace oil at a loss of approximately Rs30,000 per ton.
As Pakistan explores opportunities beyond the Middle Eastern market, the potential oil deal with Russia faces uncertainties that need to be addressed for a successful agreement.