Diesel price may be raised to generate funds for refineries

Money to be used to upgrade plants to produce Euro-2 compliant fuel.

ISLAMABAD: High-speed diesel (HSD) may become costlier by Rs2 per litre, if the Economic Coordination Committee (ECC), in a meeting scheduled on Thursday, accords its approval to raising the deemed duty on the fuel to 9% from the current 7.5%.

In a related development, The Express Tribune has learnt that a plan to import oil from India has been shelved for now due to a difference in the specifications of fuel consumed by Pakistani automobiles. Pakistani refiners are producing non Euro-compliant products, which most automobiles use; whereas Indian refineries produce Euro-3 and 4 compliant products, which will require a substantial technological shift in the machinery used in Pakistan.

Sources said the country’s apex economic decision-making body has been approached for a raise in the deemed duty on HSD so that refineries can generate money from consumers in order to upgrade their plants to produce Euro-2 diesel.

The ECC has been informed that the cost of diesel will rise by Rs1.12 per litre if the deemed duty is raised from existing the 7.5% to 9%, in accordance with the demand put forth. “However, the price of diesel will actually go up by Rs2 per litre because the rise in deemed duty has been calculated at existing prices [which are subject to change],” sources added.

It should be brought to notice that refineries have received the deemed duty for several years now, and have generated over Rs200 billion so far under the head. However, they have failed to upgrade their plants, for which the duty was intended for. A judicial commission formed by the Supreme Court had earlier recommended abolishing the deemed duty being given to refineries that had failed to upgrade their production. These refineries were scheduled to set up plants in 2012, but received an extension from the ECC till July 1, 2014.

Currently, the Pak Arab Refinery Company (Parco) is the country’s only refinery producing Euro-2 compliant diesel.

“Now, the ECC has been requested for another extension till December 2015,” sources informed The Express Tribune; adding that one plant costs over $400 million, and that all refineries except Parco are to required to set up such plants.

The Oil and Gas Regulatory Authority has opposed the proposed raise in duty, and has said that oil refineries should bound to set up plants as per the existing schedule. The regulator also questioned refineries’ claim that they would recover $1.2 billion from consumers through the increase in duty, saying that actual recovery would come in to $2.5 billion as the effect of the raise has been calculated at current prices, which are subject to change.

Officials from the climate ministry observed that: “Sometimes refineries seek extensions in the date for setting up plants, and sometimes they just want money.” They argued that the roadmap for refineries to set up plants for cleaner fuel should be strictly implemented.

When contacted, Pakistan Refinery CEO Aftab Hussain said that the deemed duty was allowed on four products, including diesel, in 2002 to provide tariff protection to refineries and replace the 10% guaranteed rate of return formula, and was meant to be used to upgrade plants, offset losses if any, and to maintain reserves. He said that refineries had started work on upgrading plants in 2006, but had later suffered losses due to the global economic meltdown.

“We are only demanding a raise in the deemed duty to upgrade our plants,” he added.

He clarified that the raise in the deemed duty will be implemented only after the upgraded plants start operation in December 2015. He also claimed that the duty will be abolished after the cost of upgrading plants has been recovered in the following six years.

Published in The Express Tribune, March 5^th, 2013.

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