The government has finalized a new policy for petroleum refining under which an incentive package will be extended for setting up deep conversion refineries anywhere in the country.
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The incentives come in the form of a 20-year tax holiday and up to a nine-year falling customs duty reduction in pricing provided the investors sign construction agreements before Dec 31, 2021.
The relevant local industry was taken on board and consulted to finalize the current framework. The new policy is set to be presented to the Economic Coordination Committee (ECC) for approval.
This is for oil refinery projects with a minimum of 100,000 barrels per day (BPD) refining capacity, which must be set up anywhere in the country with government approval latest by the end of 2021.
The refineries would be free to market their products through their own or other marketing companies or export after meeting local needs.
They would also be entitled to exemption from customs duty, withholding tax, or any other levy on import of any capital goods to be used in the refinery without certification by the Engineering Development Board (EDB).
Exemptions from ad valorem tax like general sales tax and others such as on the import of equipment to be installed or materials to be used in the refinery prior to commissioning shall be granted under the policy.
Construction, operations and engineering services performed in Pakistan, whether by local or foreign firms operating in Pakistan, as well as procurement of any local materials shall remain subject to all applicable local taxes, whether provincial or federal.
Temporary imports by contractors or sub-contractors of all machinery, vehicles, plant and equipment, other materials, and spares in connection with setting up, operation, maintenance, and repair, which are to be repatriated after completion of the works, shall be exempted from all customs duties, taxes, surcharges and levies on import, and shall be released by the customs authority on the provision of a bond by the importer, for the defined time period of use.
This will lead to foreign companies setting up in Pakistan.
To incentivize local industry to be on par with the potential new refineries, existing refineries are being given the same incentives to upgrade and modernize their refineries. There would be no restriction on technology, equipment, or process to qualify for such upgrade provided that it results in motor gasoline and diesel production to meet specifications notified by the government.
If an existing refinery meets the requirements, its upgrade, modernization, or expansion program shall be treated as a new project and it will be eligible for these incentives to the extent of upgrade or expansion through segregated accounts.
To ensure fairness the existing refineries too will have to secure government approval for expansion or upgrade program along with size, product specification, etc, no later than Dec 31, 2021.
They would then be given a waiver to continue marketing their products, until the agreed completion date of upgrade, from the notified fuel specifications for motor gasoline and diesel.
Refineries that do not provide such specifications as per the policy, and do not have a waiver shall not be allowed to sell petrol and diesel in Pakistan after June 30, 2022, if they do not meet the fuel specifications notified for imports of such products.
All these incentives would be kept under a tight monitoring mechanism.
The product pricing formula of local refineries — both new and upgraded — shall be based on Import Parity Price (IPP) to be derived from the average daily Arab Gulf Mean Freight Onboard (FOB) spot price for the pricing period in use by the regulator.
Otherwise, it shall be derived from the average daily Singapore Mean FOB price for the same period. All other elements, including premium, freight, port charges, incidentals and import duties, shall be added FOB to arrive at IPP. Ad valorem taxes shall then be added to arrive at the final consumer price.
There shall be no duties on the import of crude oil by refineries for their own use. The finished products, however, shall be subject to import duties as the government levies at the point in time.
There shall also be no guarantee of the rate of return for existing or new refineries. Any such policy protection to existing refineries, if existing today, in whatever form (deemed duty, return guarantee, etc) shall be replaced by IPP under the new policy.
The refineries shall be allowed to open and maintain foreign currency accounts and retain a certain portion of export proceeds in foreign currency to meet operational requirements.
There shall be a 10% duty levied on the import of motor gasoline and diesel of all grades as well as the import of any other white product used for fuel for any kind of motor or engine, from July 1, 2021, to June 30, 2026.
This import duty will then drop one percent per annum starting July 1, 2026, such that it is reduced to 5pc on July 1, 2030, and shall then remain fixed at 3pc thereafter.
This declining scale tariff protection shall be available to any new refinery starting from its commissioning date (i.e. 10pc for five years, with the rate declining 1pc per annum for next five years and shall remain fixed at 5pc thereafter), as long as such refinery starts construction before June 30, 2024.
The policy envisages a shift to complete deregulation of the oil sector, including products and pricing, by June 30, 2026, which is the same deadline for upgrades of existing refineries to allow the benefit of competitive forces to pass the benefit on to the consumers.
All the oil marketing companies (OMCs) thereafter, will be free to set the prices themselves, based on the quality of fuels, the location and other services being provided like High Octane Ron 97 at present.
However, the government would set the price for pumps of Pakistan State Oil, the public oil provided to give protection to the consumers.
Currently, Pakistan’s oil refining capacity is about 20 million tonnes per annum. About 60pc of the country’s requirements of diesel and 30pc of petrol are met by local refineries. The rest is imported as refined products.
Four out of five local refineries are obsolete while the fifth is 20 years old. Despite the importance of this sector to the economy and the existing condition of the refineries as mentioned, no new refinery can be set up for a decade at least.
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It must be noted that the existing refineries in Pakistan have not been keeping up with the technological upgradation and thus, this policy might incentivize them to do so.