ISLAMABAD: Before clearing next year’s budgetary proposals by the federal cabinet, its Economic Coordination Committee (ECC) on Friday approved an incentive package for the setting up of modern oil refineries with a 20-year tax holiday.

The meeting of the ECC of the cabinet was presided over by Prime Minister Shahid Khaqan Abbasi. This was the second ECC meeting in as many days.

The incentive package is designed to attract investments in the refining sector, including deep conversion refineries and expansion of existing refineries of at least 100,000 barrels per day of oil refining capacity. Most of Pakistan’s oil demand is met through imported products and the gap has been steadily growing.

Based on GDP growth of 7pc, the annual demand of petroleum products is forecast to reach around 55 million tonnes in 2030, from the 2018 estimated demand of 29.6m tonnes. This includes estimated impact of the China-Pakistan Economic Corridor on high speed diesel demand.

The oil industry has been asking the government to announce a refining policy with a long-term predictability to attract fresh investments in the sector given huge potential for capacity addition and product improvements. Work on the last refinery – Byco Refinery – started in 2008 was completed in 2012.

20-year income tax holiday with exemption from all duties, taxes for imports for a refinery project

To attract investment in the country, the ECC approved an incentive package for setting up new state-of-the-art deep conversion oil refinery projects anywhere in the country, including expansion of existing refineries of minimum 100,000 barrels per day capacity. This would also be applicable to the PARCO’s Coastal Refinery Project.

The incentive package includes 20-year income tax holiday and exemption from all duties, taxes, surcharges and levies on import by a refinery project, its contactors 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 a refinery.

The package also includes exemption from withholding tax and all other duties, taxes, surcharges and levies on imports by foreign contractors/subcontractors and their employees in connection with engineering, procurement, construction, commissioning, operation, maintenance and repair of a refinery.

Sales tax and excise duty on supply of locally manufactured building and construction material, equipment and service for the setting up of a refinery would also be exempted. New refinery projects would be given a pricing mechanism which would be no less favourable than the prevailing mechanism.

The new projects would also be facilitated in project infrastructure such as single point mooring, jetties, subsea/land pipelines etc. The package also grants waiver to applicable development surcharge on the value of exports under the EPZA Rules 1981 in case a refinery project is set up in the Export Processing Zone.

The incentive package will facilitate establishment of new state-of-the-art refineries in any part of Pakistan, including the planned Chinese refinery in Gwadar, which will ensure sustained supply of petroleum products in various parts of the country at affordable prices and reduce the import bill of petroleum products.

According to the latest oil report of the Oil Companies’ Advisory Council (OCAC), Pakistan’s petrol consumption is estimated to surge by 80 per cent to 14m tonnes by 2021-22. Overall oil demand is to increase by about 18pc despite an estimated 65pc fall in furnace oil needs during this period.

The report says the demand for petrol currently stands at about 7.97m tonnes that would jump to 14.17m tonnes in 2021-22, showing an increase of about 78pc.

On the other hand, consumption of furnace oil has been estimated to reduce by almost 65pc to 3.2m tonnes in five years from current consumption of about 9m tonnes. Furnace oil consumption is estimated to drop to 3.2m tonnes next year and then remain flat at that level for five years due to diversion of power generation to imported liquefied natural gas and coal. The fuel switch in power sector is estimated to provide about $2.5-3 billion per year.

The demand for total POL products is estimated to increase from 27m tonnes this year to about 32m tonnes in five years, showing an increase of 17.5pc. High speed diesel (HSD) would be another major driver for growth in consumption of petroleum products. HSD consumption is estimated to increase by 46.4pc to 13.7m tonnes in five years from current level of 9.3m tonnes.

The demand for kerosene and light diesel oil has been estimated to increase by 8.24pc each to 141,000 tonnes and 25,000 tonnes respectively in five years.

The OCAC says the deficit of petrol currently stands at 4.8m tonnes owing to insufficient refining capacity in the country which would surge by 122pc by 2021-22. Likewise, HSD deficit would increase from 3.9m tonnes at present to 6.3m tonnes, showing an increase of more than 62pc.

The report says it is also important to provide better world scale quality products to the consumer. “Additional Deep Conversion Refineries, De-bottlenecking of the existing Ports including Byco’s Single Point Mooring, and the addition of another Oil Pier at Port Qasim besides cross-country pipelines geared to handle dual fuels, adding matching oil depots installations and storages are the ingredients for Pakistan’s future success,” the OCAC emphasises.

Published in Dawn, April 28th, 2018