Buying Russian crude unviable for Pakistan

In one of my blogs I had questioned the economic viability of Pakistan importing Russian crude oil on three points: 1) longer distance, 2) higher freight and handling charges, 3) Pakistani refineries not tuned to refine Russian crude and on top of all 4) why to buy Russian oil on upfront payment when Saudi Arabia is supplying crude on deferred payment. Today, a Reuters report substantiated my apprehensions.

The report says, “Pakistan is unlikely to meet a target for Russian crude to make up two-thirds of its oil imports, despite attractive prices, hampered by a shortage of foreign currency and limitations at its refineries and ports”.

It also pointed, “The benefits are being offset by increased shipping costs and lower quality of refined products compared to the fuels produced from crude from Pakistan's main suppliers, Saudi Arabia and the United Arab Emirates”.

It goes to the extent of saying, “Added to the challenges, transportation costs for Russian crude are higher than for Middle Eastern crudes not only because of the longer distance traveled, but because Pakistan's ports cannot handle the large vessels departing Russia”.

According to the report, “Urals crude had to be transferred from a supertanker on to smaller ships, known as a lightering operation, in Oman before heading to Pakistan, unlike direct shipments from the Middle East”.

Even with that extra cost, it was worth importing Russian oil, said Viktor Katona, lead crude analyst at Kpler, as Saudi Arab Light crude is US$10 to US$11 per barrel more expensive for Pakistani refiners than Urals, while lightering operations add around US$2 to US$3 per barrel.

"Pakistani buyers would still be much better off," he said.

The key issue is, “Urals quality is a deterrent, as Pakistan's refineries cannot get as much gasoline and diesel out of Urals crude as they produce from Saudi and UAE crudes”.

It will take Pakistan Refinery (PRL) at least two months to fully process its first cargo of 100,000 tons (730,000 barrels) of Urals crude as it needs to be blended with Middle East crude to offset the high output of fuel oil from the Russian oil, Zahid Mir, chief executive of the refinery.

"Our optimum processing solution is to blend Urals with Middle Eastern imported crude while not exceeding 50% Ural in the blend," Mir said.

The residual fuel produced from Urals crude has to be mixed with diesel and kerosene to meet specifications for local use while the remainder is exported, but the deal was still commercially viable for Pakistan, Mir said.

PRL has no plans to upgrade its refinery to process fuel oil into higher quality fuels, he added.

Kpler's Katona expects Pakistan's liquidity issues and technical challenges to weigh on its appetite for Russian crude.

"Russian imports into Pakistan will not grow into anything bigger than one cargo per month," he said.