Pakistan eyes Russian oil deals to ease financial burden

February 15, 2023 (MLN): As Pakistan continues to suffer from a severe shortage of foreign exchange reserves, any short- or long-term deals with Russia to take crude and oil products at low prices would help reduce the nation's financial burden, government officials, refinery executives, and Karachi-based analysts told S&P Global Commodity Insights.

Various Russian export crude grades are changing hands at steep discounts in Asia and Pakistani end-users could take full advantage of the cheaper prices. Pakistan Refinery Limited, or PRL, has the potential to switch 50% of its feedstock slate to Russian crudes, while Pak Arab Refinery, or PARCO, could accommodate as much as 30%, S&P Global said in a report on Tuesday.

"Pakistan could save about $1bn annually on its overall oil import bills, taking into consideration the price cap of $60/b on Russian crude and assuming some of the distressed Russian oil product cargoes could be bought at discounts of 30% or more to the international benchmark market value, according to Khurram Schehzad, chief executive officer at Karachi-based Financial Advisory & Investment Strategy firm Alpha Beta Core," the report said. 

Pakistan imported around 60.7mn barrels of crude oil in the fiscal year ending June 30, 2022, costing the nation around $5.6bn. In comparison, it spent $3.1bn to import 64.5mn barrels in the previous fiscal year, data from the Pakistan Bureau of Statistics showed.

Pakistan spent $12bn to import 135mn barrels of oil products in the fiscal year that ended June 30, 2022, compared with $5.1bn spent for 105mn barrels of fuel a year before, the data showed.

The State Bank of Pakistan's foreign exchange reserves recently tumbled to a near nine-year low of $3bn. The reserves at the start of the fiscal year on July 1, 2022, were around $10.309bn, registering a drawdown of $7bn in the span of just seven months.

The economy was devastated by floods during the third quarter of 2022, incurring losses of $16bn, while its textile exports failed to bring in much dollar earnings in 2022 due to tepid Chinese demand, it noted. 

Regardless of attractive offers and discounts, Pakistani refiners and fuel distributors indicated that purchasing Russian oil is far from easy as technical, commercial, logistical, and financial evaluations must all make sense.

In June 2022, local refiners' initial assessment of Russian crude grades indicated that Urals could be one of the most suitable feedstock options as they are most familiar with similar medium sour grades from the Middle East.

However, after conducting deeper assessments and analysis on feedstock specification and refinery configuration, the industry finds that lighter and sweeter Russian crude grades, such as ESPO Blend and Sokol are better suited, according to minister Malik and PRL's managing director Zahid Hussain.

"Pakistan refineries are hydro-skimming refineries and therefore lighter and sweeter [Russian grades] are preferred," PRL's Hussain said, adding that, unlike the highly sophisticated refineries in Northeast Asia, local plants cannot process heavier and sourer grades like Urals with maximum middle distillate production yield efficiency.

Meanwhile, the cost of bringing Sokol and ESPO crude from Far East Russia could be much more than the freight for regular Persian Gulf crude.

Transportation cost for a regular tanker from the Middle East to Pakistan is typically seen at around $800,000-$1mn, but the cost from Far East Russia would be at least threefold higher at around $3mn-$3.5mn, according to letters of refineries sent to the energy ministry. The Persian Gulf-Pakistan tanker voyage is less than five days but it would take more than 22 days from Russia.

In addition, Pakistani banks are not willing to open letters of credit for local trading firms looking to trade Russian oil due to the international sanctions and payment issues, Yousuf Saeed, head of research at Darson Securities based in Karachi, said.

There are also a limited number of Russian tankers available to deliver Far East Russian crude to south Asia as Sokol and ESPO suppliers are highly focused on catering to Chinese buyers' needs, according to sweet crude traders based in Singapore with direct knowledge of the matter.

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