Saudi Aramco shakes hands with Pakistan’s SOEs to open Pakistan’s largest refinery

The biggest Oil and Gas company of the world and Saudi Arabia’s publicly owned oil company, Saudi Aramco has signed an MoU for the investment of $10 billion, to set up a refinery (Greenfields refinery) in the deep sea port of Gwadar. The company will make the investment alongside leading Pakistan Oil and Gas SOEs.

The state-owned Oil and Gas Development Company Ltd (OGDCL), Pakistan State Oil (PSO), Pakistan Petroleum Ltd (PPL), and Government Holdings Private Ltd (GHPL) signed the MoU to join hands with the Saudi firm. The four SOEs would join the project through equity participation. The exact share of their equity compared to Saudi Aramco’s equity is still unknown, despite various media reports.

The production capacity of this refinery is expected to be north of 300,000 barrels per day, which is the largest in the history of Pakistan. This is the first oil refinery that will be set up in more than a decade and will give considerable relief to Pakistan’s petroleum imports, a large portion of which has to be attributed to refined petroleum products owing to the low production capacity of the existing pool of refineries.

How did it Start?

It started in February 2019, when the Saudi Crown Prince, Muhammad bin Salman and his delegation visited Pakistan. The Saudi government announced an investment package of $20 billion dollars, 10 out of which were supposed to be allocated to setting up a refinery in Gwadar.

Later the governments in Pakistan changed and so did the plans of investment, owing to Pakistan’s falling credit ratings. Prime Minister Shehbaz Sharif, after coming into power became interested in expediting the energy projects, announced by Saudi Arabia.

The Arab nation offered to provide incentives for new refinery projects, prompting the Petroleum Division to speed up work on a new refinery policy that had been delayed for some time. Former petroleum minister and current Chairman of the Energy Task Force, Shahid Khaqan Abbasi, was leading the Pakistani team in negotiations with the Arabian government till December 2022.

It was reported then, that Saudi Arabia requested a less than 7.5% deemed duty on petrol and high-speed diesel for the next 25 years as one of the incentives. Currently, there is a 7.5% deemed duty on high-speed diesel, while that for petrol is 10%. While the Pakistani side didn't agree with this demand, they remained adamant on a 10% deemed duty on petrol and high-speed diesel for the next ten years to establish the new oil refinery in Pakistan. 

What is in it for us?

According to the petroleum division, only two refineries have been set up in Pakistan in the last 40 years. Moreover, Pakistan’s demand for refined crude oil is expected to cross 33 million tonnes per annum by 2023. Compared to that Pakistan is capable of producing only 20 million tonnes, out of which it only manages to produce 11 million per annum on average, which is the refineries’ utilization capacity.

Adding this refinery will be a much needed push to Pakistan’s oil and Gas sector. According to careful estimates, the addition of another refinery will only add up to fulfilling Pakistan’s domestic demand. Moreover, the FDI of $10 billion dollars would give the Pakistani economy a huge uplift.

What is in it for them?

Despite being apparently beneficial for Pakistan,, the biggest oil company of the world has managed to make the deal a rather attractive one for itself. On the subject of deemed duty, as per reports, the greenfields refinery will have a flat 7.5% deemed duty on petrol and diesel for the next 25 years. Other than that, the refinery will have a 20-year tax holiday.

They would also be entitled to exemption from levy of customs duties, surcharges, withholding tax, general sales tax, any other ad valorem tax or any other levies and duties on import of any equipment to be installed, or material to be used in the refinery projects without any precondition for obtaining certification by the Engineering Development Board.