ISLAMABAD: The Board of Management of Pakistan State Oil (PSO) has reportedly approved a renewed five-year Sale Purchase Agreement (SPA) with Pak Arab Refinery Limited (PARCO), significantly increasing monthly allocations of motor gasoline and high-speed diesel (HSD) while sharply reducing furnace oil supplies.
Under the proposed agreement, PARCO’s monthly motor gasoline (RON 92) allocation to PSO will rise from 18,000 tonnes to 50,000 tonnes, while HSD supplies will increase from 50,000 tonnes to 105,000 tonnes. In contrast, furnace oil allocations will be reduced from 32,000 tonnes to 5,000 tonnes per month, reflecting declining demand from the power sector.
The renewed agreement will remain effective for five years from the date of execution and aims to strengthen PSO’s access to locally refined petroleum products while updating commercial arrangements covering pricing, invoicing, payment security, product quality and measurement.
The previous 10-year principal agreement was signed on August 1, 2011, and expired on July 31, 2021. However, PARCO subsequently agreed to maintain the existing agreement and its three addenda until the renewed SPA is formally executed, ensuring uninterrupted supplies during the extended negotiations.
In a letter dated March 20, 2025, PARCO confirmed the continuation of the existing contractual arrangements pending finalisation of the new agreement.
Negotiations took longer than anticipated as both companies worked to align the terms with prevailing market conditions, regulatory requirements and industry practices. Discussions covered pricing, invoicing and payment mechanisms, monthly petroleum, oil and lubricants (POL) allocations, letter of credit (LC) documentation, product measurement and quality standards.
The process was further affected by parallel negotiations on the WOP Multigrade Agreement and MFM Transportation Agreement, as well as a change in PARCO’s senior management.
The Supply Coordination Committee (SCC) recommended the renewal, incorporating mutually agreed amendments, at its meeting on January 26, 2026. The Management Committee subsequently approved the proposal on February 23, 2026.
At its March 26, 2026 meeting, the Management Committee directed the Supply Function to submit proposed renewals of agreements with PARCO, Attock Refinery Limited (ARL) and Cnergyico Pk Limited (CPL) to the Board of Management for final approval.
However, the CPL renewal was excluded because the company had not agreed to unconditionally withdraw its legal suit against PSO, a condition required under the relevant management approval. Consequently, the board was approached for approval of the PARCO and ARL agreements.
Under the revised commercial framework, motor gasoline grades RON 92 and RON 95 will comply with Euro-5 specifications. The agreement will also align Jet A-1 aviation fuel quality requirements with the latest applicable DEFSTAN and AFQRJOS guidelines and introduce an updated health, safety and environment (HSE) clause for downstream logistics.
These provisions are intended to minimise product-quality disputes and ensure compliance with applicable regulatory and international standards.
The agreement will also provide greater flexibility in payment security, allowing PSO to issue an irrevocable letter of credit in PARCO’s favour or make direct payment on the due date without opening an LC.
According to sources, the revised late-payment formula removes the previous 300-basis-point escalation after 30 days and protects PSO against mark-up arising from delays caused by banks in processing letters of credit.
The updated terms are also expected to streamline settlement procedures by clarifying measurement, invoicing and LC documentation requirements. PSO’s legal and operational teams have reviewed the final draft to minimise disputes and payment delays.
A major financial consideration behind the renewal is the reduction in annual furnace oil procurement requirements from 384,000 tonnes to 60,000 tonnes. PSO management believes the lower allocation will prevent capital from being tied up in a product experiencing declining demand as the power generation mix shifts away from furnace oil.
Meanwhile, higher allocations of motor gasoline and HSD are expected to provide PSO with more reliable access to domestically refined petroleum products, potentially reducing reliance on imports and the associated costs of long-distance maritime transportation.
Story by Mushtaq Ghumman
