KARACHI: The federal government through the Ministry of Energy (MoE) has prepared an ‘Oil Refinery Policy’ to incentivise the upgradation of the local refineries to bring more investment in the refinery sector of the country.
As per the new policy document, the proposed pricing regime entails import parity-based pricing where a 10 per cent duty will be imposed on the import of petrol (MS) and high-speed diesel (HSD) for five years (from July 2021-June 2026), and then it will be decreased by 1 per cent every year to 5 per cent, remaining at 5 per cent thereafter.
In terms of fiscal incentives for refineries, major incentives include a twenty-year income tax holiday from profits, and an exemption from duties and taxes on the import of equipment or material.
If the policy is implemented, it can transform the local refinery landscape, providing much-needed stimulus for local refineries to upgrade while paving way for foreign investment in the oil refinery sector.
The policy is yet to be approved before the budget 2021-22 through the Economic Coordination Committee (ECC) as the document reveals that the policy would be implemented from July 1, 2021.
Market experts said that the new policy of the Ministry of Energy has been prepared to bring around $15 billion investment to the refinery sector.
Through this policy, the government wants refineries to upgrade themselves, but for this purpose, an investment of $6-7 billion is required so that they can make products of Euro-V fuel.
During the visit of Saudi Crown Prince Muhammad Bin Salman, it was announced that Aramco will establish a refinery and a petrochemical plant in Pakistan with an investment of $10 billion. Likewise, Pak Arab Refinery Limited (PARCO) announced it would establish a coal refinery, but both have linked their investment to a new refinery policy.
Currently, Pakistan’s oil refining capacity is about 20 million tons per annum. About 60 per cent of the country’s requirements of diesel and 30 per cent of motor gasoline are met by local refineries. The rest is imported as refined products, the documents claimed.
Four out of the five refineries operating in Pakistan are using mostly old technology and even the fifth one, PARCO, is now more than 20 years old. Despite the refining industry being integral to the growth of the economy, no new refinery has materialised for more than a decade.
Similarly, the upgradation of existing refineries has not kept pace with the technology around the world. A modern refining sector will not only boost the development of allied and downstream sectors of the economy, but will also lead to an infrastructure upgrade, import-substitution, improvement in emission levels, and export revenue in certain cases.
In October 1997, the government of Pakistan issued a petroleum policy that provided various policy incentives, including the refinery pricing formula, for upcoming refineries in the country. However, considerable time has elapsed since the said policy was framed with no new refinery.
Meanwhile, the policy focus has shifted in recent years to the sustainability of the refineries based on techno-commercial viability, quality and standards, value addition, and environmental concerns.
According to the new refinery policy, all new deep conversion oil refinery projects of a minimum of 100,000 barrels per day (BPD) refining capacity to be set up anywhere in the country, that are approved by the Ministry of Energy (Petroleum Division) before December 31, 2021, shall be eligible for many fiscal incentives. These include a twenty-year income tax holiday from profits and gains as provided in clause 125 of the income tax ordinance at the time of effectiveness of this policy, from the date of commissioning of the project.
The news policy will also provide an exemption from customs duties, withholding taxes, or any other levies on the import of any equipment to be installed, or material to be used in the refinery without any precondition for certification for Engineering Development Board.
The existing five refineries have a capacity of 417,400 BPD, of which PARCO has 100,000 BPD oil refining capacity, Attock Refinery Limited (ARL) 53,400 BPD, Byco Petroleum Pakistan Limited (Byco) 150,000 BPD, National Refinery Limited (NRL) 64,000 BPD, and Pakistan Refinery Limited 50,000 BPD.
For existing refineries to be eligible for the financial incentives provided in this policy for upgradation, modernisation, or expansion, they must get approval from the Ministry of Energy (Petroleum Division) for such projects no later than December 31, 2021. In order to get this approval, the refinery must commit to such upgradations and provide an undertaking to the government.