Iranian oil option returns for Pakistan

Pakistan is considering tapping Iranian crude oil supplies again, a possibility that has resurfaced following a temporary easing of U.S. sanctions on Tehran. This could allow Pakistan to source discounted crude and refine it locally into higher-value petroleum products.

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We can refine Iranian light crude oil, but due to high furnace oil (FO) content, it is not a commercially viable option, particularly when there is no domestic market for the FO due to its negligible usage in the power sector.

Industry experts note that while Pakistan's refineries possess the technical capability to process Iranian crude, significant commercial and operational hurdles remain. A key challenge is the high yield of furnace oil, a byproduct for which domestic demand is minimal due to its negligible use in the power sector. Previously, Pakistan Refinery Ltd (PRL) imported Iranian crude under a contract, but these purchases ceased after U.S. sanctions were imposed.

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The most notable aspect is the price of Iranian crude oil and whether it is pegged to an international benchmark, with parity to Arab crude. If there is no discount, refining at the local refinery is not economical.

The economic feasibility of refining Iranian crude hinges on several factors. A former head of a Karachi refinery highlighted that the price of Iranian crude, particularly whether it is pegged to international benchmarks with parity to Arab crude, is crucial. "If there is no discount, refining at the local refinery is not economical," he stated. He also pointed out that Indian refineries are better equipped with deep-conversion units like hydrocrackers, enabling them to process a wider range of crude grades into products like diesel and petrol. Pakistani refineries would require similar upgrades to process heavier crude grades efficiently.

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Indian refineries are mostly deep-conversion units equipped with hydrocrackers, hydrocokers, residue fluid catalytic cracking units, etc. This gives them the flexibility to process crude ranging from heavy to light grades into value-added products like diesel and petrol.

Recent trends show a decline in diesel demand in Pakistan, with sales down 32% year-on-year in May. Local refineries are currently meeting 80% of diesel demand, partly due to changes in their crude oil recipes. However, the overall refining landscape in Pakistan, with most refineries lacking advanced cracking units, suggests a need for modernization to enhance flexibility and profitability in processing different crude types.

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If Pakistani refineries are upgraded in near future then we will have a choice to process heavy crude.