In 2023, Pakistan introduced ‘tax-deferred’ bonded storage through policy guidelines to attract foreign oil suppliers, aiming to prevent oil shortages and alleviate the pressure on foreign reserves. However, no supplier responded.
This year’s Strait of Hormuz disruptions, threatening Pakistan’s oil and LNG imports, have led the government to seek foreign suppliers again. The ECC approved a revised 168-page policy guideline on bonded storage. The new proposal includes pipeline access for foreign suppliers, simplified re-export rights and full ‘tax-neutrality’ while goods remain in bonded storage. The new approach reportedly includes input from Saudi Arabia, Kuwait and Qatar.
The 2023 policy deterred international oil suppliers by treating them as local companies and exposing them to tax liabilities and strict pricing controls. It also restricted fuel storage to port terminals, limiting logistics.
In contrast, the 2026 revision addresses these issues: it includes all key energy commodities (crude oil, diesel, jet fuel, LPG and LNG) and extends bonded storage locations beyond port-based marine terminals to Mahmood Kot and Machike. Foreign suppliers can now re-export fuel within 24 hours without Letters of Credit and locally they can set prices freely without price caps.
The 2026 approach to tax neutrality (freezing all duties and taxes) on fuel in a bonded regime until it is sold locally seems inspired by successful energy hubs like Singapore, Fujairah and Rotterdam -- the strategy separates international trading from domestic tax regulations. It will allow foreign suppliers to import petroleum into bonded storage without immediate domestic sales or remittance abroad.
It is a more thoughtfully designed policy than its earlier version. However, it may still disappoint, as the last one did: Pakistan views this as a tax and regulatory problem; indeed it is, but at the same time it is an issue of infrastructure and trust.
Fujairah has become a key oil storage hub, thanks to years of terminal investment and a dedicated pipeline from Habshan; one terminal expansion in 2013 alone cost $252 million. With major companies like Vitol, Vopak, ADNOC, and VTTI providing around 18 million cubic meters of storage, Fujairah benefits from a strong, supportive industry environment.
Singapore’s advantage lies in its strong refining and petrochemical sector, making it a true oil hub rather than just a storage area. Sharing inventory data helps traders make informed decisions and manage risks. Similarly, Rotterdam offers extensive pipelines, barge connections to the Rhine, deep-water access and transparent stock data, building trust among traders.
Gwadar is important for the government’s Hormuz bypass plan. It has key benefits, including deep-water access and closeness to shipping lanes. But it has only initiated two small bunkering operations; the planned ‘oil city’ for tank farms has yet to secure a site. Current storage capacity is limited and falls far short of the millions of cubic meters needed for a functional logistics hub.
The free zone’s electricity and water supply are unreliable, and Gwadar has a fifteen-year history of failing to attract significant traffic from Karachi and Port Qasim. Announcing a bonded-storage framework does not resolve the need for tank storage and reliable utilities, which other global hubs took decades to establish.
Karachi’s two oil ports, FOTCO at Port Qasim and the Kemari terminal of Karachi Port Trust, appear to be the most viable sites under the new policy. But they lack Gwadar’s strategic importance. In the short term, Port Qasim and Kemari could serve as the main locations for bonded storage, enabling foreign suppliers to store products quickly. However, the main issue is their capacity, not readiness, as current restrictions limit the size of vessels that can dock. Port constraints have greatly limited storage options; that is likely why the government is considering building an oil city in Hub.
Hub has advantages. Since 2012, single-point mooring has supported the Cnergyico refinery and has substantial unutilised capacity (almost 90 per cent); land from a previous refinery project is available, along with proximity to existing pipelines connected to Karachi Port and the White Oil Pipeline. In contrast, Gwadar lacks these benefits. However, Gwadar is crucial as CEPC’s flagship, which China values for circumventing the Malacca Dilemma. For Pakistan, it’s a strategic priority, even if it’s not fully operational. Hub, while ready for infrastructure development, lacks the same geopolitical significance.
Fair tax regulations, like those introduced in Pakistan’s revised policy, are essential but not enough for success. Regular public inventory data is also vital, as seen in successful trading centres like Singapore, Rotterdam and even Fujairah. This transparency reduces market opacity and enables traders to assess risk effectively.
The 2023 version also failed because the local industry didn’t support it. Even today, the domestic oil industry faces challenges that the government must address to gain its support. Pakistani refiners will finance a $6 billion upgrade programme while also managing new inventory obligations after the upgrades. At the same time, they must compete against untaxed foreign bonded stock. Further complicating matters, they are still disputing a pricing formula. Local oil marketing companies are in a tough spot, too. Market forces don’t set their profit margins, which limits their ability to compete on price with suppliers that have more flexible, duty-deferred stock.
It is also essential to clarify what the policy promises during a crisis, as the political narrative often exaggerates its effectiveness. It offers a right of first refusal for only 10 per cent of the stocks held under the scheme. Ogra has two days to exercise the right, after which it is waived. Suppliers can export the remaining 90 per cent at their discretion, with no obligation to maintain a minimum stock in Pakistan. Ultimately, the right of first refusal is a limited-time purchase option, not a guarantee of fuel availability.
To achieve better results this time, the government must take four key steps: (i) Gwadar’s oil city must have a defined site and a clear construction funding plan; (ii) the government should implement a genuine inventory transparency system to build trust with traders, instead of relying solely on tax incentives; (iii) improving legal and regulatory governance is crucial, as Singapore’s strict rule of law and efficient dispute resolution make it more attractive than resource-rich countries; and (iv) the government should guarantee stable pricing mechanisms before expecting local refiners and OMCs to compete with foreign companies that enjoy tax advantages.
Pakistan needs a resilient supply chain, and while this policy is a start, it requires infrastructure, strong legal frameworks and effective enforcement to succeed.
The writer is an economist and researcher with expertise in the energy sector.
