Economic Coordination Committee (ECC) of the Cabinet on Friday approved incentive package for setting up state of the art Deep Conversion Oil Refinery Projects, mainly for Abu Dhabi Petroleum Investment Company (ADPI) which sought incentives as a pre-requisite for the revival of Khalifa Coastal Refinery (KCR) (KCR) project at Hub Balochistan.
Presided over by Prime Minister, Shahid Khaqan Abbasi, the incentive package includes 20 years income tax holiday, exemption from all duties, taxes, surcharges and levies on import by the Refinery Project, its contractors or any other persons, of all machinery, vehicles, plant and equipment, other materials and spares and consumables for setting up, operation, maintenance and repair of refinery.
The package also includes exemption from withholding tax and all other duties, taxes, surcharges, levies and import relating to foreign contractors/subcontractors and their personnel in connection with engineering, procurement, construction, commissioning, operation, maintenance and repair of the Refinery. Sales tax and excise duty on supply of locally manufactured building and construction of material, equipment and service for setting up of Refinery would also be exempted.
New Refinery projects would be given a pricing mechanism which shall be no less favorable than the prevailing mechanism. The new projects would also be facilitated in project infrastructure such as Single Point Mooring (SPM), Jetties, sub-sea/land pipelines etc.
The package also grants waiver to applicable Development Surcharge on the value of exports under the EPZA Rules 1981 in case Refinery Project is set up in Export Processing Zone.
According to official statement this decision will facilitate establishment of new state-of-the-art refineries in any part of Pakistan that will ensure sustained supply of petroleum products in various parts of the country at affordable prices and reduce the import bill of petroleum products.
Official documents available with Business Recorder reveal that the ECC in its decision on October 10, 2007 approved a summary of Ministry of Petroleum and Natural Resources titled "establishment of a coastal oil refinery at Khalifa point by IPIC of Abu Dhabi".
The ECC also approved draft Implementation Agreement (IA) between GoP and Emirates of Abu Dhabi for establishment of refinery at Khalifa Point with 250,000-300,000 barrels per day (bpd) capacity, at Hub Balochistan and certain incentives for establishment of new oil refineries to be installed alongside the coastal belt in Balochistan.
The IA was subsequently executed on November 13, 2007. However, work on KCR project could not begin at that time.
During the last decade (2007-2017), the demand for petroleum products in the country has grown from 18 million tons per annum (MTPA) to about 26 MTPA in 2017, an increase of about 4 per cent per annum. As per latest industry forecast @ 5 per cent projected GDP growth rate and incremental impact of CPEC the demand is expected to reach 50 MTPA (47 MTPA net for furnace oil) by 2030. Based on the industry's demand projections and the expected production from existing refineries, the country will be in need of adding at least three Deep Conversion Refineries with each having a capacity of 11-13 MTPA (approximately 250,000-300,000 bpd) within 7-10 years.
Deep Conversion Refinery involves better efficiency and economics as it converts heavy crude oil and furnace oil into more profitable products such as motor gasoline, diesel and jet fuels. Thus the proposed project will provide fuel security, reduce dependence on imported products and flexibility in production of refined products.
However, setting up of an oil refinery is highly complex and capital intensive besides the projects have long lead time (5-7 years). While the financial strength required for setting up of a state of the art oil refinery is mainly available internationally, potential investors seek incentives/ commitments prior to making any investment decision. In this regard, PARCO which is a Joint Venture (JV) of GoP (60 per cent) and Emirates of Abu Dhabi ( 40 per cent) through Abu Dhabi Petroleum Investment Company (ADPI) has recently revived the KCR project at Hub Balochistan now under the name of PARCO Coastal Refinery (PRC) having 250,000 bpd capacity with an estimated cost of $ 5 billion. Accordingly, PARCO has stated that ADPI has sought incentives as a pre-requisite, in order to move the next phase of the project ie (Final Investment Decision (FID).
In addition to PARCO, there are other potential investors who expressed keen interest from time to time in setting up of an oil refinery in northern part of the country. An inland refinery project also entails additional risk and cost in terms of construction and operation of crude pipelines from ports to the refinery location.
However, incentives granted by ECC in 2007 were only available to the new refinery projects alongside the coastal belt of Balochistan and those granted under the existing IA were applicable to KCR project.
Therefore, the Ministry of Energy (Petroleum Division) proposed that a uniform incentives package be offered to all potential investors as per due diligence carried out by them. Inland refinery projects may require additional incentives to be viable. The socio-economic and monetary benefits of the sate of art refinery projects for the country cannot be overemphasized.
In this regard, PARCO has also stated that whereas the cumulative impact of the incentives sought for the incentives for PCR over the project life of 20 years is estimated at $1.6 billion, the monetary benefits of $5 billion investment in the shape of forex savings, attributable profits to GoP and contribution on account of sales tax and petroleum levy are estimated to the tune of $ 84 billion (impact of incentives is just 2 per cent of the total monetary benefits to the country).
In this context, the Ministry of Energy (Petroleum Division) proposed that ECC may approve an incentive package for PARCO Coastal Refinery Project (PCR) and for all new state of the art (not second hand/ relocated) Deep Conversion Oil Refinery projects including expansion of existing refineries of minimum 100,000 bpd refining capacity to be set up anywhere in the country .
The approved package is as follows: (i) 20 years income tax holiday; (ii) new refinery project shall be exempted from the application of the Companies Profits (workers' participation) Act 1968 and Workers' Welfare Fund Ordinance 1971; (iii) exemption from all duties, taxes, surcharges and levies on import, by the refinery project, its contractors or any other persons, of all machinery, vehicles, plant and equipment, other materials and spares and consumables for setting up, operation, maintenance and repair of the refinery; (iv) exemption from withholding tax on all other duties, taxes, surcharges, levies and impost relating to foreign contractors/ subcontractors' and their personnel in connection with engineering, procurement, construction, commissioning, operation, maintenance and repair of the refinery; (v) exemption from leviable sales tax and excise duty on supply of locally manufactured building and construction material, equipment and services for setting up refinery; (vi) new refinery projects would be given a pricing mechanism which shall be no less favourable than the prevailing mechanism; (vii) facilitation in project infrastructure such as Single Point Mooring (SPM), jetties, subsea/land pipeline etc; and (vii) waiver of applicable development surcharge on the value of exports under the EPZA Rules 1981 in case refinery project is set up in EPZ.
This incentive package comprises of incentives already approved by the ECC in 2007 for new refinery projects alongside coastal belt of Balochistan and the ones which were earlier granted by ECC in 2007 under the IA to KCR project, now being sought by ADPI for PCR project.