Petrol smuggling is back. Earlier this week, the Chairman Oil Companies Advisory Council (OCAC) wrote a hard-hitting letter to Secretory Petroleum where he alleged that illicit trade from Iran has reached a staggering 4,000 tons in petroleum products every day. This amounts to approximately 15 percent of the average daily consumption of high-speed diesel (HSD) in FY22.
The smuggling network on both sides of the border, with possible involvement and participation of border controlling and handling agencies, has strengthened greatly over time. Inhabitants in bordering towns largely depend on this trade to meet the economic and financial needs of their households.
In an exclusive chat with BR Research, Adil Khattak, Chairman OCAC said: “During the Musharraf era, smuggling started through the mountainous route on bikes. Over time, informal traders flourished and developed jeepable tracks. Today, truck routes have been laid in areas where there were no roads for vehicles to travel”.
“In Baluchistan, politicians and border control agencies, on both sides of the border, are involved in smuggling, top to bottom. Drone footages show droves of petrol carriers crossing the Baluchistan border. Nobody cares. The floodgates have opened and it is killing domestic refineries. The government too is losing revenues”, Khattak said in a frustrating tone.
Invariably, the incentive to smuggle increases when the delta or difference between the retail price in Pakistan and the smuggled price from Iran widens. Currently, there is around Rs80/liter (Rs60 PL and Rs20 CD) taxes on HSD in Pakistan which is currently retailed at Rs285.6. There is no tax on smuggled diesel from Iran.
Meanwhile, the procurement price from Iran is perhaps at a discount, due to expansion in the refining industry amid sanctions on the country which limits its legal exports. Petrol and diesel are selling at a discount to international prices in Iran. “The retail price of petrol in Iran is below Rs50/liter,” a sector expert told BR Research who has recently visited the country.
Thus, the delta per liter is higher than Rs80/liter, and that amount goes to smugglers, border handling agencies, and others involved. The business has flourished in the last year which has coincided with the imposition of a higher incidence of petroleum levy. The products are being sold in Baluchistan, Sindh, and Punjab.
“There are around 100 outlets selling smuggled petroleum in the Hub area which is technically in Baluchistan, but practically a part of Karachi; and overall, over a thousand outlets are selling illicit products across the country’, added Adil Khattak.
“The penetration of products to the retail market is happening through smaller oil and marketing companies who have recently received a license. The situation was much better when most volumes were handled by big OMCs “, said a refinery employee who chose to remain anonymous.
It’s not easy to stop this. Whenever there is a huge delta in prices, petrol will cross borders illegally. One logical decision should be to legally import from Iran, as not only will the price be discounted, but the import will also incur low transportation charges. However, if Pakistan does import from Iran, the US might impose sanctions on Pakistan which the country simply cannot afford.
The issue of higher smuggling was highlighted in 2023 when the crackdown on smuggling and hundi hawala was initiated. At the time, certain measures did enable prohibit the inflow of illicit trade through Iran’s borders. “There was some improvement when SIFC took serious notice, but it lasted only a few weeks before the smuggling restarted”, lamented Adil Khattak.
Curiously, petrol has been smuggled through the border since last year, but this is the first time OCAC has cried foul. This is because last year, age-old local refineries were deliberately operating at lower throughput, as they had issues selling furnace oil (aka residual oil). Now they are exporting the surplus and operating at a low level because of reduced off-take in HSD and petrol – especially in the peak wheat harvesting season. Hence, all of a sudden, smuggling has become a massive issue for refineries.
“If the smuggling from Iran is not curtailed, refineries may not undertake billions of dollars in investment for upgradation under the new refinery policy which took four years and three governments to finalize. We are having second thoughts as our refinery expansion is based on full throughput”, warned Adil Khattak.
Truth is, refineries are known for maneuvering the government to get what they want. However, their concerns about the overall country’s loss due to the heightened smuggling of petroleum products must be taken seriously. The situation is only likely to worsen, as it is expected that the tax on petroleum products (either by increasing PL or imposing GST) will increase in the next fiscal year, and this will make smuggling even more lucrative.