KARACHI: Pakistan may save around $1.0 billion annually or 6.0 percent of the total energy bill of $18 billion expected in FY23 if Russia agrees to supply discounted crude and oil products to the country, according to experts.
“We believe that Pakistan will be interested to get petrol and diesel in price range of $60 and $85 per barrel, respectively,” Farhan Mahmood, senior analyst at Sherman Securities said.
“If that happens, product cost will be 15 percent cheaper than existing refined product prices adjusted for higher freight cost,” he said.
At current prices, Pakistan’s refined oil product import bill will be roughly around $9.5 billion in FY23. At prevalent oil prices, Pakistan may save around $400-550 million annually on refined products if the country is able to divert 30 percent of the refined purchases from Russia, he added.
Petroleum Minister had revealed that Russia has agreed to supply crude, petrol and diesel to Pakistan on discounted price. Moreover, there is a possibility that LNG will also be available to Pakistan in future, as well, to cater rising gas demand in the country. The deal will be on G2G basis; however, the modalities including product specifications and pricing will be finalized in January 2023.
This will be a better deal for Pakistan as discount on both crude and oil products will not only reduce Pakistan’s energy bill but also affect local product prices, Farhan Mahmood said.
Though it is premature to comment about the pricing as it relies on geopolitics and product specifications, Russia produces several different types of crude oil, but its main export blend is Urals, which is a medium sour crude. It also exports large volumes of ESPO blend crude to Asia while other grades include Siberian light, Sokol, Sakhalin blend, Arctic oil and Novy Port.
Based on recent price cap on Russia’s seaborne crude oil at $60 per barrel imposed by G7 which is supported by European Union, Pakistan may be eyeing for FOB price range of $55-60 per barrel which will be at a discount of 35 percent from Saudi Arabian light crude oil price of $86 per barrel. Pakistan mainly imports Saudi Arabian light crude while country’s crude oil import bill is expected to swell to $4.5 billion during FY23. However, considering higher freight charges from Russia compared to Middle Eastern region, we believe that Russian crude oil will be available to Pakistan at an effective price discount of 20 percent as freight cost will be almost double.
“We assume that Pakistan’s import bill may reduce by $300-400 million on an annualized basis assuming local refineries process 30 percent of their crude from Russia and the crude oil is 20 percent cheaper than prevalent rates,” he said. Though local refineries can process various grades of crude but our assumption of a maximum 30 percent Russian crude mix is based on our discussion with the refineries and contract arrangement already in place with other Middle Eastern countries.
As far as import of refined oil products are concerned, UAE and Kuwait remained the major trading partners. Due to non availability of products amid Russia-Ukraine war and limited global refining capacity, prices of refined products particularly diesel is at a higher premium to crude oil price. Currently imported price of petrol and diesel is roughly around $98 per barrel and $123 per barrel - at a premium of $3 and $30 per barrel premium on crude oil, respectively.
“We believe that Pakistan will be interested to get petrol and diesel in a price range of $60 and $85 per barrel, respectively,” he said. If that happens, product cost will be 15 percent cheaper than existing refined product prices adjusted for higher freight cost. At current prices, Pakistan’s refined oil product import bill will be roughly around $9.5 billion in FY23. At prevalent oil prices, Pakistan may save around $400-550 million annually on refined products if the country is able to divert 30 percent of the refined purchases from Russia. “Thus, Pakistan may save around $1.0 billion annually or 6 percent of the total energy bill of $18 billion expected in FY23 if Russia agrees to supply discounted crude and oil products to Pakistan”, Farhan Mahmood said. As far as impact on OMCs and refineries are concerned, it is not clear whether only PSO, PRL and PARCO will handle oil products and crude oil or private companies will also be allowed to import as this may create price disparity between Russian products and other middle-eastern fuels, he said.
Copyright Business Recorder, 2022
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