Why are the US and Pakistan making an oil deal?

US President Donald Trump on Wednesday announced a new agreement for the joint development of Pakistan's oil reserves, as both countries work on expanding trade and economic ties.

"We have just concluded a deal with the country of Pakistan, whereby Pakistan and the United States will work together on developing their massive oil reserves," Trump posted on his Truth Social platform.

It wasn't immediately clear what "massive" oil reserves Trump was referring to. Oil is Pakistan's largest import item, accounting for nearly 20% of Pakistan's total import bill, according to central bank data. Most of that oil comes from the Middle East.

Nevertheless, Trump's called the deal "a significant beginning" to a potential long-term energy partnership.

The energy partnership was unveiled by Trump before the White House on Thursday announced a broader trade agreement with Pakistan, and soon thereafter a 19% tariff rate on Pakistani imports to the US. This is lower than the previous rate of 29%

Pakistan hails 'landmark deal'

Both countries also hailed the US-Pakistan trade agreement. Pakistan Prime Minister Shehbaz Sharif called it a "landmark deal" that would "enhance our growing cooperation."

The Finance Ministry said the deal marked the "beginning of a new era of economic collaboration especially in energy, mines and minerals, IT, cryptocurrency and other sectors,"

On Friday, Pakistan welcomed the new, lowered, tariff rate, with the Finance Ministry calling it a " balanced and forward-looking approach" from the US.

"This development marks an intriguing shift in Pakistan–US relations; from a traditionally geopolitical and strategic partnership toward a more economically focused cooperation," Azeem Khalid, a New York based international affairs expert, told DW. 

Pakistan's tariff rate is also lower than the 25% imposed on arch-rival neighbor India. In announcing the oil deal, Trump took a jab at New Delhi, quipping that India could one day buy Pakistani oil.

"Who knows, maybe they'll be selling oil to India someday!"

However, it seems that as of now, oil is flowing in the opposite direction. On Friday, Reuters news agency reported that Pakistan's largest oil refiner, Cnergyico, said it would import 1 million barrels of US crude oil in October via its trading partner, Vitol, a Dutch energy and commodity trading company.

"If it is commercially viable and available, we could import at least one cargo per month," Cnergyico's Vice Chairman Usama Qureshi told Reuters.

As for Pakistani oil, before this deal, Pakistan made several unsuccessful attempts at offshore exploration in the offshore Indus basin. Estimates of Pakistan's proven recoverable conventional crude oil reserves range from 234 million to 353 million barrels, positioning the country approximately 50th in the world in terms of oil reserves.

Energy and security

Untapped oil reserves are believed to be located in Balochistan, with additional prospects in Sindh, Punjab, and Khyber Pakhtunkhwa.

As the center of an armed insurgent movement that frequently carries out attacks, developing resources in Balochistan presents security problems.

Baloch insurgents perceive resource extraction as a form of economic exploitation by Pakistan's federal government and frequently target these kind of projects with attacks.

According to trade law expert Osama Malik, extraction of oil from Balochistan could further alienate a population that is already disgruntled at the exploration of the province's mineral resources by China. 

Experts have expressed cautious optimism about the recent deal, as it may attract investment, introduce advanced extraction technologies, and facilitate new field surveys. However, actual extraction of petroleum products remains uncertain without confirmed reserves and the necessary infrastructure in place.

 "When American companies establish a presence in Balochistan, it is anticipated that the insurgency will not be at its peak," Qamar Cheema, a security analyst, told DW.

"As support for these groups diminishes it will lead to a reduction or potential elimination of the insurgency," he added.

US geopolitical interests in Pakistan

The US has strategic interests in Balochistan due to its proximity to Iran and Afghanistan.

"Washington is focused on establishing a presence in Balochistan, which is rich in minerals and holds significant strategic value due to its proximity to Iran," Cheema said. 

Washington views Balochistan as a potential monitoring and pressure point for Iranian activities, particularly amid ongoing tensions regarding Iran's nuclear program and its regional influence.

The agreement also carries potential implications as Washington aims to reduce Pakistan's growing reliance on China.

"Islamabad will also have to balance between the considerable Chinese investment in the energy and mineral sector and future investment by the US," said trade law expert Malik.

China is investing billions into developing rail and road links in Pakistan. The $65 billion China-Pakistan Economic Corridor (CPEC) project is intended for shipping Chinese goods via the Xinjiang region across the mountain border through Pakistan and into the Arabian Sea at Balochistan's Gwadar port. 

Gwadar port is a key node in China's trade plans routing through Pakistan Image: Aamir Qureshi/AFP/Getty Images

"From China's perspective, the entry of US companies into Pakistan's resource exploration sector presents a competitive challenge to Chinese oil and mineral firms. Yet, considering the historical depth of Pakistan–China relations, this situation may serve as a diplomatic bridge rather than a point of contention," said international affairs expert Azeem Khalid.

Security expert Cheema, believes Pakistan relies on China for military equipment and on the United States for macroeconomic stability, particularly through the IMF. 

"This deal is likely to strengthen the economic partnership between Pakistan and the US. Additionally, the US seeks to establish an alternative ally in the region other than India," said Cheema. 

Written with material from Reuters 

Edited by: Wesley Rahn