After much dilly-dallying, Pakistan has made its first purchase of Russian crude oil — at a “discounted” price. With Russia looking for new outlets for its crude oils and Pakistan looking for cheaper crude to overcome its acute balance of payments crisis, the deal serves both countries well.

With a multipolar world in the making, and Pakistan’s traditional allies from China, Iran, Türkiye and even Saudi Arabia preferring to be a part of a new regional bloc led by China, this could be a strategic move towards a closer and warmer relationship between Islamabad and Moscow.

To reach a deal, both countries had to overcome considerable hesitation on their respective parts. Badly in need of US support from the International Monetary Fund and other multilateral bodies, Pakistan feared a US backlash to any such deal.

Russia, on its part, was initially reported to be uncertain whether Pakistan would really want to proceed with an oil deal. Following a visit by the Russian energy minister to Islamabad and further meetings between their respective officials, Russia suggested Pakistan purchase one cargo as a “test case”.

The higher costs of Russian oil import transport and refining may offset the price differential

Pakistan’s imports from Russia are expected to reach 100,000 barrels per day (bpd) if the first transaction goes through smoothly, said Minister of State for Petroleum Musadik Malik while announcing the agreement last month.

In an era where the race is on to capture markets, how would Pakistan’s traditional Gulf and Arab oil suppliers react to any “long term” deal between Islamabad and Moscow? This is a point of concern to Pakistan. Currently, 80 per cent of Pakistan’s oil requirements of roughly 154,000 barrels per day are being met by our traditional Gulf and Arab suppliers, mainly Saudi Arabia and the UAE.

Yet to be fair, global markets are in a transition. Due to sanctions, Russia had to relinquish many markets, especially in Europe. Saudis and other Arab Gulf suppliers are filling up those gaps. Hence Pakistan resorting to Russian crude may not be a cause of real concern to Saudi Arabia and the Emirates. After all, they have not reacted harshly to the purchase by India of Russian oil.

India’s imports of crude oil from Russia soared to a record 1.6 million barrels per day in February and are now higher than combined imports from its traditional suppliers, Iraq and Saudi Arabia.

Further, in sharp contrast to the past, Pakistan’s Gulf Arab allies have resorted to realpolitik on issues of major concern to Pakistan vis-à-vis India, such as Kashmir. Pakistan cannot stay oblivious to all those developments. It needs to protect its interests. But Pakistan’s dependence on financial support from Saudi Arabia and the UAE makes it vulnerable. Pakistan will need to balance its stance and present its case before its Gulf and Arab friends, forcefully and diplomatically.

What savings Pakistan would make from this deal is another matter of debate in the media. There has been considerable speculation in global media about the price and currency of the deal. Pakistan has generally refrained from making public the terms of the deal on “Russian request”. Some media reports, however, insist the deal has been done at around $50 per barrel. That is considerably cheaper than the current market prices.

The currency of the deal is another point of interest. Lately, while talking to Bloomberg, minister for Power Khurram Dastgir Khan clarified that although the payment for the first shipment has been made in US dollars, Pakistan would like further purchases to be in made in yuan, given the nation has a currency swap arrangement with China.

Yet, to be fair, the mathematics is not that simple. Shipping crude to Karachi from Russian ports means higher shipment costs. Pakistan’s existing oil imports from the gulf come via Dubai, roughly 1,300 kilometres from Karachi port. The nearest Russian seaport is 8,000 kilometres away. All this could mean an additional cost of somewhere around $10-15 per barrel.

Further, unlike the refined oil sold by Saudi Arabia, Russia would sell crude oil to Pakistan. With Pakistani refiners configured to process lighter Arabian crudes, the consignment of heavier crude could mean an additional refining cost too. As per some media estimates, this could also add some $4 per barrel to the overall cost.

Pakistan will also need to overcome the issue of product portfolio from refining the Russian crude in Pakistan. Russian crude oil produces 50pc furnace oil and 32pc diesel as compared to Arabian oil, which produces 45pc diesel and 25pc furnace. This detail is significant in the context of Pakistan’s oil consumption pattern.

Diesel, used for transportation, makes up 39pc of Pakistan’s total consumption, while furnace oil, used for power generation, makes up just 15pc. As a result of refining the Russian crude, Pakistan will end up with more furnace oil than it needs. This would add to the ultimate cost, reports have been emphasising.

A beginning has been made, but there remain several impediments in the process before both countries can move ahead towards the much-desired energy relationship in a strategic sense.

Published in Dawn, The Business and Finance Weekly, May 29th, 2023