The potential long-term oil supply deal between Pakistan and Russia has encountered significant challenges, putting its prospects in doubt. While both sides agreed on the establishment of a special purpose vehicle (SPV) for importing oil from Russia, Pakistan has yet to take the necessary steps to initiate the process.
Complicating matters further, the current coalition government is approaching the end of its term as elections are scheduled for later this year.
The limited time frame adds uncertainty to the negotiations and raises questions about the feasibility of reaching a long-term agreement.
Another obstacle stems from Pakistan’s request for a long-term oil transportation deal with attractive discounts. However, Moscow appears hesitant to commit to such an agreement, as it is reluctant to offer concessions on oil supply.
The divergent positions of the two parties have created a deadlock, making it unlikely for a long-term deal to be inked at this stage.
Furthermore, Russia quotes ex-India oil prices on the Platts index, meaning that Russian oil prices are subject to fluctuations on Platts. This makes it challenging to offer permanent discounts, further complicating the negotiation process.
The Pakistani government finds itself caught between two possible approaches to a potential oil deal. One option involves the government setting up an SPV to oversee oil imports from Russia, thereby indicating state involvement in the purchasing process.
Alternatively, the government could allow the oil industry to engage in commercial deals directly with Russian firms, putting the responsibility for profit or loss on the industry itself.
In a recent test case, Pakistan Refinery Limited (PRL) imported 100,000 tons of crude oil from Russia to assess the economics of Russian oil.
The findings revealed that Russian crude has higher volumes of furnace oil. However, due to a decline in demand for furnace oil in Pakistan, primarily driven by power plants switching to liquefied natural gas (LNG), the market for Russian oil has become limited.?