ISLAMABAD: The Cabinet Committee on Energy (CCoE) has granted a 60-day extension to oil refineries to meet the deadline given in the Pakistan Oil Refining Policy as refineries have raised many issues which were not properly taken care of in the policy, sources close to Minister for Petroleum and Power told Business Recorder.
Sharing the details, sources said, Petroleum Division recently briefed the CCoE that pursuant to the approval of Cabinet Committee on Energy of August 7, 2023 and ratification by the Federal Cabinet on August 9, 2023 Petroleum Division notified the Pakistan Oil Refining Policy and forwarded it to Oil and Gas Regulatory Authority (OGRA) and refineries for implementation.
The policy was aimed to upgrade the existing refineries to produce environment friendly Euro-V fuels and decrease the production of furnace oil.
Pakistan refining policy: PRL executes upgrade agreement with OGRA
To achieve this objective, the policy provided incremental incentive of 2.5% on HSD (in addition to current 7.5%) and 10% on MS in the form of deemed duty for 6 years starting from notification of the Policy.
The incremental incentive would be deposited in an escrow account maintained by OGRA with the respective refinery for meeting up to 25% of the upgrade projects’ cost. OGRA would allow withdrawal of funds from escrow account by the respective refinery, post financial close of the upgrade projects and against expenditure made for each milestone/ deliverables.
To avail the incremental incentive, the refineries were required to execute an upgrade Agreement, open an Escrow Account and provide Rs, 1 billion bank guarantee to OGRA within 3 months of notification of the policy by November 16, 2023.
In case the refineries did not execute the Upgrade Agreement, the Policy envisaged that they would not be allowed to produce and market petroleum products below Euro V specifications after February 16, 2024.
Petroleum Division further noted that to implement the Policy, a working group of representatives from OGRA, refineries and DG Oil held a series of meetings to develop mutually agreed Upgrade Agreement and Escrow Account Agreement.
After lengthy deliberations, OGRA finalized the template of Upgrade Agreement and conveyed the same to refineries for execution on November 8, 2023. However, four out of five refineries through a joint letter of November 13, 2023 raised a number of observations on the final draft shared by OGRA.
Besides, minor issues, they also raised major/ material issues which are as follows: (i) 7.5% Deemed Customs Duty on HSD - the Policy provides the incentive of 10% deemed duty including prevailing 7.5% on HSD for 6 years. The refineries have requested to continue the said 7.5% deemed duty for sustainability beyond the 6-year period as it is critical for the viability of the refineries.
Refineries argue that continuation of deemed duty will be instrumental for sustainable operations of refineries and that otherwise they will not be able to compete with import parity price due to a number of reasons such as (a) economy of scale of refineries in Gulf (b) much higher tax rate for refineries in the country and (c) reliance on imported crude etc.
The refineries added that in case 7.5% is discontinued after 6 years, their IRR will substantially reduce and debt payback will become challenging; (ii) Tax Exemption - refineries have stated that income tax on incremental incentives would result in a shortfall in the intended support of 25% of project cost, which will significantly impair the viability of the Upgrade Project.
Accordingly, they have requested for tax exemption on the incremental incentive (2.5% on H5D and 10% on MS) to be deposited in Escrow Account.
The Policy is silent on requisite tax exemptions; (iii) Committed Output - refineries have to execute an Upgrade Agreement including output and outcome of Upgrade projects as stipulated in clause 6.1. and 6.1.3.1 of the Policy.
The refineries have requested that instead of strict compliance of numbers mentioned in clause 6.1 of the Policy, they may be allowed flexibility to confirm the product slate/outcome of Upgrade projects after FID;(iv) Arbitration - The clause 6.1.5.1 of the Policy provides that for any dispute arising under this Policy, the matter shall be referred to the arbitrator appointed by Secretary Petroleum.
Copyright Business Recorder, 2023
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