Government approves dollar-based returns for $300 Million oil pipeline project.
In a surprising move, the government has endorsed a dollar-based guaranteed return for the transportation of petroleum products through the 477-kilometre Machike-Thallian-Tarujabba White Oil Pipeline, a project estimated to cost $300 million.
The decision, made by the Economic Coordination Committee (ECC) of the Cabinet, comes despite strong reservations from the ministries of finance and power, reported Dawn.
The project will be executed on a government-to-government basis by a joint venture comprising Azerbaijan’s state-owned oil company SOCAR, Pakistan State Oil (PSO), and the Frontier Works Organisation (FWO).
Touted as a strategic investment from Azerbaijan, the pipeline has long been championed by the FWO, which initially proposed using local resources for its development.
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The Ministry of Finance also raised objections, recommending that dollar-based returns be strictly tied to foreign investment and not apply if local financing is used.
It further suggested extending the payback period from four to seven years to mitigate early-stage tariff impacts and called for more realistic assumptions regarding interest rates and the weighted average cost of capital (WACC).
Despite these warnings, the ECC sided with the Petroleum Division, which argued that altering the terms would make the project unattractive to investors. Government approves dollar-based returns for $300 Million oil pipeline project.
The committee approved the project, citing its potential to strengthen bilateral ties with Azerbaijan and attract future foreign investment.
SOCAR, Azerbaijan’s state-owned oil company, conditioned its investment on a “ship-or-pay” model, similar to the “take-or-pay” agreements used in IPPs. This model requires full payment for the pipeline’s annual capacity of 7-8 million tonnes, regardless of actual throughput.
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The ECC partially addressed concerns by deciding that dollar-based returns would only apply if foreign investment is involved. The Oil and Gas Regulatory Authority (Ogra) will allow transportation tariffs to be denominated in US dollars and has declared the pipeline as the default mode of oil transport.
Currently, 70% of petroleum products in Pakistan are transported by road, 28% through an existing pipeline from Karachi to Machike, and only 2% by rail. The new pipeline aims to shift a greater share of oil transport to pipeline infrastructure, reducing costs and inefficiencies.
Oil Marketing Companies (OMCs) will be required to commit to minimum annual pipeline volumes, with any shortfall adjusted through their existing Inland Freight Equalisation Margin (IFEM). If collective commitments fall below the threshold, the national IFEM mechanism will cover the shortfall.
The FWO has already submitted a revised tariff petition for the Machike-Thallian section, which Ogra has accepted. A separate petition for the Thallian-Tarujabba section is under review. While Ogra has determined a provisional dollar-based tariff, the details remain confidential.
The Petroleum Division has positioned the project as a strategic opportunity to unlock foreign investment and modernize Pakistan’s oil transport infrastructure. However, critics argue that the guaranteed dollar-based returns could burden the economy, particularly if local financing is used.
The FWO initially proposed a 14.6% IRR and a 25% equity IRR, but Ogra noted that the project’s final cost would depend on the financing and operational model adopted.
