Ministry seeks extension for refinery upgrade

The planned upgrade of existing oil refineries has been dealt a blow owing to the failure to sign implementation agreements as the Petroleum Division is seeking an extension in deadline for another six months.

In this respect, the division has prepared a summary for taking approval of the Cabinet Committee on Energy (CCOE).

Earlier, the deadline for signing plant upgrade agreements with the Oil and Gas Regulatory Authority (Ogra) was April 22, 2024. Three refineries namely Attock Refinery Limited (ARL), National Refinery Limited (NRL) and Pakistan Refinery Limited (PRL) had agreed to ink agreements before the deadline, while two other refineries – Pak Arab Refinery (Parco) and Cnergyico PK – needed more time.

However, the Petroleum Division neither arranged the signing of agreements with the willing refineries nor extended the date to accommodate the request of others. The formulation of a new refining policy has already taken more than four years, causing a loss of about $4 billion to the country.

ARL, NRL and PRL plan to invest $3 billion in upgrading their plants while total investment will reach $6 billion when Parco and Cnergyico also join them. “We understand that the Petroleum Division has initiated a summary for the Cabinet Committee on Energy for extension in the deadline for signing up-gradation agreements by six months,” an industry player said.

“The government seems to be more focused on attracting foreign investment, which is no doubt important but it needs to realise that foreign investment flows in only when existing foreign and local investors are listened to,” it added. The CCOE reviewed a summary dated January 25, 2024, submitted by the Petroleum Division on February 6, 2024, and approved proposed amendments to the policy. The CCOE’s decision was also ratified by the federal cabinet.

Accordingly, the amended “Pakistan Oil Refining Policy for Up-gradation of Existing/Brownfield Refineries 2023” was notified for implementation.

The policy envisages upgrading the existing refineries to produce environmentally friendly Euro-V fuels and reduce the production of furnace oil. To achieve this objective, the policy provides a 2.5% incremental incentive on high-speed diesel (HSD), in addition to the current 7.5%, and 10% on motor spirit (petrol) in the form of deemed duty for seven years.

The deemed duty will be deposited in an escrow account maintained by Ogra with refineries for meeting up to 27.5% of plant upgrade costs. Ogra will allow the withdrawal of funds by the refineries from the escrow account, post-financial close of upgrade projects and for meeting the expenditure made to achieve each milestone.

To avail themselves of the incremental incentive, the refineries are required under the policy to execute plant upgrade agreements, open an escrow account and provide a Rs1 billion bank guarantee to Ogra within 60 days of the notification of the policy, ie, by April 22, 2024.

Clause 6.1.3.5 of the policy provides that deemed duty on HSD shall be reduced from 7.5% to 5% for refineries that do not sign the upgrade agreement within the deadline of 60 days.

Ogra said that ARL, NRL and PRL had conveyed their readiness to sign the agreement and the Petroleum Division may coordinate in this respect.

However, Parco and Cnergyico, which jointly contribute more than 50% of the country’s refining output, have yet to finalise the agreement. Parco is in the process of updating its feasibility study, after which its board of directors will decide on the planned refinery upgrade. These activities may take five to six months.

Published in The Express Tribune, May 9^th, 2024.

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