Staff Report
ISLAMABAD:
Petroleum Division has drafted an incentive package for refineries of the country and requested the government to make the proposed incentive package part of Finance Bill 2021-22 in order to technical up-gradation of existing refineries and incentivize new investment.
Well-informed sources told that the Petroleum Division has formulated an incentive package for investment in up-gradation and sustainable operation of existing refineries as well as to attract investment in new state of the art deep conversion integrated refineries. And, requested that the proposed incentive package be made part of Finance Bill 2021-22.
As per details, a draft incentive package was prepared after extensive deliberation between the stakeholders comprising of commitment from refineries for upgradation within five years to produce environmental friendly Euro-V spec products and reduce furnace oil production. And, after five years, refinery will be in a position to operate at optimal capacity with technological enhancement, leading to forex saving.
Sources said that tariff protection for refineries be provided by zero percent duty on raw material (crude) for refineries and 10pc duty on finished products (petrol/diesel). Similarly, 0% import duty on crude oil which is a raw material for refineries. Furthermore, decrease import duty from 13% to 10% on diesel and increase import duty from 5% to 10% on petrol are also proposed in the said incentive package for the refineries of the country.
Available documents disclosed that the proposed tariff protection formula would contribute revenue to refineries up to 40% only and remaining 60% investment would be arranged by refineries at their own (about US $ 3.5 billion total cost) for upgradation during next five years.
As per estimates, the net revenues for Federal Board of Revenue (FBR) will remain neutral due to tariff revision coupled with growing demand of petroleum products in the country.
Documents further revealed that a comprehensive monitoring mechanism has laid down in draft policy which include transfer of international revenues to special reserve account in National Bank of Pakistan (NBP) to be exclusively utilized for project upgradation which will be monitored by Oil and Gas Regulatory Authority (OGRA) through technical inspection/audit as well as statutory commercial audit to be carried out by one of big four (04) audit firms.
“Certain tax incentives/exemptions are part of proposed incentive package,” said the documents.
It is also learnt from the documents that the draft incentive package was circulated to stakeholders such as finance and planning division as well as OGRA and FBR etc. They said that the petroleum products demand supply projections indicates requirement of additional refining capacity of at least 400,000 barrel per day at a cost of US $ 10-15 billion by 2030. They said with regard to investment for new refineries, in February 2019, ARAMCO and PSO initiated discussion for the integrated deep conversion refinery petrochemical in Pakistan. The pre-feasibility was completed in July-August 2020, however the project has been on hold due to low IRR.
Earlier, a meeting was chaired by the Prime Minister of Pakistan on 7th of December 2020 to review the progress of PARCO Coastal Refinery Project (PCR) in which the PM endorsed (i) incentive package for upgradation of refineries with an investment of USD 3-5 billion and (ii) a green field deep conversion integrated refinery petrochemical project with an investment in a range of USD 10-15 billion.
Similarly, a meeting with finance minister was held on 2nd June 2021 to discuss the policy incentives and inclusion of same in Finance Bill. The meeting was attended by Finance Minister, Minister for Energy, SAPM on Petroleum, Secretary Petroleum, Chairman FBR, Additional Secretary, Finance and Revenue, DG (Oil) and representatives of refineries. A detailed presentation was made on the proposed incentives. Finance Minister while endorsing the spirit, advised Chairman FBR to seek further clarity on the fiscal and tariff protection incentives before incorporation in the Finance Bill.
In compliance, a meeting was held on 4th June 2021 with the Chairman FBR, attended by the Secretary Petroleum, DG (Oil) and representatives of refineries wherein detailed data and assumptions were shared and board macroeconomic picture and challenges of midstream refining sector were highlighted.
It is worth mentioning here that the last Petroleum Policy was announced in 1997. In last 49 years only two refineries have been commissioned in the country due to limited incentives.
In view of discontinuation/reduction of the various incentives/pricing formulas from time to time, the protection available to local refining industry has significantly been eroded, coupled with low international margins, which have badly affected the profitability of the refineries causing heavy losses and thereby putting the survival of local industry at stake and are now at the verge of closure.
The prevailing pricing mechanism for local refineries is regulated and linked with international market with low tariff protection. Despite various constraints, refineries kept on upgrading to produce Euro-II/Euro-III standard products. Accordingly, their survival is now at risk unless fiscal support and adequate tariff protection is urgently provided.
