Proposed policy: Local refineries: Finance Div for adequate tariff protection

ISLAMABAD: Finance Division has proposed that tariff protection enjoyed by the existing refineries in neighbouring countries/ region be made part of refineries policy, well-informed sources told Business Recorder.

Commenting on draft refineries policy, Finance Division maintains that financial projections/ estimates of funds be arranged by granting incentivize tariff protection equivalent to the incremental custom duty on MS and HSD at the rate of 10% and 2.5%, respectively for 6 years to be annexed with draft for better understanding of fiscal support offered to refineries for augmenting of their efforts of upgradation.

Finance Division further argued that tariff protection to local industry is a global practice and acceptable under the rules of WTO. In this connection, practices of tariff protection to oil refineries in neighbouring countries/ region may form part of the policy, the sources added.

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The Refineries Policy was on the agenda of Cabinet Committee on Energy (CCoE) held under the chairmanship of Prime Minister on April 18, 2023. The policy didn’t get approval of the Committee as Petroleum Division was asked to seek comments from concerned stakeholders and be announced in the budget.

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

Sharing the details, sources said that the petroleum products contribute 31 per cent in primary energy mix of Pakistan with overall consumption of around 23 million tons per annum (MTPA). Out of this, the locally refined products are around 11 MTPA (inclusive of -30% local crude processing) while deficit crude oil and petroleum products have to be imported.

The indigenous and imported crude is refined by five local refineries which have been periodically upgraded to meet local fuel specifications. The refineries upgrade include setting up of Diesel Hydro De-sulfurisation (DHDs) to reduce Sulphur from Diesel and Isomerization plants for enhancing the production of Motor Sprit (Petrol) at a cost of around Rs. 75 billion. Petroleum products contribute 31% in primary energy mix of Pakistan overall.

Government has been emphasizing local refineries to further up-grade their plants by producing Euro-V specification fuels and minimizing production of furnace oil; however, it requires capital investment of around $ 4 to 4.5 billion. This would require refineries to arrange funding from their own resources and borrowing from lenders at commercial terms. To obtain funding, refineries will have to improve their balance sheets.

The refineries’ five years’ profit/ loss position indicated that the sector needs fiscal support of the government to improve the financial position for up-gradation purpose. In case of no intervention by the Government, the local refining industry is at risk of collapse/ shutdown. In such a case the domestic crude oil production of approximately 70,000 barrels per day by Pakistan’s E&P companies would have to be exported; whereas, the import of multiple petroleum products instead of single product, i.e., crude oil will further complicate the growing congestion at ports. Such scenario might discourage investment in exploration of oil and gas sector, apart from creating vulnerability in supply chain of strategic fuels and placing additional burden on our balance of payments.

In October 1997, the Government of Pakistan introduced the Petroleum Policy 1997 (amended in 2002), which replaced the minimum 10% guaranteed rate of return for refineries with tariff protection formula/ deemed duty (10% on HSD, 6% on SKO, LDO & JP-4). However, in 2008 tariff protection was reduced to 7.5% on HSD only but the tariff protection could not attract investment in the new refinery/ sufficient upgradation and, therefore requires to be improved.

Accordingly, Energy Sub-Group of the Advisory Committee of the Planning Commission was constituted which made recommendations with regard to investment in refinery sector through government support including product pricing policies, tax structure, etc.

In view of above, Petroleum Division prepared a draft Pakistan Oil Refining Policy for new and existing refineries which was discussed in CCoE meetings which in its decision of September 13, 2021 provided guidelines to improve the policy document; therefore, the policy has been revisited.

The establishment of a new refinery requires considerable lead time and huge investment for which a policy along with attractive incentives needs to be in place which is under process of finalization.

In case of existing refineries necessary changes have been incorporated in the policy after deliberation with the refineries and government bodies.

Accordingly, the draft Pakistan Oil Refining Policy, 2023 for up gradation of existing refineries has been submitted for the consideration and approval of the EEC of the Cabinet whereby certain tax exemptions and tariff protection incentives have been proposed, as provided in section-6 of the proposed policy.

By granting the incentive of tariff protection (equivalent to the incremental custom duty on MS and HSD at the rate of 10% and 2.5%, respectively as approved in Finance Bill 2020-21), the consumer price of MS, as well as HSD will be raised by Rs 3 per litre which may be minimized by optimum utilization of White Oil pipeline, the sources continued.

Copyright Business Recorder, 2023