Islamabad: In a decision that stirred debate among key government ministries, Pakistan has approved a dollar-denominated guaranteed return scheme for transporting petroleum products through the Machike-Thallian-Tarujabba White Oil Pipeline. The ambitious project, estimated to cost $300 million, will be executed through a joint venture involving Azerbaijan’s state-owned oil company SOCAR, Pakistan State Oil (PSO), and the Frontier Works Organisation (FWO).
The Economic Coordination Committee (ECC) of the Cabinet sanctioned the scheme amidst concerns from the finance and power ministries. Proponents argue the project will bolster Pakistan’s strategic ties with Azerbaijan and stimulate foreign investment. However, the decision to offer guaranteed dollar returns has drawn skepticism.
During deliberations, Power Minister Sardar Awais Leghari highlighted past issues with similar models applied to Independent Power Producers and urged for a thorough evaluation of the project’s costs and internal rates of return before finalizing the terms.
Despite objections, the Petroleum Division backed the terms, arguing that adjustments could make the project less appealing to investors. SOCAR insisted on a “ship-or-pay” model, ensuring payment for the pipeline’s capacity regardless of its actual usage, a condition likened to the “take-or-pay” models in power agreements.
The Ministry of Finance cautioned against extending dollar-based returns to investments funded locally and recommended extending the payback period to mitigate initial tariff impacts. Nonetheless, ECC decided to proceed, seeing the pipeline as a pivotal opportunity for foreign investment despite potential financial implications.
Currently, petroleum transport in Pakistan predominantly relies on roads, with pipelines playing a minor role. The new pipeline is expected to shift a considerable portion of oil transport to pipelines, enhancing efficiency and reducing road traffic.
The Oil and Gas Regulatory Authority (Ogra) is set to implement tariffs in US dollars and designate the pipeline as the primary mode of oil transport. Oil Marketing Companies will be mandated to meet minimum pipeline usage volumes, with shortfall taxes offset through existing financial mechanisms.
Ogra is handling tariff petitions for the project’s different sections, setting provisional tariffs as discussions continue. The specifics of these tariffs remain classified.
This pipeline not only targets efficiency in oil transport but also reflects a broader strategy to cement international partnerships and drive infrastructural growth within Pakistan.
