New Refinery Policy to benefit local Refining

May 22, 2023

According to news flows, the Finance Division has proposed that the tariff protection enjoyed by existing refineries in neighboring countries/region should be included in the refineries policy. In relation to the draft refineries policy, the Finance Division suggests that financial projections and estimates of funds should be arranged by granting incentivized tariff protection. This protection would be equivalent to the incremental custom duty on Motor Spirit (MS) and High Speed Diesel (HSD) at the rates of 10% and 2.5% respectively for a period of six years. This proposal aims to provide a clear understanding of the fiscal support offered to refineries for their upgrading efforts.

The Finance Division argues that tariff protection for the local industry is a common global practice and is acceptable under the rules of the World Trade Organization (WTO). As a result, the practices of tariff protection granted to oil refineries in neighboring countries/regions could be incorporated into the policy.

On April 18, 2023, the Refineries Policy was discussed during a meeting of the Cabinet Committee on Energy (CCoE) chaired by the Prime Minister. However, the policy did not receive approval from the Committee. The Petroleum Division was instructed to gather comments from relevant stakeholders and present it in the budget.

The Petroleum Division has proposed an increase in the rates of Motor Spirit (MS) and High Speed Diesel (HSD) by Rs 3 per liter. This increase is aimed at providing an incentive of tariff protection equivalent to the incremental custom duty on MS and HSD at the rates of 10% and 25% respectively to new refineries, as approved in the Finance Bill 2020-21.

In Pakistan, petroleum products contribute 31% to the primary energy mix, with an overall consumption of approximately 23 million tons per annum (MTPA). Out of this, locally refined products amount to around 11 MTPA (including 30% local crude processing), while the remaining crude oil and petroleum products need to be imported.

There are five local refineries in Pakistan that have been periodically upgraded to meet local fuel specifications. These upgrades include the installation of Diesel Hydro De-sulfurization (DHD) units to reduce sulfur content in diesel and Isomerization plants to increase the production of Motor Spirit (Petrol). These upgrades have incurred a cost of approximately Rs. 75 billion. The government has been encouraging local refineries to further upgrade their facilities to produce Euro-V specification fuels and reduce the production of furnace oil. However, this requires a significant capital investment of around $4 to 4.5 billion. Refineries will need to arrange funding from their own resources and borrow from lenders on commercial terms in order to obtain the necessary funds and improve their balance sheets.