Budget steps may hamper refinery upgrade projects

The Oil Companies Advisory Council (OCAC), while welcoming the Cabinet Committee on Energy’s (CCOE) decision on extending the refinery policy by six months, has raised concerns over the measures taken in budget, believing they will stymie efforts to upgrade refineries for producing environmentally friendly fuels.

The CCOE, chaired by Prime Minister Shehbaz Sharif, approved on Friday a six-month extension in the deadline for signing plant upgrade agreements under the new refinery policy. When reached for comment on the extension, OCAC Chairman and Attock Refinery Chief Executive Officer Adil Khattak remarked “it is certainly a positive step”.

However, he noted that some measures included in the recently announced federal budget for fiscal year 2024-25 forced refineries to reconsider the feasibility of their projects. One such issue is the sales tax exemption for petroleum products, which will prevent refineries from claiming a significant amount of the input tax paid on taxable purchases and services.

Further adverse impact comes from 2% additional customs duty on the import of equipment, which will enhance the cost of planned projects. Khattak revealed that refineries had requested an urgent meeting with the minister for petroleum to seek his understanding and resolution of the issues threatening the successful implementation of the refinery policy, crafted and approved following many years of hard work.

Prior to the FY25 federal budget, three refineries – Attock Refinery Limited, National Refinery Limited and Pakistan Refinery Limited – agreed to sign plant upgrade agreements with the Oil and Gas Regulatory Authority (Ogra) and make cumulative investment of $3 billion. Two other refineries – Pak Arab Refinery (Parco) and Cnergyico PK – sought more time, for which the six-month extension was granted on Friday.

Earlier, all refineries drew attention of the government to a significant amendment to the Sales Tax Act 1990, proposed through the Finance Bill 2024, to exempt motor spirit (petrol), high-speed diesel, kerosene oil and light diesel oil from sales tax. These products were previously zero-rated but the new measure will effectively restrain refineries from claiming approximately 70% of input sales tax paid on taxable purchases and services.

This will negatively affect the financial results of refineries as sale prices of most of the petroleum products are regulated, preventing refineries from passing the increased cost on to customers. The cumulative negative impact of the proposal is of such a magnitude that it will make the operation of refineries unsustainable, they warned.

The government has recently announced Pakistan Refining Policy for Upgradation of Existing/Brownfield Refineries 2023, which provides various incentives to refineries for making huge investment within the specified strict timelines. Refineries are undertaking upgrade and expansion projects worth $4.5 billion and this huge investment will significantly add value to the economy mainly through import substitution and employment generation.

However, after the sales tax exemption, a huge amount of input tax to be paid on project-related imports and purchases could not be claimed. This will substantially increase project costs, rendering them unviable. Consequently, the refinery policy is feared to become redundant and deprive the country of a huge investment of $4.5 billion.

“This proposal is counterproductive as it will negatively impact the refineries by impairing their cash flows, increasing costs and eliminating the value for the country and investors to invest in upgrade and expansion projects,” said a refinery official.

“We strongly oppose this proposal and urge the federal government to keep the existing status of taxable supplies for petroleum products, including motor spirit, high-speed diesel, kerosene oil and light diesel oil.”