Russia’s invasion of Ukraine upended the global natural gas market. Europe’s efforts to replace Russian gas supplies have exacerbated price spikes for buyers around the world. In particular, such developments are putting significant pressure on South Asian countries like Pakistan, whose economies are heavily dependent on gas but are struggling to obtain it at an affordable price.
For Pakistan, natural gas makes up 50 percent of its total energy supplies and the country relies on gas for a third of its electricity output. Against this backdrop, Islamabad has drifted closer to Moscow in recent years, in part because the government has been looking for ways to shore up the country’s energy security.
In June 2023, Russia sent gas supplies to Pakistan through Uzbekistan and Afghanistan for the first time. A convoy of 10 trucks carrying Russian liquefied petroleum gas (LPG, which is manufactured by refining crude oil or processing raw natural gas) entered Pakistan via the Torkham border crossing from Afghanistan. The Russian LPG imports were allegedly obtained at a discount and the transaction was completed in Chinese yuan, according to Pakistani Petroleum Minister Musadik Malik. However, Russian Energy Minister Nikolai Shulginov refuted Malik’s claim and stated that Pakistan did not get a special discount. This was part of a deal between the two countries for 110,000 tons of LPG.
While Pakistan initially described this as a trial run, later Pakistan’s petroleum minister said that it aims to meet one-third of its oil import needs with Russian crude.
One might be forgiven for thinking that this gas deal heralds the start of a long-term friendship between Russia and Pakistan. But the reality is far more complicated. There are three reasons why this is the case.
First, Russia and Pakistan’s relationship is driven by mutual self-interest. Russia needs a market for its stranded gas reserves, while Pakistan desperately needs an energy lifeline. In January this year, Pakistan experienced a series of blackouts and had to cut off electricity to save up its energy reserves for the worst of the winter.
Pakistan started importing LNG for the first time in 2015 and in the same year, the country built its first LNG terminal. Historically, Pakistan has imported much of its oil from Saudi Arabia and the United Arab Emirates. However, in March 2023, Saudi Arabia refused to provide any further bailouts or interest-free loans to Pakistan, meaning that Pakistan could no longer afford to buy oil from Riyadh.
Gas talks between Russia and Pakistan began back in 2015 when they both announced the start of the long-delayed Pakistan Stream Gas Pipeline project (PSGP) formerly known as the North-South Gas Pipeline or PakStream. Russia proposed to construct an LNG pipeline to transport liquefied natural gas from the southern port city of Karachi to Pakistan’s north. However, Pakistan and Russia’s North-South Gas Pipeline Project faced challenges. In 2016 the U.S. imposed sanctions on RT Global, a Russian company that was nominated to carry out the construction of the pipeline. RT Global was also a major shareholder in the project. Despite changing the ownership structure later in 2021 to reflect Pakistan as the only major stakeholder in the project to avoid any violations of sanctions, the project has remained in limbo.
Second, the situation in Pakistan is unstable. The country is experiencing significant economic problems from double-digit inflation making everyday goods such as food and fuel more expensive; there has been a rapid devaluation of Pakistan’s currency, the rupee. On top of that, last year’s flooding caused an estimated $40 billion in damage. Pakistan’s budget deficit has been worsened by large government subsidies, and a growing debt load has brought the country perilously close to default. In light of this, Pakistan cannot economically sustain long-term Russian energy contracts because transporting and refining crude oil is too costly and expensive.
Finally, and sympathies aside, there is an additional dynamic at play here. While commercially this makes sense, it may not make sense politically. Pakistan arguably wants to avoid antagonizing the United States further. Both countries have traditionally shared a strong relationship, despite U.S. President Joe Biden’s cold shoulder since the Afghanistan withdrawal and the Taliban takeover. As such, Islamabad may not be tempted to sign oil deals with Moscow that would exceed the price cap agreed upon by Western countries, because this could trigger U.S. sanctions. Plus there are geopolitical concerns. Pakistan has tried to keep neutral in the ongoing conflict, with Pakistan reportedly sending small arms to Kyiv.
While Pakistan could be forgiven for trying to relieve its immediate energy shortages with the help of Russian gas imports, Islamabad still treads a fine line. Pakistan’s policymakers need to be cautious.
In Importing Russian Gas, Pakistan Treads a Fine Line
Source: Frappler
0 Comments