A Long-awaited Respite

Russia agrees to supply petroleum products on discounted price

KARACHI: Pakistan has struggled a lot in procuring energy this year after the surge in the prices for oil, natural gas and coal. Petroleum Minister Musadik Malik’s big revelation that Russia has agreed to supply petroleum products on discounted price heralds the respite the nation desperately seeks.

Pakistan is also pursuing to negotiate long-term deals with the Russian firms for the supply of liquefied natural gas (LNG), the minister said.

The deal will be on government-to-government basis, while the modalities, including product specifications and pricing will be finalised in January 2023.

Moreover, the declining trend in the global oil prices is another trigger to positive sentiments over the expectations of offsetting normalised import bills in the months to come.

Farhan Mehmood, an energy sector analyst at Sherman Securities said that the discount on both crude and oil products will not only reduce Pakistan’s energy bill but also affect the local product prices.

“Based on the recent price cap on Russia’s seaborne crude oil at $60/barrel imposed by G7, supported by the European Union, Pakistan may be eyeing for freight-on-board (FOB) price range of $55 to $60/barrel. This computes to a discount of 35 per cent from Saudi Arabian Light crude oil at the rate of $86/barrel,” he added.

“It is premature to comment about the pricing, as it relies on geopolitics and product specifications,” Mehmood remarked.

The energy crisis in Pakistan has deepened this year and now, the natural gas supplies will be very limited for the households. The gas utility companies were already observing across-the-board hours long supply outages.

Last month, an official from the Petroleum Ministry said that Pakistan had no other option but to ration natural gas supply this winter, with gas provided three times a day for cooking to the households, amid acute shortages and a forex crisis in the world’s fifth most populous country.

Pakistan has been experiencing an energy crisis, as it cannot afford to import a lot of energy products at the current high prices. The stronger US dollar and the skyrocketing LNG prices have worsened the country’s finances, with foreign exchange reserves down in October 2022 to their lowest level in three years.

According to an Engro Corporation official, their Floating Storage and Regasification Unit (FSRU) at Port Qasim was available but the supplies were not coming that frequently.

“The prices have surged significantly and the European buyers are paying premiums to secure supplies, which we are unable to match,” the official added.

The fertiliser plants, including Engro’s were also experiencing gas supply issues, which was hurting production, he added.

“The country is desperately looking for additional LNG cargoes but it will not be an easy task given a consistent decline in the forex reserves, amid continuing political instability and unavailability of LNG in the international spot market.”

The gas demand in the country had already started rising and the shortfall is likely to soar to record levels in the coming months.

Sui Southern Gas Company (SSGC) recently sent “closure notices” for over three months in winters to the local industries, which the latter rejected, saying that gas outages would lead to massive layoffs and closure of businesses.

An official at a gas utility company said the state-owned companies had been trying to purchase LNG cargoes for the last one year.

“But there has not been a success so far, which is unusual and suggests both the extent of the global fuel shortage and the apparent reluctance of the energy suppliers to sell to a country in the depths of an economic crisis.”

As a result, Pakistan is facing an imminent energy shortage, frequent blackouts, soaring electricity bills and inflation hovering over 20 per cent, amid pressure from the International Monetary Fund (IMF) to fulfil its financial terms and conditions.

Khurram Schehzad, CEO of AB Core, said that all the stakeholders must sit together, have consensus and focus on energy planning, alternatives, cost reduction and efficiency to shun unmanageable situations.

“Given the circumstances, the authorities should implement short market hours; secure long-term gas and fuel contracts; reduce transmission and distribution losses; and cut subsidies and the circular debt,” he noted.

Coming back to the Russian oil and gas, Pakistan mainly imports Saudi Arabian Light crude, while its crude oil import bill is expected to swell to $4.5 billion during FY23.

For Mehmood, Pakistan’s import bill may reduce by $300 to $400 million on an annualised basis, assuming the local refineries process 30 per cent of their crude from Russia and the crude oil being 20 per cent cheaper than the prevalent rates.

“Though the local refineries can process various grades of crude, our assumption of a maximum 30 per cent Russian crude mix is based on the discussion with the refineries and contract arrangement already in place with other Middle Eastern countries,” he said.

Currently, the imported price of petrol and diesel is around $98/barrel and $123/barrel. Pakistan will be interested to get petrol and diesel in a price range of $60 and $85/barrel, respectively. If that happens, the product cost will be 15 per cent cheaper than the existing refined product prices adjusted for higher freight costs.

At the current prices, Pakistan’s refined oil product import bill will be around $9.5 billion in FY23.

At the prevalent oil prices, the country may save around $400 to $550 million annually on refined products if it is able to divert 30 per cent of the refined purchases from Russia.

Pakistan may save around $1 billion annually, or 6 per cent, of the total energy bill of $18 billion expected in FY23, if Russia agrees to supply discounted crude and oil products to Pakistan.