PAKISTAN’S oil refineries play a major role in our energy needs. They save Pakistan billions in foreign exchange annually and give jobs to tens of thousands. However, it has received little support from the government in the last decade and is often at the receiving end of undue criticism. For instance, some critics say the sector needs government subsidies to survive and the state shouldn’t strive for investments in oil refineries. This is misleading and incorrect.

Pakistan’s refineries don’t get direct subsidies or heavy payouts from the government for their survival. Many industries receive some form of government support: Fertilizers benefits from gas subsidies, automotives receive tariffs on vehicle imports, and banks get heavy government borrowings and low deposit markup rates. Oil refineries, however, receive minimal support in the form of 7.5pc of duty on high-speed diesel, but since a refinery produces a number of other products as well, the net impact is just 2.25pc on the whole barrel. This modest tariff protection for a heavily capital intensive industry which imports its raw materials is simply inadequate.

An oil refinery’s business model is fairly straightforward and usually profitable, although margins are underpinned by movements in fuel prices. Refineries make profits by processing and converting crude oil into various refined products which are sold to oil marketing companies and other buyers. They also feed petrochemical and other ancillary industries.

Pakistan’s leading refineries have shown that they can turn decent profits even in tough times. The refiners generally thrive in a weak oil price environment, since they use crude oil as a raw material and any reduction in international oil prices lowers their cost of production. But they can report losses when oil prices jump higher.

For refiners in Pakistan, the third quarter of 2018 was a difficult period with the price of Brent crude oil climbing to $80/barrel by late-September. The impact was compounded by the rupee’s devaluation. But some of the biggest refiners still managed to post a profit.

Rather than taking subsidies, the oil refiners pay hundreds of billions each year to the government as taxes and duties. In FY18, four leading listed refineries contributed Rs 176.9 billion to the exchequer as taxes, levies, and duties.

In fact, the oil refining sector is one area where the state should encourage investment. In a free market the state can encourage investments in certain sectors for strategic reasons but ultimately market forces should determine which industries investors choose to focus on.

The message from the market, especially foreign investors, is loud and clear — Pakistan needs more refineries.

Shehryar Ahmad
Karachi

Published in Dawn, March 25th, 2019