The diesel smuggling racket and it’s long shadow 

Over a 909-kilometre stretch of land along the Pakistan-Iran border, a small informal economy has developed around the art of smuggling. And while everything from Iranian snacks to crockery are illegally transported along the Gabd-Rimdan line, the most precious commodity is diesel.

Early on Saturday morning, reports emerged estimating that smuggled Iranian oil has captured 25 to 30 percent of the diesel market in Pakistan. This untaxed, unaccounted for diesel in turn represents a huge loss to the government’s coffers, which are being deprived of billions of rupees in taxes and import duties. And that isn’t the extent of the problem. Because cheap diesel is emerging from Iran and entering the market in massive volumes, local refineries are having to slash prices to keep up.

So what exactly is going on, how does this smuggling take place, and what impact does it have on Pakistan’s local petroleum industry? Already we are seeing reports filter in that Attock Refinery has reduced its operations to 25% capacity for five days stung by petrol smuggling. 

How it works

The smuggling of petroleum products into Balochistan from Iran has long been a practice that has left Balochistan’s fuel economy relatively free from the shocks of the rest of the country’s fuel economy. The region of Balochistan extends into Iran, and the neighbouring country has a small province by the same name. The border is largely barren and sparsely populated and the common culture between people on either side of the border makes it extremely difficult to impose strict border regulations. Hundreds of thousands if not millions are involved in this illicit trade.

And that has made this stretch of land into a Wild-West story. From small speed boats carrying diesel across the sea-route to experts on Toyota four-wheelers and motorcycles carrying canisters of petrol across the rough terrain with precision and circus-like acrobatics there is a whole different world out there. And its effects on Pakistan’s economy have been devastating. In Profit’s investigation on the matter, very little information is available in the public domain. For the most part the matter is kept under wraps due to a range of factors that are going to be discussed later in the article. For now let us focus on how diesel smuggling works.

This year, as petrol prices continued to soar and inflation hit all-time high in the country, the demand for these cheap, imported, petroleum products has risen astoundingly. For a story back in February this year when the smuggling operation responded to the demand by scaling up, Profit was able to get in touch with a person of interest directly involved in the smuggling trait, Jahangir Baloch*. According to him there are four primary routes being utilized by local smugglers. Out of these four routes, three are categorized to be illegal, whereas one of the routes is considered to be ‘relatively legal’, for the lack of a better expression, as there is oversight from the Frontier Constabulary (FC). 

Read more: The Lucky Irani smuggling circus at the Balochistan border 

Over the recent years, especially with a spike in global oil prices, smuggling of Iranian diesel has drastically increased. Balochistan is almost entirely run on imported diesel, but it has cast a long shadow. A senior source in the government, at the start of this year, told Profit that “smuggling of Iranian diesel has also increased drastically…[it] can be found up north as far as Gujranwala currently.”

The impact 

The results are in front of us. On the 4th of May, the Attock Refinery Limited announced that it was faced with an emergency that requires immediate attention, due to which it will be functioning at a 25% capacity for over five days. 

As per the notification,  High Speed Diesel (HSD) upliftment by OMCs from ARL has been abysmally low in the preceding two months. It was disclosed to the PSX that they suspect their supply envelope to have been infiltrated by smuggled product, which has presented to be a predicament to the company. Adding insult to injury, the refinery’s HSD stocks have also reached a concerningly high level, with little to no capacity left in their storage tanks. These conditions have created an impossible situation for the refinery, leaving them no choice but to shut down the main distillation unit for five days, in order to manage the critical levels and conduct essential maintenance on allied downstream units. 

And the impact is not limited to just Attock. In a recent article, Dawn quoted a detailed report issued by the S&P Global Commodity Insights quoting several officials, analysts and oil producers which said cheaper Iranian diesel has rapidly gained popularity among Pakistani consumers looking for affordable fuels at a time when inflation is high and fuel prices have only soared and not budged from their bullish trend. 

A shortage of dollar reserves and faltering Pakistani currency 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. 

According to the report 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 per cent YoY to 1.17m tonnes, or about 8.8m barrels, according to OCAC. The widespread availability of Iranian diesel, especially in the southern region of the country, is hurting refiners’ diesel sales due to a significant price spread between Pakistani and Iranian barrels. 

Take the example of Attock Refinery again. The partial shutdown is not going to have a particularly strong financial impact. What it does affect is the refinery’s ability to do business in the near future. According to Mustafa Mustansir, Director Research and Business Development at Taurus Securities, the current event might not have far-reaching financial consequences. “I don’t think it should have much financial impact, since they have sufficient inventory to sell if need be during these five days.” 

However, Mustansir believes that the more serious problem that ARL faces at the moment is that of storage, “They have less space to store refined products, so the surplus inventory which they will try to manage by operating at a lower utilisation level can be an issue.”

The refinery’s latest expansion and up-gradation project completed in November 2016, which included reducing Sulphur contents in High Speed Diesel, increasing refining capacity, enhancing production of Premium Motor Gasoline, and expanding its captive power plant.  Moreover, its paid-up capital has increased from Rs 80 million to Rs 1,066.163 million, since it started.

As things stand, Attock and other refineries are fighting a losing battle on an uneven playing field. The smuggling causes losses to the government and hurts local setups. However, this way there is cheaper fuel available in the country. The net impact, however, is negative. And it is imperative that law enforcement agencies either regularize and tax Iranian diesel (which is near impossible due to sanctions) or clamp down on the practice of smuggling.