IMPORTING FUEL FROM INDIA AMID RISING ENERGY PRICES

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)

Oct 1 - 7, 20
12

Pakistan is largely dependent on oil imports. The country's annual energy requirements are expected to more than double to 177 million tons of oil equivalent by the year 2020.

The country's consumption of petroleum products currently stands at about 21 million tons, of which about 85 per cent was met through imports. The transportation of about two million tons of POL products takes place through the railway, 4.5 million tons through pipelines and about 14.5 million tons by road. Analysts believe that lifting of a ban by Pakistan on movement of fuel from India by road will translate geographical advantages into lower transport costs, as import from India could help Pakistan reduce rising transport costs on fuel imports from far-off countries such as Kuwait.

Pakistan's total refining capacity is about 13 million tons, while Bhatinda and Panipat in India have a refining capacity of about 15 million tons and two refineries of the Reliance Industries have a capacity of 40 million tons. The price of diesel and petrol in Pakistan is higher against the prices in India. If Pakistan lifts ban on fuel imports from India, the oil marketing companies could be allowed to import the two products through open bidding, while Indian companies would be allowed to participate in tenders floated by oil marketing companies.

The move for fuel trade between India and Pakistan has been under discussion. Last year, India and Pakistan decided to undertake new initiatives such as a cross-border pipeline to enable the trade of petroleum products with energy-starved Pakistan. Pakistan commerce and trade secretary Zafar Mahmood and his Indian counterpart Rahul Khullar concluded trade talks in Islamabad. The two countries agreed to set up a joint working group to enhance trade and discuss a pipeline and the route and funding for trade of fuel and electricity from across the border.

India has already agreed to export fuels to Pakistan to help it meet the power shortfall in a move that could bring a new market for Indian refiners such as Reliance Industries Ltd., India's biggest company by market value. Islamabad linked the oil imports from India with export of Pakistani cement and chemicals without any barriers.

Indian Oil Corp (IOC), the India's largest refiner, has showed willingness to supply petrol and diesel if Pakistan lifts its ban on imports of fuel. The IOC hopes to expand its 300,000 barrels per day (bpd) refinery in the northern Indian town of Panipat if Pakistan lifts the import ban. The biggest hurdle for Indian exporters appears to be the preferential price at which Middle East countries sell fuel to Pakistan.

India has granted Pakistan the status of "most favoured nation", while Pakistan recognized that granting equal status to India would help to expand trade relations.

The country currently faces acute energy crisis, which has not only suffocated the industry but also made the lives of 170 million Pakistanis unbearable, as they face frequent power outage and hours long load-shedding of electricity in hot summer. The increased power tariffs and power outages have already crippled the industry, causing widespread discontentment in the business circles.

Pakistan meets only 15 per cent of the consumption from indigenous crude production, while 30 per cent crude and 55 per cent refined products are imported. The country's total diesel consumption of about 4.4 million tons can be met through imports from India where its prices are lower than in Pakistan.

The issue of fuel trade between India and Pakistan came up in the middle of 2008, but has been on hold as relations deteriorated. Bilateral fuel trade has been held hostage to their years of hostility, with Pakistan intermittently lifting a ban on imports of Indian petroleum products when relations have improved. Pakistan allowed diesel imports from India in 2009, but no Indian supplies were sent in the face of preferential prices offered by Pakistan's allies such as Kuwait.

With a refining capacity of 13 million tons, Pakistan meets only half of its annual requirements, while India exports about 25 percent of its 185 million tons refining capacity. Pakistan-Arab Refinery Company (PARCO), a joint venture between Government of Pakistan (60%) and Abu Dhabi Petroleum Investment (40%) is presently is considered the fulcrum in the country's strategic oil supply and logistics. Incorporated in May 1974 as a public limited Company, the PARCO has emerged as the strategic fuel supplier to the country. It is actively involved in various facets of oil storage, transportation, refining and marketing of energy products.

In the past three years, Pakistan planned to launch two refinery projects in Balochistan in order to double its refining capacity. In 2007, United Arab Emirates had signed an implementation agreement with Pakistan for establishing a $5 billion refinery at Khalifa Point in the Hub district of Balochistan. Under the deal, Abu Dhabi's International Petroleum Investment Company (IPIC) agreed to set up Khalifa Coastal Refinery (KCR) with a target capacity of refining 200,000 to 300,000 barrels per day (bpd). The project, which scheduled to be completed by 2012, delayed for various reasons. Abu Dhabi's IPIC holds a 74 per cent stake, while PARCO has a 36 per cent stake in the KCR project.

In 2009, China shelved $10 billion oil refinery in Gwadar. China-funded oil refinery project was estimated to have a total capacity to refine 21 million tons of oil per annum. The project had two components including a petrochemical complex and oil storage. The petroleum products so refined in Gwadar would be transported to Kashghar on Pakistan's north through a pipeline.

India and Pakistan have stepped up efforts over the past many months to improve their trade and economic relations. They resumed bilateral trade dialogue in April last year. The two sides have agreed to enhance bilateral trade, which currently stand at $2 billion, to $6 billion by 2014. Last month, India overturned a ban on foreign direct investment (FDI) from Pakistan and allowed a citizen or entity from Pakistan to make such investments in India. The Indian cabinet on August 18, in a major move to promote trade ties with Pakistan, excluded 254 items which make up to 30% of the total sensitive products' list.