Petroleum Division unwilling to table new refinery policy in CCoE tomorrow

Energy minister says summary of policy being finalised, will be ready by next week

The Petroleum Division is unlikely to present a summary on the new Pakistan Oil Refining Policy 2021, despite being on the agenda for the Cabinet Committee on Energy (CCoE) meeting tomorrow.

According to the agenda, a meeting of the cabinet will be held on Thursday chaired by Minister for Planning, Development and Special Initiatives Asad Umar to take up three agenda items, and any other item with the permission of the chair.

The Pakistan Oil Refining Policy 2021 had been mentioned as a top agenda item for the CCoE meeting. However, the petroleum division on Wednesday was found unwilling to present a summary in this regard.

Earlier, the CCoE was scheduled to take up the draft oil refinery summary on December 16 last year but delayed its consideration. Similarly, a meeting of CCoE held on December 22 had not considered the new refinery policy as the new policy was not made part of the CCoE agenda.

According to the draft oil refining policy (as revised under directions of CCoE), incremental revenue from tariff protection meant for the sustainability of the refining sector would be contributing up to 30 per cent of the project cost, reduced from 40 per cent proposed previously. Similarly, refineries have to contribute debt/equity (minimum 70 per cent) for the remaining cost of the project on their balance sheet.

The tax holiday has been withdrawn from the previously proposed period of 10 years for existing refineries. Further refinement of special reserve account mechanism to ensure upgradation/modernisation and there will be no withdrawal of funds from special reserve account till award of EPC contracts. 

Under the policy, OGRA is mandated to monitor project progress to ensure that the proceeds are used only for upgradation. Refineries would provide bank guarantees worth Rs500 million till the start of commercial operations. 

No dividend payment and adjustment of losses permissible from the special reserve account. Besides this, there will be no import duties and sales tax on the import of petroleum crude oil with effect from July 1, 2022, being the main raw material of refineries.

Sources in the oil refining industry said that the ultimate beneficiary for delays in the publication of the new Pakistan Oil Refining Policy 2021 is the oil import lobby. Adding that the new oil refining policy has been pending for over a year, it is strange that the petroleum division will not table a summary for the new policy even though it is part of the CCoE agenda for Thursday. 

“If the summary is still not ready, why was it brought on the CCoE agenda and what happened to the earlier summary on which every relevant ministry had given consent,” questioned sources. They elaborated that the fiscal part of the policy was approved in June last year and it was made part of the budget (2021-2022).

Talking to Profit, Federal Minister for Energy Hammad Azhar said that a summary of the policy was being finalised and will be ready by next week. However, he did not give any timeline for presenting the revised summary in CCoE for its approval. 

As per details, the summaries which will be taken up during next CCoE meeting include draft Pakistan Oil Refining Policy 2021, Circular Debt Management Plan-Revision, and Circular Debt Report for November, 2021.

Earlier, the CCoE meeting held on September 13 last year had considered the summary dated August 30, 2021, submitted by the petroleum division, and approved the draft Pakistan Oil Refining Policy 2021 to the extent of establishing new refineries. 

The petroleum division also was directed to present workable options for sustainability and upgradation of existing refineries including the mechanism for payment of incremental incentives. Moreover, the CCoE demanded clarity on extending tariff protection to the industry prior to its commercial operation date (CoD), and utilisation of revenue stream caused by tariff protection on offsetting losses instead of upgradation in the past.

Pursuant to the directions of CCoE, key stakeholders were engaged in a consultative process to redefine the policy paradigm for sustainability and upgradation of existing refineries through viable policy interventions.

In order to ensure the supply of quality products to consumers, the government has been constantly improving the desired specifications of refinery products to remain aligned with the global refinery market as well as international quality benchmarks. Improvement in product standards has led to the upgradation of existing plants to remain commercially viable against the headwinds of the import of oil products.

As per sources, the five existing refineries have constantly been upgrading their installed configurations in compliance with new specifications and to compete with international suppliers in line with the tariff protection formula given in the budget speech on Finance Bill 2002, whereby refineries were required to operate and compete in the open market, without the precondition to upgrade.

“Local refineries have made improvements in the product specifications of petrol and high-speed diesel (HSD),” sources said. They added that the refineries have made an investment of Rs200 billion against the collection of deemed duty.

Documents available with Profit show that there will be tariff protection in the form of 10% import duty on motor gasoline and diesel of all grades along with imports of any other white product used for fuel for any motor or engine, effective from the date of the commission for six years, provided that a refinery starts construction of a project before December 31, 2025.

Similarly, there will be no import duties and sales tax on the import of petroleum crude oil, with effect from July 1, 2022, being the primary raw material. However, the finished products shall be subject to import duties and sales tax notified by the competent authority from time to time.

Profit also learned that the government would issue a mechanism for the pricing regime for new refinery projects that shall be no less favorable than the prevailing mechanism till deregulation.

The product pricing formula of refineries will be based on true import parity price (IPP), to be derived from Arab Gulf Mean FOB spot price, or if not published, shall be derived from Singapore Mean FOB price. The government will add all other elements, including premium, freight, port charges, incidentals, import duties, exchange rate, provincial taxes as applicable, and different price adjustments as per PSO actual imports.

Additionally, prevalent inland freight of imported crude oil to refineries and provincial duties, levies, and taxes at the import of crude oil shall be added for refineries.

All new deep conversion oil refinery projects of a minimum of 100,000bpd refining capacity as well as infrastructure projects mentioned in the policy to be set up anywhere in the country, which start the construction of the project before December 31, 2025, shall be eligible. The new deep conversion refinery shall maximise conversion of the bottom of the barrel to value-added products.

It is pertinent to mention that the government had already approved a 10 per cent upfront tariff for the existing tariff rate in the FY22 budget. The government, through the new policy, intends to provide necessary incentives and tariff protection to attract an investment of $10-15 billion in the sector as well as support existing refineries in their modernisation and upgradation efforts, being strategic assets to the country.

Local refineries are currently facing furnace oil storage constraints mainly due to the refusal of independent power producers (IPPs) to lift stocks from refineries, whereas refineries have been making efforts to convince the power division to resolve the issue. The new oil refining policy is seen as a solution to these problems.


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Ahmad Ahmadani
Ahmad Ahmadani
The author is a an investigative journalist at Profit. He can be reached at [email protected].
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