ISLAMABAD: The Oil and Gas Regulatory Authority (Ogra) has invited expert and public feedback on a proposed four-year upfront payback period for a $432 million government-to-government oil pipeline project between Pakistan and Azerbaijan, amid reservations from key federal ministries.
Ogra has scheduled a public hearing for March 2 to seek stakeholder views on whether the proposed four-year recovery period is justified and how the project may impact regional transportation costs compared to the existing road-based fuel movement system.
The project envisages the construction of the Machike–Thallian–Tarujabba white oil pipeline. Section I involves a 20-inch, 256-kilometre pipeline from Faisalabad to Thallian near Islamabad, with a capacity of seven million tonnes per annum (MTPA), extendable to 10 MTPA. Section II would convert into a 12-inch, 172km pipeline to Tarujabba near Peshawar with a five MTPA capacity, while Section III includes an eight-inch, 9km link from Thallian to Faqirabad.
The estimated cost stands at $320 million for Section I, $94 million for Section II, and $17.5 million for Section III, with an overall project life of 30 years. However, the cost previously cleared by the Economic Coordination Committee (ECC) of the cabinet was around $300 million.
The project is to be developed through a joint venture involving Azerbaijan’s SOCAR, the Frontier Works Organisation (FWO), and Pakistan State Oil (PSO). It is being pursued as a strategic investment aimed at strengthening bilateral trade and investment ties between Pakistan and Azerbaijan.
The Ministry of Finance has objected to the proposed dollar-based guaranteed returns, arguing that such returns should apply only if foreign investment materialises. It also called for extending the payback period to seven years to reduce early-stage tariff pressures and recommended revisiting assumptions related to interest rates and the weighted average cost of capital (WACC).
Similarly, Power Minister Awais Leghari cautioned against offering guaranteed dollar returns, citing lessons from past agreements with independent power producers (IPPs). He stressed the need for a thorough review of project costs and internal rate of return (IRR).
SOCAR has reportedly proposed a “ship or pay” arrangement, similar to the “take or pay” model used in IPP contracts, requiring payment for reserved pipeline capacity even if petroleum products are not transported.
Despite these reservations, the ECC approved the terms and conditions proposed by the Petroleum Division, viewing the project as a strategic opportunity that could unlock future investments and deepen bilateral cooperation.
Currently, about 70 percent of petrol and diesel in Pakistan is transported by road, 28 percent through the existing Karachi–Machike pipeline, and 2 percent by rail. Under the proposed mechanism, Ogra would declare the new pipeline as the default mode of transportation, requiring oil marketing companies to commit minimum annual volumes. Any shortfall would be adjusted through the inland freight equalisation margin, with transportation tariffs denominated in US dollars.
Ogra has also sought comments on whether the projected throughput volumes, pipeline capacities, and proposed storage facilities — 60,000 tonnes each at Faisalabad and Thallian, and 50,000 tonnes at Tarujabba — are adequate and justified over the project’s 30-year life.
Story by Khaleeq Kiani
