Pakistan Plans First Strategic Oil Reserve Following Hormuz Crisis

After enduring a three-month crisis linked to Iran, Pakistan has begun reassessing its energy security due to the fragility of fuel supply chains and its near-total reliance on imports passing through the Strait of Hormuz.

In an unprecedented move, Islamabad is formulating plans to create the country's first strategic petroleum reserve aimed at strengthening its capacity to withstand geopolitical crises and fluctuations in global energy markets, according to Nikkei Asia.

Last week, Pakistan's Petroleum Division under the Ministry of Energy issued a tender to conduct a feasibility study for developing strategic petroleum reserves. The division emphasized that recent supply disruptions and volatility in crude oil and refined product markets have underscored the urgent need for flexible storage and emergency infrastructure to ensure continuous refining operations and uninterrupted fuel availability.

Pakistan depends on the Strait of Hormuz for up to 90% of its oil and liquefied natural gas imports, yet it currently lacks any official strategic petroleum reserves.

A government official familiar with the matter stated that the Ministry of Energy intends to adopt a multi-tiered model for the petroleum reserve. This model would include state-managed emergency stocks, mandatory reserves held by sector companies, and protected commercial storage facilities that can be utilized when necessary.

The plan also involves establishing customs-controlled storage stations for imported oil and fuel under the supervision of customs authorities. This arrangement would allow local and international traders to hold stocks without immediate payment of duties and taxes, with the option to access these quantities during emergencies.

Additionally, the new strategy encompasses boosting local oil exploration activities and modernizing national refineries. Official data indicate that Pakistan's daily consumption is approximately 300,000 barrels, while domestic production stands at about 62,000 barrels per day.

To reduce import dependence, Pakistan aims to increase its production to between 150,000 and 200,000 barrels daily, requiring investments estimated at around six billion dollars or more at current prices.

As part of the plan's implementation, the Pakistani government is conducting negotiations with Middle Eastern countries and China to establish customs storage facilities within Pakistan.

The strategic port of Gwadar is considered one of the prime locations for hosting these facilities, which would enhance the port's role as a logistical and energy hub in the region, according to the government official.

These initiatives coincide with recommendations from the International Energy Agency that oil-importing countries maintain reserves sufficient for at least 90 days of consumption.

By comparison, Japan's strategic and commercial reserves covered 254 days of domestic consumption as of last December, while India holds stocks sufficient for about 74 days.

Although Pakistan's commercial reserves were adequate for 28 days at the onset of the recent crisis involving the United States and Iran, the absence of genuine emergency reserves compelled the government to consider purchasing liquefied natural gas shipments on the spot market at high prices and to implement measures to rationalize fuel consumption.

Initial plans target building a strategic stockpile sufficient for 45 days in the first phase, with the possibility of increasing it to 90 days later.

Despite the momentum behind the plan, experts argue that the proposed policy still requires greater clarity, especially regarding tax incentives and mechanisms for accessing reserves during emergencies.

Osama Rizvi, a global market strategies expert at Primary Vision, stated that customs storage will not enhance energy security unless clear rules are established for emergency use of the stock, pricing mechanisms, stock rotation, and foreign currency payment settlements. He warned that these facilities could otherwise become ordinary commercial warehouses rather than true strategic reserves.

Khalid Waleed, a researcher at the Institute for Sustainable Development Policies in Islamabad, agreed with this assessment, emphasizing that commercial stocks cannot substitute sovereign emergency reserves without transparent rules for stock release, disclosure, allocation priorities, and pricing.

Another government official indicated that the project will be funded through a special fund relying on allocating 10 rupees from the current petroleum tax imposed on each liter of fuel. Presently, the tax stands at 58 rupees per liter of diesel and 102.17 rupees per liter of gasoline.

Waqas Ghani, head of equity research at JS Global Capital, believes the plan is financially feasible, noting that the government could allocate around 700 million dollars annually from petroleum tax revenues to support the establishment of the strategic reserve.

Estimates suggest that building an initial reserve sufficient for one month might require about one billion dollars, with private sector storage facilities potentially easing the financial burden on the state.

Energy experts highlight that the main challenge extends beyond purchasing oil to include investments in storage facilities, tanks, monitoring systems, working capital, insurance, and foreign currency financing for the stock.

Some experts consider the most balanced approach to be a combination of a limited emergency oil reserve alongside parallel investments in battery storage, renewable energy, and clean energy. This strategy would enhance Pakistan's long-term energy security and reduce its vulnerability to market shocks and geopolitical crises.