Cheaper Iranian diesel has rapidly gained popularity among Pakistani consumers looking for affordable fuels as inflation rate soared to the highest level in nearly five decades in the country in April, hurting volumes at local refiners and putting them on track to post dismal sales in the second quarter of 2023, refinery sources and industry analysts said.
Domestic refiners in Pakistan are facing tepid consumer demand because of a sharp slowdown in economic activity, with the country's oil product sales in April tumbling 46% year on year to 1.17 million mt, or about 8.8 million barrels, according to Pakistan's Oil Companies Advisory Council.
Gasoline sales in Pakistan fell 24% from a year earlier to 580,000 mt in April, while diesel sales dropped 50% year on year to 460,000 mt and fuel oil consumption plunged 83% to just 70,000 mt during the period, latest data from OCAC and oil marketing companies showed.
Industrial, transportation and agricultural activities have slowed as inflation rates surged. A shortage of dollar reserves and faltering Pakistani currency has also kept fuel prices high in the country, prompting small private trading companies and individuals with a business network in Iran to purchase heavily discounted diesel, said industry analysts, including Tahir Abbas, head of research at Karachi-based broking firm Arif Habib Ltd.
Pakistan's inflation rate surged to 36.4% in April, the highest since December 1973, government data showed.
Gasoline sales during the first 10 months of the fiscal year started July 1 fell 17% to 6.173 million mt, while diesel sales over July 1-April 30 tumbled 28% year on year to 6.173 million mt, OCAC data showed.
Iranian fuel at discount
The widespread availability of Iranian diesel, especially in the southern region of the country, is having a negative impact on refiners' diesel sales due to a significant price spread between Pakistani and Iranian barrels, said Insight Securities, a Karachi based broking firm.
The average retail price of diesel has been Rupees 288/liter in recent weeks in Pakistan, while Iranian diesel has been selling as low as Rupees 230/liter, according to market observers. Private dealers have been able to make decent profits by selling Iranian diesel Rupees 35/liter cheaper than local diesel.
Pakistan's customs department does not closely track and officially record Iranian oil products flowing into the country via non-conventional channels and no official data is currently available on such volumes, refinery sources said.
However, between 35,000-60,000 b/d of diesel could have flowed into the domestic market through southern sea and land transportation routes under the radar in recent months and it's possible that the volumes could rise, according to estimates from a senior executive at Attock Refinery and a middle distillate distribution management source at Pak Arab Refinery, or PARCO, who declined to be identified.
Pakistan officially banned imports of Iranian oil after the US enforced sanctions on Iran's petroleum and petrochemical trade in 2013.
However, a lack of dollar liquidity and shortage of foreign exchange reserves to import petroleum products have prompted Pakistani authorities to turn a blind eye on the issue, refinery sources and analysts at Insight Securities said.
Minister of Energy Musadik Malik declined to comment on the matter when contacted by S&P Global Commodity Insights, while a government official, who declined to be identified, said customs officials have been directed to increase vigilance to clamp down on such smuggling activity.
"Infiltration of Iranian diesel is growing and it could substitute as much as 25%-30% of Pakistan's total diesel sales," a private dealer told S&P Global.
The influx of Iranian diesel has also led to revenue losses in billions of rupees for the government, refining industry participants said.
Officials and executives at major Pakistani refiners said that Oil and Gas Regulatory Authority, Interior Ministry and the border authorities are all required to clamp down on any illegal Iranian oil trades. Many private dealers with no fear of a reprisal have been offering smuggled Iranian products to oil marketing companies on discounted rates minus a petroleum development levy.
"The government either doesn't understand the gravity of the situation or is just turning a blind eye due to shortage of foreign exchange reserves required for legal imports of deficit products," the Attock Refinery executive said.
"Smuggling of petroleum products from Iran to a limited extent has always been there in connivance with border authorities, but [it] has never been on this huge and unparalleled scale, which if allowed to continue unabated, may lead to local refineries' shutdown, which has already partially started with [the] Attock Refinery reducing its output to 25% only," the executive said.