Pakistan lines up Saudi-backed refinery as it eyes more Russian oil

A $10 billion Saudi-backed oil refinery project planned in Pakistan’s port city of Gwadar aims to capitalize on the troubled economy’s potential, and, sources say, lay a foundation for taking in more Russian crude.

Four Pakistani state-owned energy companies late last week signed a memorandum of understanding (MOU) with Saudi Aramco, which will inject the initial 30% equity into the project. Once built, the refinery will be able to process 300,000 barrels per day, according to details released by the government.

That alone would surpass the combined total of 215,000 barrels per day of petroleum products refined in Pakistan in 2020-2021, according to a report by the Oil and Gas Regulatory Authority.

The quartet of enterprises — Pakistan State Oil (PSO), Oil and Gas Development Company Limited (OGDCL), Pakistan Petroleum Limited (PPL), and Government Holdings Private Limited (GHPL) — also signed a memorandum with China National Offshore Oil Corp. for engineering, procurement and construction of the refinery. Gwadar has long been positioned as the heart of China’s Belt and Road projects in the country.

Pakistan is mired in political and economic crises, which forced it to go to the International Monetary Fund for a $3 billion standby bailout arrangement to avoid a default. For this reason, some experts Nikkei Asia interviewed expressed skepticism about the refinery project, questioning the need for the additional capacity in light of the economic woes. Security is also an ever-present concern, highlighted by a deadly suicide bombing in northwestern Khyber Pakhtunkhwa province on Sunday.

But some argue that the parties involved are playing a longer game. James Dorsey, a senior fellow at the S. Rajaratnam School of International Studies in Singapore, reasoned that although the economic situation in Pakistan is not ideal, the country, with a population of over 200 million, still has huge economic upside. “This refinery will take a few years to build and by that time economic growth is anticipated in Pakistan,” he said.

The refinery could handle Russian crude, which Pakistan has just begun importing. With Ukraine war sanctions limiting Russia’s export options and forcing discounts, a cash-strapped Islamabad turned to Moscow to bolster its energy supplies. Pakistan recently imported one shipment of Russian crude and is negotiating a second with a long-term oil transportation deal.

The secretive dealings have raised several questions: over Pakistan’s ability to process the Russian oil, as well as shipment costs, and how exactly the government can pay for the fuel in Chinese yuan. Nevertheless, a Pakistani government official privy to the developments told Nikkei on condition of anonymity that importing oil from Russia has been a success.

“Pakistan plans to increase its oil imports from Russia, which would result in a need for additional refinery capacity in Pakistan,” the official said. “The proposed refinery in Gwadar will possibly help refine increasing volumes of Russian crude.”

The Saudis, meanwhile, have been eyeing this project for some time. Crown Prince Mohammed bin Salman’s visit to Pakistan in February 2019 brought the first announcement that a $10 billion oil refinery would be built in Gwadar. After a four-year interval, Dorsey believes Riyadh is likely serious about the project now.

“Initially the Pakistanis tried to integrate the [Gwadar refinery] project in BRI but the Chinese refused it,” Dorsey said, saying the project can now move ahead outside the Belt and Road framework.

The Saudi investors have been promised a 20-year tax holiday. Alex Vatanka, founding director of the Iran program at the Washington-based Middle East Institute, believes Aramco’s decision must have convincing commercial logic. “An investment on this scale has commercial merit,” he said. “The Saudis have the money, the economic vision, and Pakistan’s energy market is both huge and hungry.”

Experts also note that the deal comes in the context of Saudi-Iranian rapprochement, and that this could be a factor in the refinery, which is to be built just 90 kilometers from the Iranian border.

Luke Przybyszewski, president of the Abhaseed Foundation Fund, a Polish group of Middle East experts, said Pakistan could reap rewards from both sides of that detente. “Cheap energy from Iran and [foreign direct investment] from Saudi Arabia seems to be a good choice, perhaps currently acceptable to both Riyadh and Tehran,” he said.

But in Gwadar itself, some are doubtful they will see big benefits. Aslam Bhootani, a member of the National Assembly representing Gwadar, complained that the details of the project have not been discussed with him. “We often hear that MOUs are signed, but there is no development on the ground,” Bhootani said. “To date, Gwadar does not have an uninterrupted and guaranteed supply of power,” he added. “Unless this issue is resolved, no megaproject in the coastal town can be successful.”