After considerable delay, hesitation and uncertainty, the Pak-Saudi oil refinery project is moving ahead. “Saudi Arabia and Pakistan are on the verge of finalising a game-changing $14 billion deal for an advanced oil refinery,” Saudi daily Arab News reported on July 22, 2023.
The multi-million-dollar, state-of-the-art oil refinery project, with a capacity to process 350,000-450,000 barrels of crude oil per day, was initially agreed upon during the official visit of Saudi Crown Prince Mohammed bin Salman to Pakistan in 2019. The project also envisions setting up an integrated petrochemical complex alongside the refinery.
Since the agreement, the project has gone through many ups and downs. When the then Saudi petroleum minister Khalid Al-Falih visited the site, circles privy to the discussions in Dhahran — the headquarters of Saudi Aramco — were heard underlining that Al-Falih was not impressed.
There were also a few other issues impeding the progress. The security situation of Gwadar was one of the factors. The Saudis were not very sure about it. They were also reluctant because of the proximity of Iran to the site in Gwadar. The project site is just 90 kilometres from the Iranian border.
The new Pak-Saudi joint venture refinery will be able to export an estimated 35pc-40pc of its output
The state of relations between Riyadh and Tehran then also made the Saudis think and rethink the project. At a point in time, the Saudis reportedly also insisted on moving the location of the project to somewhere near Karachi. Consequently, Hub was discussed as an alternative site for the project.
Although relations between Saudi Arabia and Iran have improved in the meantime, some media reports indicate that the site selection decision, Gwadar, or Hub, has been left to the Saudis.
To promote foreign investment in the sector, Pakistan recently also unveiled a new policy, under which any new, deep conversion oil refinery of a minimum 300,000 barrels per day capacity, achieving financial close within five years, would be eligible for a customs duty of 7.5 per cent, on petrol and diesel of all grades produced in the refinery, for 25 years effective from the date of commissioning of the refinery.
All such projects shall also enjoy a 20-year tax holiday and would also be entitled to exemption from levy of customs duties, surcharges, withholding tax, general sales tax, any other ad valorem tax or any other levies and duties on import of any equipment to be installed, or material to be used in the refinery projects without any precondition for obtaining certification by the Engineering Development Board.
Since Saudi Aramco is expected to inject the initial 30pc equity into the proposed refinery, the Saudi oil giant was hesitant to proceed with the project unless local equity partners also joined the project. Aramco wanted to spread the risks.
“In our earlier discussions [with Saudi authorities], there were two issues. One was obviously, who are the other(local) equity partners? Since Pakistan was sure of the viability of the project, it had no hesitation in arranging local equity for the proposed project,” the then Pakistan’s minister of state for petroleum, Dr Musadik Malik, told Arab News late in July.
“So, we have put together equity partnerships of more than 40pc-45pc as of now. PSO is taking the lead in local equity with 25pc, and other local firms have also committed 5pc-10pc stakes in the project. This makes our equity share more than required,” he added.
Thus, late last July, four Pakistani public entities signed three memoranda of understanding (MOUs) to raise the necessary local equity for the project, providing some comfort to the Saudi investors. These included Oil and Gas Development Company Ltd, Pakistan State Oil, Pakistan Petroleum Ltd, and Government Holdings Private Ltd.
In the meantime, Pakistan also succeeded in bringing to the table “world-class refinery engineering, procurement and construction (EPC) partners who are also going to take a position in the equity,” Mr Malik had then added. The EPC agreement was inked with China National Offshore Oil Corporation and Pakistan’s Monarch International. All these helped soothe the Saudi nerves.
The low domestic requirement for fuel products has also been a point of concern. Already, at this moment, the refining capacity in the country is 20 million tonnes. Of this, the consumption is just around 11m tonnes. The additional output from the Saudi joint venture would make the capacity still larger.
However, most believe Pakistan’s consumption is bound to grow. Additionally, there is always the incentive to add value to crude and export petroleum products. India made windfalls over the recent months by importing crude from Russia, processing it and then exporting oil products derived from the cheap Russian crude to Europe and even the United States after value addition. It is estimated that the new Pak-Saudi JV refinery will also be able to export 35pc-40pc of its output.
In the meantime, Pakistan is also reportedly in discussion with Abu Dhabi and Azerbaijan on another similar joint venture refining project.
Once the projects come to fruition, it could prove to be a harbinger of more future foreign investments in the country, including in the mining sector.
Already, there are hints that Saudi Arabia is evaluating the prospect of investing in gold and copper mines in Pakistan. At a recent mining conference, both Saudi Arabia and Barrick Corporation senior executives were present, and they reportedly discussed the possibility.
After the conference, Mark Bristow, the CEO of the Toronto-based Barrick Gold Corp, which owns a 50pc stake in Pakistan Reko Diq gold and copper mine, told Reuters that the company is open to bringing in Saudi Arabia’s wealth fund as one of its partners for Reko Diq.
The governments of Pakistan and the province of Baluchistan own the remaining 50pc stake in the mines. Barrick considers the mine one of the world’s largest underdeveloped copper-gold areas.
Bristow said Barrick wouldn’t be diluting its equity in the project but “will not mind” if Saudi Arabia’s Public Investment Fund (PIF) wants to buy out the equity of the Pakistan government.
“There is a strong relationship between Saudi and Pakistan, and since we control the project, we have the first right of refusal,” Bristow added. He said that Barrick would support PIF coming into the mine through Pakistan’s 25pc equity stake. All this is a breeze of fresh air.
Published in Dawn, The Business and Finance Weekly, September 4th, 2023