Dollar-Based Pipeline Approval
The Government of Pakistan has recently given the green light to a major energy infrastructure project that has stirred both optimism and controversy in equal measure: the Machike-Thallian-Tarujabba White Oil Pipeline. Valued at an estimated $300 million, this 477-kilometre pipeline is designed to transport petroleum products across strategic regions of the country. The decision is notable not just because of the project’s scale, but also because of the unique financial model backing it—dollarised returns for investors.
For a country like Pakistan, where energy security remains a perennial challenge, the approval of such a project reflects the government’s intent to modernise oil transport systems and reduce the heavy dependence on road-based logistics. At present, around 70% of petroleum products are transported by road, leading to high costs, inefficiencies, and safety hazards. A modern pipeline promises not only efficiency but also greater reliability in the energy supply chain.
However, Dollar-Based Pipeline Approval has not come without debate. Strong reservations were voiced by the Ministry of Finance and the Ministry of Power, both of which cautioned against guaranteeing dollar-based returns to investors. Their concerns stem from Pakistan’s painful past experiences with Independent Power Producers (IPPs), where long-term dollar-denominated contracts created a financial burden on the national exchequer. Despite these objections, the Economic Coordination Committee (ECC) of the Cabinet approved the project, citing strategic and diplomatic importance, especially in strengthening ties with Azerbaijan.
Azerbaijan’s state-owned oil company SOCAR, Pakistan State Oil (PSO), and the Frontier Works Organisation (FWO) will execute this project through a government-to-government collaboration. The deal represents not just an infrastructure investment but also a diplomatic signal of Pakistan’s willingness to deepen its energy cooperation with Azerbaijan.
Key Features of the Machike-Thallian-Tarujabba Pipeline
The Machike-Thallian-Tarujabba pipeline goes beyond being just another infrastructure initiative; it aims to reshape Pakistan’s petroleum logistics framework. Spanning 477 kilometres, it will connect Machike near Sheikhupura to Tarujabba near Peshawar, passing through Thallian as a central hub. Strategists chose this route to target critical demand centres in Punjab and Khyber Pakhtunkhwa, where fuel consumption is high.
The project boasts an estimated price tag of $300 million, financed through a joint venture that includes SOCAR, PSO, and FWO. Its distinct financing model denominates returns in US dollars, which protects investors against currency depreciation—a significant concern in Pakistan’s volatile exchange rate environment.
In terms of capacity, the pipeline is expected to handle 7 to 8 million tonnes of petroleum products annually. This is a game-changer, considering that the bulk of petroleum currently moves by road tankers, which are costly, inefficient, and prone to accidents. By diverting a significant portion of oil transport to pipelines, Pakistan aims to cut transportation costs, reduce road congestion, and minimise environmental hazards caused by tanker accidents and spillages.
This pipeline will serve as the default mode of petroleum transport. Oil Marketing Companies (OMCs) must commit to minimum pipeline volumes each year, ensuring full utilisation of the infrastructure. If OMCs fall short of their committed volumes, tariff adjustments under the Inland Freight Equalisation Margin (IFEM) will cover the shortfall, distributing the burden across the sector instead of placing it on a single operator.
This project not only promises operational benefits but also aims to strengthen Pakistan’s energy resilience. By developing modern oil transport infrastructure, the country can improve fuel availability, lower supply chain costs, and reduce dependency on foreign-controlled shipping and road transport dynamics.
Government-to-Government Collaboration
One of the most significant aspects of this pipeline project is its execution model: a government-to-government (G2G) partnership. In an era where private investors often dominate infrastructure projects, Pakistan has opted to align itself with a friendly nation, Azerbaijan, to ensure smooth execution and long-term strategic benefits.
At the heart of this collaboration is SOCAR, Azerbaijan’s state-owned oil company. SOCAR brings technical expertise, financial strength, and international credibility to the table. For Azerbaijan, this project represents a chance to extend its energy influence into South Asia while deepening diplomatic and economic ties with Pakistan.
On the Pakistani side, the partnership involves two powerful entities:
- Pakistan State Oil (PSO), the country’s largest oil marketing company, which ensures strong institutional backing.
- Frontier Works Organisation (FWO), a military-led engineering powerhouse, had originally championed this pipeline concept using local resources.
This tripartite venture symbolises a blend of international expertise, domestic institutional support, and strategic execution capacity. More importantly, it strengthens bilateral relations between Pakistan and Azerbaijan, which have been growing steadily in recent years. Both countries see this project as a stepping stone toward broader economic cooperation, especially in the energy sector.
By leveraging Azerbaijan’s investment and technical know-how, Pakistan not only secures foreign direct investment but also opens the door to future energy collaborations, including potential LNG imports and joint ventures in refining and petrochemicals. This government-to-government framework also minimises risks associated with private-sector profit-driven models, making it more sustainable in the long term.
Economic Coordination Committee (ECC) Approval
The ECC of the Cabinet plays a central role in Pakistan’s economic governance, making high-level decisions on projects with significant financial and strategic implications. In the case of the Machike-Thallian-Tarujabba pipeline, the ECC deliberated extensively on the financial and policy aspects before approving.
The Petroleum Division presented the proposal, highlighting the pipeline’s strategic importance for energy security, cost savings, and diplomatic relations with Azerbaijan. The division argued that without offering dollarised returns, it would be impossible to attract the necessary foreign investment from SOCAR, as investors would shy away from Pakistan’s unstable currency environment.
While the Ministry of Finance and Ministry of Power both raised red flags, the ECC ultimately sided with the Petroleum Division. The committee emphasised the long-term benefits of reducing road dependency, improving oil transport efficiency, and securing foreign investment. It also noted the potential for this project to serve as a model for future energy infrastructure collaborations.
Despite approving the project, the ECC did attempt to introduce some safeguards. It ruled that dollarised returns would only apply in cases involving foreign investment. If local sources financed the project, investors would receive returns denominated in Pakistani rupees instead. This compromise aimed to balance investor confidence with national financial prudence.
Ministries’ Reservations and Concerns
Not everyone in the government is celebrating this approval. Both the Ministry of Power and the Ministry of Finance expressed deep concerns, warning that the project could create financial risks for Pakistan in the long run.
The Power Minister, Sardar Awais Leghari, pointed out that Pakistan should have learned its lesson from the Independent Power Producers (IPPs), where guaranteed dollar returns locked the government into expensive contracts. These contracts have been one of the major reasons behind the country’s rising circular debt crisis in the power sector. He cautioned that adopting a similar model in oil transport could lead to a repeat of those financial troubles.
The Ministry of Finance echoed these concerns, particularly questioning the “ship-or-pay” model proposed by SOCAR. This model, similar to the “take-or-pay” system used in IPPs, obligates Pakistan to pay for the full capacity of the pipeline, whether or not it is fully utilised. This, according to the finance ministry, could create an unnecessary financial burden, especially during times of reduced demand.
Additionally, the ministry argued that dollar-based returns should only be justified in cases of genuine foreign investment. If local financing were used, then linking returns to the dollar would unfairly benefit domestic investors at the expense of the national economy. To mitigate early tariff shocks, the ministry also recommended extending the payback period from four to seven years, making the project more sustainable.
Despite these objections, the Petroleum Division maintained that such changes would make the project unattractive for foreign investors, who demand strong financial guarantees before committing capital in Pakistan. The ECC eventually overruled the objections, a decision that remains controversial in economic circles.
