PSO clears renewed SPA with PARCO?

ISLAMABAD: Pakistan State Oil (PSO) Board has reportedly given its nod sought to execute a renewed five-year Sale Purchase Agreement (SPA) with Pak Arab Refinery Limited (PARCO), providing for a substantial increase in monthly allocations of motor gasoline and high-speed diesel (HSD) while sharply reducing furnace oil supplies.

According to sources, the proposed agreement will increase PARCO’s monthly motor gasoline (RON 92) allocation to PSO from 18,000 tonnes to 50,000 tonnes and more than double the monthly HSD allocation from 50,000 tonnes to 105,000 tonnes. In contrast, the monthly furnace oil allocation will be reduced from 32,000 tonnes to 5,000 tonnes, reflecting the power sector’s declining reliance on the fuel.

The renewed agreement, which will remain effective for five years from the date of execution, is intended to strengthen PSO’s access to domestic refinery production, improve supply security and update commercial arrangements governing pricing, invoicing, payment security, product quality and measurement.

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The existing 10-year principal agreement between the two companies was executed on August 1, 2011, and expired on July 31, 2021. However, PARCO subsequently confirmed that the expired agreement and its three addenda would remain fully effective until the renewed agreement was formally signed, ensuring continuity of supplies during the prolonged negotiations.

In a letter dated March 20, 2025, PARCO formally confirmed the continuation of the existing contractual arrangements pending execution of the renewed SPA.

The negotiations took longer than anticipated as both companies sought to align the agreement with prevailing market conditions, applicable regulations and industry practices. The discussions covered pricing, payment and invoicing mechanisms, monthly petroleum, oil and lubricants (POL) allocations, letter of credit (LC) documentation, measurement and quality requirements.

The process was also affected by parallel negotiations on the WOP Multigrade Agreement and the MFM Transportation Agreement, as well as a change in PARCO’s top management.

The Supply Coordination Committee (SCC) recommended renewal of the agreement, incorporating mutually agreed amendments, at its meeting held on January 26, 2026. The Management Committee subsequently approved the renewal at its meeting on February 23, 2026.

At its meeting on March 26, 2026, the Management Committee directed the Supply Function to submit the 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 is not being submitted alongside the other two proposals because the company has not agreed to unconditionally withdraw its legal suit against PSO, a condition precedent under the relevant management approval. Consequently, the board is being approached for approval of the PARCO and ARL renewals.

Under the revised commercial framework, motor gasoline grades RON 92 and RON 95 will comply with Euro-5 specifications, supporting the transition towards cleaner fuels. The agreement will also bind the quality specifications of Jet A-1 aviation fuel to the latest applicable DEFSTAN and AFQRJOS guidelines, while introducing an updated health, safety and environment (HSE) clause for downstream logistics.

The changes are intended to reduce the risk of disputes over product quality and ensure that supplies meet applicable regulatory and international standards.

The proposed agreement also introduces greater flexibility in payment security. PSO will be able to provide an irrevocable letter of credit in PARCO’s favour or make direct payment on the due date without opening an LC.

According to the sources, the revised late-payment formula removes the previous 300-basis-point escalation after 30 days and protects PSO from mark-up arising from delays on the banking side in processing letters of credit.

The revised terms are also expected to simplify settlement procedures by clarifying measurement, invoicing and LC documentation requirements. PSO’s legal and operational teams have vetted the final draft to minimise the risk of disputes and settlement delays.

Another key element is the reduction in furnace oil procurement requirements from 384,000 tonnes annually to 60,000 tonnes. PSO management believes the lower allocation will prevent capital from being tied up in a product whose demand has declined as the power generation mix shifts away from furnace oil.

The increased allocations of motor gasoline and HSD are also expected to provide PSO with more assured access to locally refined products, potentially reducing dependence on imported supplies and associated long-distance maritime freight.

Copyright Business Recorder, 2026