The Cabinet Committee on Energy (CCoE) is scheduled to hold a meeting on Thursday (1st February, 2024) to discuss and resolve the implementation issues of the Pakistan Oil Refining Policy 2023, which aims to upgrade the existing brownfield refineries to produce Euro V compliant fuel.
Background
The policy, which was approved by the CCoE in June 2023, offers various incentives to the refineries for upgrading their facilities, such as deemed duty, tax exemption, and output flexibility. The policy also requires the refineries to sign upgrade agreements with OGRA within six months of the policy notification, failing which they would face penalties and restrictions.
However, the refineries raised several concerns regarding the viability and sustainability of the upgrade projects, which have delayed the signing of the upgrade agreements. The refineries highlighted the financial implications and foreign exchange situation, which pose challenges in arranging debt and equity for the projects. They also pointed out the technical constraints and legal/contractual issues in the upgrade agreement template finalised by OGRA.
Enter the consultants
To address these concerns, the Ministry of Energy, in collaboration with OGRA, engaged in multiple meetings with the refineries and hired financial consultant KPMG and legal consultant Ajuris to examine the proposals and provide recommendations.
KPMG’s analysis revealed that the discontinuation of 7.5% deemed duty on HSD and taxation on CAPEX incentives negatively impacted project IRR and NPV for the majority of the refineries, while the continuation of deemed duty on HSD and taxation significantly improved project economics.
Considering this, KPMG proposed the continuation of 7.5% deemed duty on HSD for the project’s life. Regarding taxation, options were explored, and an alternate proposal was developed, including compensating the shortfall by enhancing the cap limit from 25% to 27.5% and extending the incentive period from six to seven years.
Ajuris provided legal options to address outstanding legal/contractual issues in the upgrade agreement template, such as arbitration, force majeure, and committed output. After discussions with refineries and OGRA, several recommendations were formulated, including adding a force majeure clause to the policy and the upgrade agreement, and allowing output flexibility for the refineries.
The findings of the KPMG as well as Ajuris were also discussed with the refineries and OGRA in a series of meetings. The last meeting was chaired by Minister for Energy on 15th January, 2024 wherein the following recommendations were agreed for considerations of the CCoE:
- To compensate for the shortfall in incremental/ Capex incentive due to taxation, the cap limit of withdrawal from escrow account may be enhanced from current 25% to 27.5% of the project cost and incremental incentive period may be increased from current six to seven years.
- The prevailing 7.5% deemed duty on HSD for sustainability shall continue after the seven years incentive period for 20 years or till deregulation, whichever I earlier.
- After the completion of a six year period for upgradation, the waiver shall expire and the refineries producing products below Euro V specification will not be entitled to any deemed duty on MS and HSD. Deemed duty on HSD shall be reduced from 7.5% to 5% for refineries which do not sign the upgrade agreement (UA) within one month of the date of notification of amendment in the policy.
- It was felt that there was no forum available to resolve the issues faced by the refineries after signing the upgrade agreement, therefore the following committee shall be constituted which shall address the issues/anomalies faced during implementation of this policy.
- Secretary, Petroleum Division (Chairman)
- Secretary, Finance Division
- Chairman OGRA
The implications of the meeting
Sources revealed that any refinery who has already signed the upgrade agreement under the original refining policy for Upgradation of Brownfield Refineries Policy 2023 will have the right to opt the amended provisions/incentives of the policy as a package by executing a supplemental to the upgrade agreement.
It is pertinent to mention that in response to these recommendations, the CCoE is expected to consider and deliberate on various proposals during its upcoming meeting. The decisions made will play a crucial role in shaping the future trajectory of the oil refining sector in Pakistan, which is facing challenges in meeting the growing demand for clean and sustainable energy.
