ISLAMABAD: The government has decided not to extend a dollar-based rate of return to the Machike–Thallian–Tarrujabba White Oil Pipeline (MTT-WOP) project in the absence of foreign investment, sources close to the petroleum minister told Business Recorder.
According to sources, the Petroleum Division recently briefed the Economic Coordination Committee (ECC) of the Cabinet, that during the visit of Ilham Aliyev, President of Azerbaijan, to Pakistan from July 11–13, 2024, Pakistan presented several investment opportunities to Azerbaijan. These included the establishment of a joint trading company, investment in a petrochemical refinery, upgradation of Pakistan Refinery Limited (PRL), underground gas storage facilities, and the MTT-WOP project. Azerbaijan expressed interest in these proposals, and significant progress has since been made.
On December 9, 2024, the Special Assistant to the Prime Minister on Foreign Affairs emphasized the need to resolve outstanding issues with Azerbaijan and called for preparations ahead of the Prime Minister’s visit to Baku in February this year. The MTT-WOP project was among those listed for discussion.
ECC rejects MTT-WOP over flawed financial assumptions
Given the urgency of the matter, a technical team from the Frontier Works Organization (FWO) visited Baku from December 23–27, 2024, and held in person meetings with their counterparts at SOCAR to advance the White Oil Pipeline project.
As a follow-up, the Prime Minister appointed a high-level delegation led by the Minister for Communications and Privatization, who visited Baku on January 31, 2025. During a meeting with the President of SOCAR, the company proposed the inclusion of a “Ship or Pay” clause as a condition for investment in the project.
The project was further discussed during the Prime Minister’s official visit to Azerbaijan from February 23–25, 2025.
In response, FWO and Pakistan State Oil (PSO), acting as joint consortium partners through their project company Frontier Oil Company-I (FOC-I), developed an alternative proposal based on the “Ship or Pay” model to address SOCAR’s concerns. Under the proposed framework, OGRA would establish a regulatory mechanism to ensure the pipeline’s optimal utilization by declaring it the default mode of oil transportation.
Accordingly, FOC-I submitted a revised tariff petition to OGRA for the Machike–Thallian section of the pipeline, which OGRA has approved. Work on the tariff petition for the Thallian–Tarrujabba section is currently underway.
It was noted that OGRA had requested the Petroleum Division to obtain necessary ECC approval on key terms and conditions, which had been submitted by FWO and had been agreed between stakeholders for the said project and provisional tariff had been approved based on the said terms.
The ECC being the competent forum was requested to approve the following regulatory framework/policy guidelines proposed by OGRA for Machike-Thallian section, which would also be applicable for Thallian to Tarrujabba section: (i) tariff shall be in US dollar based instead of Rupee based tariff. OGRA has already determined the provisional tariff in US dollar; (ii) a regulatory framework shall be developed by OGRA to ensure optimal utilization of pipeline by declaring it a default mode of transportation;(iii) OGRA may be authorized to develop a commercial framework which will require Oil Marketing Company to commit minimum annual pipeline volumes; (iv) if committed volumes thresholds will not be met, the shortfall will be covered/adjusted by OGRA through existing Inland Freight Equalization Margin of each Oil Marketing Company; and (v) if the committed volumes for the year are below the minimum volumes required, the shortfall will be met through Inland Freight Equalization Margin mechanism of the country. OGRA may be authorized to develop mechanism for enabling above provision.
It was further noted that the ECC considered the summary and in its decision of June 2, 2025 constituted a committee co-chaired by Secretary Finance and Secretary Petroleum and including representatives from OGRA and Ministry of Planning Development & Special Initiatives, to review and finalize the financial modalities of the project and to ensure that the proposed tariff had been calculated correctly on the basis of realistic financial assumptions. Meeting of the committee was convened on June 4, 2025 followed by multiple working level meetings wherein financial model of project was reviewed by the Finance Division.
Finance Division, in its letter of July 28, 2025 advised rationalizing the interest rate assumptions, more rational WACC calculations, increase in the payback period from 4 to 7 years, in order to avoid higher tariff impact in the early stages of the project.
Furthermore, Finance Division suggested that the technical details relating Inland Freight Equalization Margin (IFEM) and declaration of ‘default mode of transport’ may be finalized by the Petroleum Division, taking into consideration the peculiar needs of the sector. The ECC was apprised that the advice of the Finance Division had been reviewed and Petroleum Division felt that these amendments would make the key project unattractive.
During the ensuing discussion, the Petroleum Division reiterated its stance on the original position and explained the importance of the project, as approximately 70% Mogas and Diesel transported by road, whereas 28% is done through the pipeline and 2% is carried through railway. It was explained that Azerbaijan is interested in the project to bring investment in to the country. The forum observed that the project would open new vistas for future investment and hence, must be seen in a larger strategic perspective and be understood as an investment opportunity.
The Ministers for Petroleum, Power, National Food Security & Research and SAPM for Industries & Production endorsed the proposal. The Minister for Power added that all aspects of the investment proposal should be checked thoroughly for cost and IRR, keeping in view the instance of Independent Power Projects (IPPs).
The Finance Division noted that dollarized return was being considered only in the context of foreign investment and should not be applicable in the event that foreign investment does not materialize. The OGRA mentioned that cost of the project is dependent on the type of modality to be used.
After detailed deliberations the ECC approved the project with the stipulation that the dollarized return would be applicable only in the event of foreign investment coming into the project.
Copyright Business Recorder, 2025
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