FWO seeks 4-year payback for $432m Azeri-funded pipeline

• Guaranteed transportation tariff to facilitate Socar participation
• Pipeline tariff projected at $64 a tonne
• Project to link Faisalabad, Thalian and Tarujabba

ISLAMABAD: Supported by the federal government, the Frontier Works Organisation (FWO) has sought recovery of about $432 million in investment in the proposed 437km Faisalabad-Peshawar white oil pipeline within four years through a guaranteed transportation tariff to ensure the participation of Socar, Azerbaijan’s state oil company.

Under a tariff petition filed with the Oil and Gas Regulatory Authority (Ogra), transportation of petroleum products from Faisalabad to Thalian near Rawalpindi and onward to Tarujabba near Peshawar would cost about $64 per tonne in the first year, targeted for 2029, before gradually declining to $14.5 per tonne by 2058, the final year of the proposed 30-year tariff period.

Ogra has published the 3,033-page tariff petition along with the Front-End Engineering Design, volume stability report and financial model before formally approving the tariff, which has already received backing of the Economic Coordination Com­m­ittee and cabinet to satisfy Socar.

An official said Ogra was expected to approve the construction-stage tariff soon.

Frontier Oil Company (FOC) — a subsidiary of FWO, Pakistan State Oil and Socar — told the regulator that while capital expenditure on the Faisalabad-Thalian-Tarujabba White Oil Pipeline would be substantially higher than road transportation, the pipeline tariff had been structured to decline over time as capital costs were depreciated or amortised and debt was repaid.

The project is proposed to have a 55:45 debt-to-equity ratio. FOC said the declining tariff would pass the benefit of lower costs to consumers over time, in contrast with road transportation costs, which tended to increase.

The project is considered important for strategic and national reasons and would transport both petrol and high-speed diesel from Gatti in Faisalabad to Tarujabba, completing a pipeline “backbone” from Karachi to Peshawar.

It is intended to meet increasing petroleum demand in northern parts of the country, including demand linked to CPEC-related development and increasing vehicle ownership, while reducing the risk of recurring fuel shortages.

The project is also expected to improve the reliability and safety of supplies to northern Punjab and Pes­h­awar, reduce dependence on road tankers and lower carbon emissions.

The project is expected to rely largely on local resources while providing dollar-linked returns allowing recovery of the investment in four years. The ministries of finance and power had raised objections to such an upfront return on investment.

The proposed pipeline comprises a 256km, 20-inch line from Faisalabad to Thalian, with capacity of about seven million tonnes per annum, extendable to 10m tonnes. A 172km, 12-inch section would run from Thalian to Tarujabba with capacity of 5m tonnes per annum, while an 8-inch, 9km spur would connect Thalian to Faqirabad.

The estimated cost has been put at $320m for the first section, $94m for the second and $17.5m for the third. Ogra has assessed the project life at 30 years. Interestingly, the project cost approved by the ECC about five months ago had been $300m and the two ministries had expressed reservations over guaranteed dollar-based returns on petroleum transportation.

The proposed pipeline is to be developed on a government-to-government basis with Socar, FWO and PSO through a joint project company. The project, now being treated as a strategic investment from Azerbaijan, had earlier been pursued by FWO through local resources.

Power Minister Awais Leghari had cautioned against guaranteed dollar-based returns. He argued all aspe­cts of the investment proposal, incl­uding project cost and internal rate of return, should be thoroughly chec­ked in light of the IPP experience.

Socar had sought a “ship or pay” arrangement for its investment, similar to the “take or pay” mechanism used in power purchase agreements, under which payment would be made for committed pipeline capacity even if the petroleum products were not transported for some reason.

The finance ministry also questioned the proposed four-year payback period, arguing that dollarised returns should apply only where foreign investment actually materialised and should not be extended to locally financed investment.

It sought rationalisation of interest-rate assumptions and weighted average cost of capital. It proposed extending the payback period to seven years to reduce the tariff burden in the project’s early years.

The ministry also wanted the petroleum division, rather than Ogra, to finalise technical issues related to the Inland Freight Equalisation Margin and the declaration of the pipeline as the default mode of transportation.

However, the petroleum division argued that such changes would make the project unattractive. Therefore, the ECC overruled the finance ministry’s demand for revised payouts as well as the power minister’s reservations, observing that the project could open new avenues for investment and should be viewed in “a larger strategic perspective” and be understood as an investment opportunity.

At present, about 70pc of petrol and diesel is transported by road, 28pc through the existing pipeline network from Karachi to Machike and 2pc by rail.

The new project is expected to increase the share of petroleum products transported by pipeline by around 10pc.

The tariff would be denominated in US dollars and linked to optimal utilisation of pipeline capacity under a “default mode of transportation”.

Under the proposed mechanism, oil marketing companies would be required to commit minimum annual pipeline volumes and any shortfall would be covered through the Inland Freight Equalisation Margin.

According to the agreed mechanism, Ogra will design a regulatory framework to ensure optimal utilisation of pipeline by declaring it a default mode of transportation.

Given high stakes and quick returns, Ogra was previously nervous about taking a regulatory stance and instead wanted the ECC to provide comfort zone with clearance on key terms and conditions submitted by the FWO and agreed between stakeholders for the project.

Published in Dawn, September 7th, 2026