Acquiring Russian Oil at discount- Understanding Ural Oil – Refinery Configuration of six Operational refineries in Pakistan

Russia’s Urals oil is used as a reference brand for pricing of export oil mixture . The other main reference brand is Brent. It comprises a mix of heavy sour oil of  Urals and the Volga Region blended with light oil of Western Siberia Urals crude exported from the Baltic and Black Sea ports involving long shipping voyages  to China and India .

Russia produces four crude oils namely ESPO, Urals, Sokol and Sakhalin with ESPO and Sakhalin considered suitable for refining in Pakistan’s refineries by blending it with the crude oil imported from UAE and Saudi Arabia. In any case local refineries meet 20 % of Pakistan’s petroleum requirements with the remaining 80 % refined by importing crude oil subject to each crude consignment being adjusted one time with technical suitability of the crude grade , refinery configuration and yield in terms of percentage of volume. PARCO is likely to pioneer this venture.

Regional Illicit Fuel Cargo Scenario

Russian oil imports account for the second largest source for India after imports from Iraq. Indian contracts for Urals crude  for March to June and projections for deliveries in July and August (around 66.5 million barrels cumulative)  amount to more than the quantity purchased during all of 2021 ( procured 4.8 million metric tonnes of discounted Russian oil ). India is importing Urals oil and compared to Brent crude , being the global benchmark, discount being favorable at around USD 30 per barrel. Urals oil from Russia currently trades at about USD 95 a barrel, while the global benchmark Brent crude is above USD 119 a barrel. Earlier Russian Ural crude was uneconomical due to high freight costs. India has been taking advantage of increased global shipping costs and trying to dominate Russian trade to other South Asian countries including Iran and Oman .

Sanctions

Indian refineries are facing a daunting task to finance Russian purchases on account of sanctions on Russian banks however,  no secondary sanctions apply on countries doing business with Russia. India’s dependence on West Asian oil, gives Indian refiners improved bargaining strength with Saudi Arabia oil pricing besides strategically improving its energy security.

Russian Companies & Commercial Subterfuge

International traders namely Vitol and Trafigura had to disengage from Russia’s oil trade on account of US sanctions .The Russian state owned shipping group Sovcomflot with its tanker fleet is a key player in enabling oil exports to India and elsewhere after Western certifiers withdrew their services due to global sanctions against Moscow. This is bolstered by certification by the Indian Register of Shipping ( IRC) , an internationally recognized classification company, completing the paper trail including the much needed  insurance coverage required to maintain Sovcomflot’s tanker fleet afloat and continue delivering Russian crude oil to overseas markets. The IRC as per information available on its website certified more than 80 ships managed by SCF Management Services (Dubai) Ltd, which not surprisingly turns out to be a Dubai-based entity listed as a subsidiary on Sovcomflot’s website.

 Russian route to transport crude to India – Russia to direct Westward crude to the East – Analysis of Transportation Modes

Russia’s seaborne oil exports have increased from 3.394 million bpd on 28th February 2022  to 3.754 million bpd by 13th June 2022 , an increase of 11% , despite trade sanctions. Russian oil transported vide sea are unloaded at India’s western ports and China is supplied Russian crude shipped from Russia’s Pacific coast . Logistic issues persist as there is a global shortage of ships which can act as ice breakers as most of the hydrocarbon is located in the Artic and after the sanctions managing insurance is problematic but trade dynamics may alter this situation. Vessels voyages are longer when transporting Urals crude  from Russia’s western ports to Asia rather than Europe as typically a journey to China may take around two months.

Russia exports nearly 50% of its crude oil and refined products via long-distance pipelines with the balance through waterborne liftings and trade. It has the two longest oil pipelines in the world, the Druzhba to the west, and ESPO oil pipeline in the East. However, there are commercial limitations to delivering incremental crude oil to the east via the ESPO oil pipeline. Russia and China market participants signed a long-term oil supply contract in 2012 for an estimated annual volume of 15 MMt for the term of 20 years. In contrast to Russia’s lack of crude oil storage facilities , China has 12 SPR sites in operation totaling 249.7 mmbbl and was contemplating another 5 sites. Russia does have an inherent advantage  as besides these pipelines waterborne crude oil liftings via Very Large Crude Carriers , medium size Aframax tankers and other vessel sizes and types provide additional Russian crude oil disposition options.

Technical intricacies involved in acquiring of Russian Oil

Sanctions are presently applicable to Russia and no secondary sanctions imposed on other countries. Sanctions are imposed as per US Presidential orders which need to be carefully interpreted. At present Russia is denied access to SWIFT/ international Western Banking channels and both China and India are circumventing this payment route by other means so Pakistan can examine this mechanism. No sanctions are imposed on Pakistani refineries and even if sanctions are imposed they will be imposed on India and China as well and existing cargoes are exempt from sanctions. Long term contracts with Saudi and U.A.E for crude are not binding if price escalates. Only once , in 1998 , Saudi offered oil on deferred payments and later converted the same into grant.

 Saudi Oil Suppliers Apprehensions 

Pakistan and Saudi Arabia and U.A.E have long term crude supply contracts and there has to be an upper cap on oil pricing. If they are unhappy they can offer Pakistan lower priced oil. Regarding labour in the Kingdom of Saudi Arabia and U.A.E India also has a sizeable labour and technical and executive presence in Saudi Arabia but they feel no such threat. Anyway this has to managed diplomatically as well . This energy crisis was in the making since the Russian invasion of Ukraine and the anticipated disruption of Energy and Food Supply chain. Pakistan’s energy policymakers should have timely proposed alternative energy source instead of simply remaining complacent and attending board meetings of PARCO and PSO and getting huge remunerations without foresight for overcoming the energy crisis.

State owned refineries and private refineries Sleep

PARCO is a Mid Country Refinery with a strategic shareholding of GoP as well as shareholding of UAE. Pakistan State Oil  , which has the market share of around 65 % in the domestic market,  has a strategic shareholding of GoP and can place order for Russian crude. PARCO configuration is more advanced and Russian crude can reach and initially be stored at Karachi Port Keamari storage whereas other refineries are of older configuration and have not upgraded therefore remain inefficient in any case . PARCO can blend Russian crude with Saudi and U.A.E crude or can exclusively refine Russian crude .
No sanctions on Pakistani refineries and even if sanctions are imposed they will be imposed on India and China as well and existing cargoes are exempt from sanctions.We should cross the bridge when we reach it. PARCO refinery  can blend or process any crude and in case of any additional cost, being public sector , can absorb the additional initial costs of refining Russian crude out of GoP revenue share otherwise GoP should have privatized its shareholding immediately.

Maritime supply route suits Pakistan – Role of PNSC

Eastern maritime route suits Pakistan passing China and Straits of Malacca from Russian Ports of Valadivistok and Kozmino. It is not known if Pakistan National Shipping Corporation (PNSC) studied the logistic costs and time involved in these routes vis-à-vis its existing oil routes from the Middle East.  As per information available in the public domain PNSC has four Oil Carriers which can be deployed on the Russian route. PNSC can charter oil tankers as well. PNSC is bound to comply GoP directives to carry liquid fuel cargoes from Russian ports and lame / technical excuses should not be tolerated. In any case PNSC is inefficient and operates in a monopoly. Otherwise what is the use of a National Flag Carrier ? As per published accounts PNSC is earning PKR 4 billion profit annually. Out of its 11 vessels 4 are crude carriers and 7 are chartered to other parties in other routes. So to ensure Energy Security it can lower or not even charge  freight rates as it has a healthy balance sheet. Role of public sector in Pakistan traditionally was to support state initiatives , invest and open up the sector for the private sector investment which will only come when there is assured profit. Even if  PNSC is to go insolvent / bankrupt as long as energy and food security is met it is acceptable. National Insurance Corporation Limited  being state controlled is mandated to provide insurance back up to PNSC as required .

Iran Refines the art of evading sanctions

Iran is experienced and has developed mechanisms to evade sanctions by capitalizing on the geography of its territorial waters . Due to sanctions by US on Iran crude and chemicals loaded from Iran come to the high seas then are transferred through ship to ship mode (STS) after the ship GIS/coordinates are disabled. The vessels then move to any Middle East port (usually Fujerah in U.A.E) obtain a Certificate of Origin and BL is issued for onwards destination to any port for discharging. Deliberate switching off of AIS transmitter is a violation of SOLAS and Iran cargo remains under US sanctions 2000.

Iran circumvents sanctions and maintains a certain level of crude exports. The geography of the Gulf depicts an unregulated labyrinth of production facilities , trading hubs, networks of oil refineries, storage tanks, production sites and export terminals littering southeast Iraq and southwest Iran near the river that separates the two countries as well as the coastal region of Iraq’s al-Faw Peninsula which camouflages the origin of oil. Cargo ships and oil tankers (with crude stored ) are moored in anticipation of Iraqi and Iranian crude.

Iran Dubai Collusion and FATF

Iran in collusion with U.A.E which is a global trading and transshipment hub for crude and refined petroleum products blends liquid cargo , changes vessel names and identification codes to obfuscate the identify of its oil tankers. The UAE coastline is hugged with Iran’s armada of 123 tankers registered in various nations without the inclination to monitor tankers flying their flag. The United Arab Emirates in now in the ” Grey List ” of FATF.

  1. Iranian vessels are adept at ‘spoofing’ – manipulating the GPS software that reports a vessel’s position so it appears to be elsewhere when it docks undetected in prohibited areas for disguising an illicit transfer of liquid fuel in the region.
  2. The EU’s 11th sanctions package came into effect in July 2023 allowing regulators to directly connect entry of a port or a channel with deceptive shipping practices, and specifically spoofing. This gives authorities the power to block entries – a powerful, fast, and public sanction on players in the dark fleet, the gray fleet, or those trading above G7 price caps. It’s not really critical if all EU countries enforce this but it’s critical if the EU’s large ports and channels enforce as they can prevent any Greek flagged vessel from entering even if Greece does not contest the stoppage of its vessels.

By Nadir Mumtaz