Duty protection for refineries on cards

CCOE may allow oil refineries to spend deemed duty on upgrading plants

ISLAMABAD:

The Cabinet Committee on Energy (CCOE) may approve a tariff protection of 10% deemed duty on diesel and 2.5% on petrol to help oil refineries execute upgrading projects to enhance their production capacity for meeting the country’s demand.

It had already been approved in budget but refineries were not allowed to utilise the collection for upgrading their plants.

Petroleum Division, in a meeting, informed the CCOE that petroleum products contributed 31% to Pakistan’s primary energy mix with overall consumption of around 23 million tons per annum (mtpa).

Of this, the locally refined products account for around 11 mtpa (inclusive of 30% local crude processing) while the deficit is imported.

The locally produced and imported crude oil is refined by five refineries, which have been periodically upgraded to meet fuel specifications.

Their upgrade includes setting up diesel hydro desulphurisation (DHD) plants to reduce sulphur content in diesel and isomerisation plants for enhancing the production of motor sprit (petrol) at a cost of around Rs75 billion.

The government has been pressing oil refineries to further upgrade their plants by producing Euro-V specification fuels and minimising production of furnace oil but it requires capital investment of around $4-4.5 billion.

In this case, refineries will need to arrange funding from their own resources and through borrowing at commercial terms. To obtain funding, they will have to improve their balance sheets as well.

The five-year profit or loss statements of refineries indicate that the sector needs fiscal support from the government to improve its financial position for plant upgrades. In case of no intervention by the government, the refining industry will be at risk of shutdown, according to industry players.

In such a case, the domestic crude oil production of approximately 70,000 barrels per day would have to be exported. On the other hand, import of petroleum products will exacerbate the growing congestion at ports.

According to the industry players, such a scenario may discourage investment in exploration of oil and gas, apart from creating vulnerability in the supply chain of strategic fuels and placing additional burden on balance of payments.

In October 1997, the government introduced the Petroleum Policy 1997 (amended in 2002), which replaced the minimum 10% guaranteed rate of return for refineries with a tariff protection formula/ deemed duty (10% on high-speed diesel and 6% on koresene oil, light diesel oil and JP-4).

However, in 2008, the tariff protection was reduced to 7.5% on high-speed diesel only, which discouraged investment in new refineries/ sufficient up-gradation.

Later, an energy sub-group of the Planning Commission’s advisory committee was constituted, which made recommendations vide a letter dated April 14, 2021 for investment in the refinery sector through government support including product pricing policies, tax structure, etc. Keeping in view the situation, the Petroleum Division prepared a draft of Pakistan Oil Refining Policy for new and existing refineries, which was discussed in CCOE meetings.

CCOE, vide its decision dated September 13, 2021, provided guidelines to improve the policy document, therefore, the policy was revisited.

Published in The Express Tribune, February 24^th, 2023.

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