The new oil refining policy has become a shuttlecock between government departments, triggering fears the policy may be delayed further owing to the amendments proposed time and again.
The current PML-N led coalition government took up for discussion the draft oil refining policy in a recent meeting of the Cabinet Committee on Energy (CCOE), chaired by Prime Minister Shehbaz Sharif.
Though incentives have been approved for the investors planning to set up new refineries, the endorsement of proposed concessions for the existing refineries mulling over upgrading their plants has been delayed.
A close aide to the prime minister asked about the impact of incentives for the local refineries and said that the government would have to increase oil prices up to Rs18 per litre, which led to the delay in approval of the new policy.
“The real impact will be Rs2.5 per litre,” a source said, adding that the Petroleum Division failed to plead the case of offering incentives to the existing refineries.
Now, further amendment has been made in the draft policy, causing concern in the oil refining sector.
According to sources, the government wants to open an Escrow account to deposit the money meant for investing in plant upgrades.
In this case, the Oil and Gas Regulatory Authority (Ogra) will be the monitoring body. It will release the money after refineries complete the upgrading of plants.
Sources, however, pointed out that governments in the past had also set up Escrow accounts but they failed.
Refineries do not have any objection to the opening of Escrow account but they fear the release of money will take so long that the progress on project upgrades will suffer.
According to sources, government bodies always delay regulatory approvals for the release of money.
Oil refineries have already warned that they will shut down in the absence of a new policy as they are suffering huge losses on furnace oil exports.
Smuggled Iranian oil has suppressed demand for the locally produced petroleum products, making oil marketing companies hesitant to lift oil stocks from refineries.
Owing to slim demand, the refineries are running below production capacity and have opted for fuel oil exports at significant losses in order to keep plants running.
The issue of smuggled petroleum products has been brought to the attention of the federal government but a solution is still awaited.
Two refineries, Pak Arab Refinery Limited (Parco) and Pakistan Refinery Limited (PRL), are currently exporting furnace oil. However, sources indicate they are suffering a loss of Rs30,000 per tonne.
Parco has so far exported 150,000 tonnes while PRL has shipped 50,000 tonnes. Parco and PRL are planning to export an additional 50,000 tonnes and 15,000 tonnes, respectively.
Sources note that the refineries were able to sustain their operations initially due to higher profit margins. Now, the margins have gone down and if the current situation persists, their profits will turn negative.
Representatives of the refineries had been invited to participate in a meeting of the sub-committee formed by the CCOE.
During the huddle, they warned that the refineries would have to shut down if the situation, particularly the influx of smuggled Iranian oil, did not change.
They highlighted that the refineries were exporting fuel oil at significant losses, resulting in an unsustainable petroleum products business due to a massive decline in sales.
The committee was informed that the CCOE had already resolved the issue of deemed duty collection and its utilisation during the previous government’s tenure.
At that time, the cabinet body put similar queries, including the amount of deemed duty collected by the oil refineries and the investment made in project upgrades. The Petroleum Division was requested to provide a report.
Refineries had collected Rs200 billion in deemed duty and utilised the amount to upgrade their projects.
In response to the observations made by the CCOE in a meeting held on August 20, 2021, the Petroleum Division recalled that deemed duty (tariff protection) was introduced after the abolition of the guaranteed return formula (10-40%) in 2002.
The purpose of deemed duty was to enable the refineries to operate on a self-financing basis by offsetting losses and expanding/ upgrading. A 10% tariff protection was introduced for diesel and 6% for JP-4, kerosene oil and light diesel oil.
Published in The Express Tribune, June 29th, 2023.
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