Introduction
Pakistan is making efforts to procure Russian crude oil at a discounted rate of USD 50 per barrel, which is at least USD 10 per barrel less than the price cap imposed by the G7 countries due to Moscow’s invasion of Ukraine. However, Russia had expressed doubts over Pakistan’s initiative and had asked Pakistan to import one crude oil cargo first to indicate its seriousness. Pakistan had committed to setting up a new Special Purpose Vehicle (SPV) company responsible for the import of Russian oil to Pakistani refineries, but it had not yet started work on this plan and had not registered the SPV. Arabian crude oil produces more diesel and less furnace oil, while Russian crude oil produces more furnace oil and less diesel, which will erode the incentives offered by Russia on crude oil trade. Pakistani refineries are already facing problems in consuming furnace oil after the country’s power plants shifted towards LNG fuel. Pakistan requires crude oil that produces higher diesel oil, which will increase costs and erode incentives on crude oil from Russia.
Pakistan’s Efforts to Procure Discounted Russian Crude Oil
Pakistan has been making efforts to procure Russian crude oil at a discounted rate of USD 50 per barrel, at least USD 10 per barrel less than the price cap imposed by the G7 countries due to Moscow’s invasion of Ukraine. Despite cabinet-level talks in both Russia and Pakistan in recent months about oil purchases, Moscow seemed wary of the possibility that Islamabad is again merely going through the motions for the sake of leverage. This is why Russia has requested that Pakistan import one cargo of crude oil first before proceeding further. However, Petroleum Minister Musadik Malik recently announced that Pakistan had made its first purchase of Russian crude oil at a discounted rate, and the cargo would reach the country next month via sea. Islamabad plans to increase the import volume to 100,000 barrels per day if the first transaction with Moscow goes through smoothly.
Russia had requested that Pakistan import one cargo of crude oil first before proceeding further to ensure Pakistan’s seriousness in this initiative. Petroleum Minister Musadik Malik recently said Pakistan had made its first purchase of Russian crude oil at a discounted rate, and the cargo would reach the country next month via sea. Pakistan plans to increase the import volume to 100,000 barrels per day if the first transaction with Moscow goes through smoothly. Under the deal, Pakistan will buy only crude, not refined fuels.
Challenges in Negotiating Crude Oil Pricing with Russia
One of the most critical issues in the crude oil pricing negotiation with Russia is the G7 Oil pricing cap mechanism, which the United States has recently reminded Pakistan to follow to negotiate the best possible price. Additionally, Pakistani refineries require crude oil that produces higher diesel oil, which will increase costs and erode incentives on crude oil from Russia. Arabian oil produces 45% high speed diesel (HSD) and 25% furnace oil, while Russian crude oil will produce 32% HSD and 50% furnace oil. If we take such a ratio, Pakistan will require higher discounts from Russia. Furthermore, the federal government had not taken the oil industry on board to discuss this issue, suggesting instead that the oil industry be taken on board to finalize crude oil pricing with Russia.
Pakistan’s Energy Trade with Turkmenistan
Turkmenistan has started supplying liquefied natural gas to Pakistan through the territory of Afghanistan. The transit route will run from the Afghan city of Torgundi on the border with Turkmenistan to the Spin-Boldak border crossing (Kandahar). The task of transporting gas from Turkmenistan to Pakistan through Afghan territory was undertaken by a private company, which pays the Afghanistan for transit. In the first stage, 50 gas tankers were transferred from Turkmenistan via Afghanistan to Pakistan. On May 1, 2023, Pakistan celebrated the arrival of the first-ever shipment of liquefied petroleum gas (LPG) from Turkmenistan, which was transported through the southern Afghan province of Kandahar. Pakistan and Turkmenistan have reiterated the commitment to implement the TAPI Gas Pipeline Project at the earliest, although the construction of the Afghan section has been delayed due to the inability of the Afghan government forces to ensure the safety of the construction.
Turkmenistan has been unable to implement the ambitious project to build the TAPI gas pipeline (Turkmenistan-Afghanistan-Pakistan-India) in Afghanistan so far. Although it agreed on the construction of the Afghan section both with the previous government in Kabul and with the Taliban government that seized power in August 2021. The construction of the Afghan section was launched in 2018 but was frozen due to the inability of the Afghan government forces to ensure the safety of the construction. The Taliban have promised to begin construction of the Afghan section of TAPI over the past year, but construction has not yet begun.
Pakistan and Turkmenistan have reiterated their commitment to implementing the TAPI Gas Pipeline Project at the earliest. Officials stated that the fuel coming from Turkmenistan is much better in quality compared to Iranian gas.
While Pakistan has made progress in energy trade with Russia and Turkmenistan, there are still challenges to overcome. Pakistani refineries require crude oil that produces higher diesel oil, which may increase costs and erode incentives on crude oil from Russia. In addition, the TAPI gas pipeline has faced numerous delays and security concerns, which may delay the project’s implementation. Nonetheless, Pakistan’s energy trade with Russia and Turkmenistan is an essential step towards achieving energy security and reducing dependence on traditional energy sources.
CEFE Group’s Strategic Position in Pakistan’s Energy Trade Initiatives
CEFE Group’s presence in the region puts it in a perfect position to play a key role in the country’s energy trade initiatives. As a midstream energy business house, CEFE specializes in finance, trade, logistics, storage, and risk management. With a wide range of activities, including worldwide trading and logistics, construction and real estate development, power generation and distribution, consulting and technical services, and capacity building, CEFE has become one of the leading business houses in Asia.
Through its subsidiaries, affiliates, and vendors, CEFE manages the global supply chain, enabling it to provide total logistics support and procurement for its customers. Additionally, CEFE is an active trader in the paper and physical markets of energy, supplying branded and unbranded fuels, heating oil, petrochemical feedstocks, lubricants, and other petroleum products. CEFE also owns, leases, operates, develops, and acquires crude oil and refined petroleum products terminals, pipelines, storage facilities, and logistics assets.
One of CEFE Group’s most significant investments in the region is its owned storage facility in Hairatan, Afghanistan. This facility has a storage capacity of 25 million liters, allowing it to store and distribute large quantities of fuel products to meet the growing energy demand in Afghanistan. Moreover, the facility enables CEFE to provide critical services to both the US government and other regional customers, supporting regular deliveries of fuel products throughout the country.
The facility’s location near the border with Uzbekistan and Tajikistan provides a crucial transit point for the import and transfer of fuel products into Afghanistan, making it an essential component of the region’s energy infrastructure. Furthermore, the facility’s infrastructure, including six large tanks, ten smaller tanks, pumps, flow meters, filtration systems, and fuel laboratory, enables it to meet the highest quality and safety standards. Additionally, the Hairatan-Mazar-i-Sharif Railway connects the facility to Russia and other CIS countries, providing a direct and cost-effective transportation route for fuel products.