KARACHI: A joint study will be conducted to project high-speed diesel (HSD) demand in Pakistan before a formal review of Pakistan State Oil’s (PSO) long-term contract with the Kuwait Petroleum Corporation (KPC) takes place in September 2026.
A government committee, led by the petroleum minister, recommended that PSO, the Oil and Gas Regulatory Authority (Ogra), and the Petroleum Division jointly carry out this projection before committing to volumes for the next contract extension. The committee was originally established to investigate the low offtake of petroleum products from domestic refineries by licensed oil marketing companies (OMCs) over the past year.
The committee further advised that while the current contract remains valid, KPC’s share should be maintained at above 70 per cent of total imports. Any remaining volumes should preferably be sourced from outside the Strait of Hormuz on a competitive basis.
PSO’s long-term supply arrangement with KPC introduces a fixed quantity of imported HSD into the national supply chain. While this guarantees supply and price stability — as evidenced during recent regional tensions — it also restricts market space for domestic refineries, particularly during periods of subdued demand.
The committee identified several factors contributing to the low offtake from local refineries. These include a weak Product Review Meeting (PRM) regime, the absence of ‘take-or-pay’ agreements between refineries and OMCs, and PSO’s fixed procurement obligations under the KPC deal. Other factors included increased refinery production due to deemed duty incentives, discounted prices from alternative suppliers, and smuggling. Smaller OMCs also cited the refineries’ stringent Letter of Credit (LC) requirements as a significant hurdle.
The PSO-KPC agreement is designed to ensure national energy security by fixing minimum and maximum import volumes over three-year periods, with monthly cargo placements agreed six months in advance. However, because HSD demand fluctuates, these long-term commitments reduce the flexibility required for supply adjustments.
During the investigation, OGRA highlighted the need for clear policy guidelines regarding import prioritisation. The committee reviewed the history of the agreement, which has been operational since 1976, noting that the current three-year extension (January 2024 to December 2026) involves annual commitments of 1.8 to 2.2 million metric tonnes. It was observed that these volumes were committed by PSO without prior consultation or approval from Ogra.
PSO explained that the contract quantities were based on demand projections, local production estimates, and the anticipated success of anti-smuggling drives at the time. The company noted that KPC has historically been cooperative, adjusting cargoes to meet demand fluctuations without imposing penalties for lower offtake. Additionally, the Kuwaiti government provides a 90-day interest-free deferred payment facility with no LC requirement.
Following the review, the committee decided that a formal overhaul of the contract terms is necessary. For the remainder of the current term, KPC’s import share will stay above 70 per cent in line with prevailing Ogra practices. The remaining volumes, ideally sourced from outside the Strait of Hormuz by private companies, will be allocated based on each company’s market share and historical performance.
