Govt Approves Dollar-Based Returns for $300 Million Oil Pipeline Project

In a decision that has stirred significant debate, the government has approved a dollar-based guaranteed return for the transportation of petroleum products through the Machike–Thallian–Tarujabba White Oil Pipeline, a 477-kilometer project with an estimated cost of $300 million.

The approval was granted by the Economic Coordination Committee (ECC) of the Cabinet, despite serious reservations raised by both the Ministry of Finance and the Ministry of Power, according to a report published by Dawn.

Project Structure and Stakeholders

The project will be executed on a government-to-government (G2G) basis through a joint venture between Azerbaijan’s state-owned oil giant SOCAR, Pakistan State Oil (PSO), and the Frontier Works Organisation (FWO).

The FWO has been advocating for this project for several years and initially suggested using local resources to develop the pipeline. However, it has now taken shape as part of a strategic investment from Azerbaijan.

Concerns Over Dollar-Based Returns

During the ECC meeting, Power Minister Sardar Awais Leghari strongly opposed the guaranteed dollar-based returns, warning that Pakistan had already suffered from similar arrangements under the Independent Power Producers (IPPs) model.

He recommended conducting a detailed review of the internal rate of return (IRR) and associated costs before finalizing terms.

The Ministry of Finance also expressed concerns, suggesting that dollar-based returns should be strictly tied to foreign investments and should not apply in cases where local financing is used. The ministry further proposed:

• Extending the project’s payback period from four to seven years to ease tariff pressure.
• Revising assumptions regarding interest rates and the weighted average cost of capital (WACC) to more realistic levels.

Petroleum Division Pushes Project Forward

Despite these objections, the Petroleum Division defended the project, arguing that any change to the agreed terms would discourage investment. The ECC sided with this view, citing the project’s potential to:

• Enhance bilateral relations with Azerbaijan.
• Attract further foreign investment in Pakistan’s energy sector.

SOCAR’s Investment Conditions

SOCAR agreed to participate on the condition of a “ship-or-pay” model, similar to the controversial “take-or-pay” agreements in the power sector. This model requires payment for the pipeline’s full annual capacity of 7–8 million tonnes, regardless of actual volumes transported.

The ECC partially addressed concerns by ruling that dollar-based returns will only apply when foreign investment is actually involved.

Meanwhile, the Oil and Gas Regulatory Authority (Ogra) has approved denominating transportation tariffs in US dollars and has formally declared the pipeline as the default mode of oil transportation in the country.

Current Petroleum Transport in Pakistan

At present, petroleum product transportation in Pakistan relies heavily on road networks:

• 70% by road
• 28% via the existing Karachi–Machike pipeline
• 2% by rail

The new White Oil Pipeline aims to significantly increase the share of pipeline-based transport, reducing costs, improving efficiency, and cutting reliance on less reliable modes.

Tariff Commitments and IFEM Mechanism

Under the new arrangement, Oil Marketing Companies (OMCs) will be required to commit to minimum annual volumes through the pipeline. Any shortfall in these commitments will be adjusted against the companies’ existing Inland Freight Equalisation Margin (IFEM).

If total volumes fall below the national threshold, the IFEM pool will cover the deficit, ensuring the project’s financial stability.

Tariff and IRR Issues

The FWO has already submitted a revised tariff petition for the Machike–Thallian section, which has been accepted by Ogra, while a separate petition for the Thallian–Tarujabba section remains under review.

Ogra has determined a provisional dollar-based tariff, though details have not been disclosed publicly.

Initially, the FWO proposed an IRR of 14.6% and an equity IRR of 25%, but Ogra has noted that final costs and tariffs will depend on the financing model and operational structure ultimately adopted.

Critics vs. Supporters

The Petroleum Division insists that the project is a strategic opportunity to modernize Pakistan’s oil transportation system while attracting foreign capital.

Critics, however, warn that guaranteeing dollar-based returns — particularly if local financing is involved — risks repeating the costly mistakes of the IPP model, potentially burdening the economy with long-term obligations.