ISLAMABAD: The government has finalised a new policy for petroleum refining under which an incentive package will be extended for setting up of deep conversion refineries.
The package will provide a 20-year tax holiday and up to nine-year cascading customs duty reduction in pricing provided the investors sign construction agreements before Dec 31, 2021.
The policy framework has been finalised in consultation with the local refining industry. The new policy is set to be presented to the Economic Coordination Committee (ECC) of the cabinet shortly for approval.
All new deep conversion oil refinery projects of a minimum of 100,000 barrels per day (BPD) refining capacity, to be set up anywhere in the country with government approval latest by Dec 31, 2021, shall be eligible for 20-year income tax holiday from profits and gains from the date of commissioning.
The government will not guarantee product off-take and 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 equipment to be installed, or material to be used in the refinery without certification by the Engineering Development Board (EDB). They would also avail exemption from general sales tax, or any other ad valorem tax on the import of equipment to be installed or materials to be used in the refinery prior to commissioning.
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 customs authority on provision of a bond by the importer, for the defined time period of use.
All the above incentives would also be available to the existing refineries as incentive to upgrade and modernise 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.
This could include modernisation, expansion and bottom-of-barrel upgrade, whether individually or jointly, by the existing refineries. If an existing refinery qualifies as having met the requirements, its upgrade, modernisation or expansion programme shall be treated as a new project, and shall be eligible for these incentives to the extent of upgrade or expansion through segregated accounts.
The existing refineries would also have to secure government approval for expansion or upgrade programme along with size, product specification, etc, no later than Dec 31, 2021. They would then be given 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 undertaking 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.
Upgrade, modernisation and expansion would be subject to 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, or if not published, shall be derived from 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 final consumer price.
There shall be no duties on import of crude oil by refineries for their own use. The finished products, however, shall be subject to import duties to be notified by the government from time to time. There shall also be no guarantee of 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 per cent duty on import of motor gasoline and diesel of all grades as well as import of any other white product used for fuel for any kind of motor or engine, from July 1, 2021 to June 30, 2026.
The rate of import duty would then drop one per cent 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 shift to complete deregulation of 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.
The principle to be followed will be that all oil marketing companies (OMCs) 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 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 these numbers and the refining industry being integral to the growth of the economy, no new refinery could materialise for more than a decade. Similarly, upgrade of the existing refineries has not kept pace with technology.
Published in Dawn, March 24th, 2021