Pakistan has placed its first order for discounted Russian crude oil, a move that could potentially reduce the country's reliance on Middle Eastern oil producers. The order amounts to around 100,000 barrels per day (bpd) of Russian crude oil, which does not include related products. In 2022, Pakistan imported 154,000 bpd of oil, with most of it coming from Saudi Arabia and the UAE. The introduction of Russian crude could have a significant impact on the supplies from Middle Eastern producers, which may not be welcomed and could lead to future issues. It's worth noting that Pakistan imports around 500,000 bpd of oil.
Pakistan and Russia had already planned to finalize a deal when representatives from both countries met. At that time, the Petroleum Division aimed to secure the deal at a price close to $50 per barrel, lower than the price cap. Shipping crude oil from Russian ports was estimated to take around 30 days, with resulting transportation costs of $10-15 per barrel. The payment method for crude oil imports from Russia had not been disclosed, but options included Pakistan National Shipping Corporation ships or Russian tankers for transportation.
However, the introduction of discounted Russian crude oil presents several technical challenges that still need to be addressed. The most significant issue is adapting refineries to process the heavy-grade sour Russian oil, which is different from the sweeter and lighter oil currently being imported from the Middle East. In addition, given the distance, freight rates may also be higher.
There are also important diplomatic considerations. Pakistan is currently trying to meet all the conditions to secure a bailout from the International Monetary Fund (IMF). According to the IMF's latest report, the country is already facing high levels of debt distress, and the specter of a sovereign default is ever-present. Pakistan's economy is expected to grow by only 0.5% this year, compared to 6% last year. Inflation remains at multi-decade levels, and people have died in stampedes attempting to obtain free wheat/flour. Importing discounted Russian oil might delay or obstruct the ongoing negotiations with the IMF.
Furthermore, the introduction of Russian oil could deteriorate relations with the country's long-term vendors, namely Saudi Arabia and the UAE. Pakistan enjoys many benefits in terms of external financing from Saudi Arabia in the form of delayed oil payments, debt rollovers, and other assurances that endorse the country's case with International Financial Institutions (IFIs). However, things seem to be changing of late, as Saudi Arabia has given a clear message of "no more easy money" and has refused to provide further interest-free loans or bailouts.
Pakistan's dependence on energy imports is a major issue, as it amounted to a staggering $23.3 billion during the last fiscal year, accounting for almost 30% of total imports. In the current fiscal year, the figure has already reached $7.7 billion. Recently, the government of Pakistan increased the price of petrol by Rs. 10, a 3.5% increase overnight. In one year, the price of petrol has increased by more than 100%.
In conclusion, while the purchase of discounted Russian crude oil may be welcomed by the people of Pakistan if it translates to lower prices at the pump, several technical and non-technical challenges still need to be addressed. The most important challenge is for the country to navigate the complex geopolitical quandary it is currently in.
By Osama Rizvi for Oilprice.com
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