The long-awaited Petroleum Refining Policy, known as the Pakistan Oil Refining Policy for New/Greenfield Refineries 2023, the initial draft of which was prepared in 2021, has been a great disappointment insofar as its scope and limitations for other potential investors is concerned. This is a unique and convoluted investment policy that has been framed exclusively for a single project i.e. “a greenfield deep conversion integrated refinery and petrochemical complex of crude oil processing capacity of 300,000 barrels per day (bpd)”, which is being established with the cooperation of Saudi Arabia. The Policy does not allow any other refinery project in future, either based on a different oil refining process or technology but deep conversion only, or of a capacity less than 300,000-bpd, and, above all, it has to be an integrated refinery and petrochemical complex, whether possible or not. Refinery projects of less than 300,000-bpd capacity, if considered, will have another package of lower incentives and concessions.
The long-awaited Petroleum Refining Policy, known as the Pakistan Oil Refining Policy for New/Greenfield Refineries 2023, the initial draft of which was prepared in 2021, has been a great disappointment insofar as its scope and limitations for other potential investors is concerned. This is a unique and convoluted investment policy that has been framed exclusively for a single project i.e. “a greenfield deep conversion integrated refinery and petrochemical complex of crude oil processing capacity of 300,000 barrels per day (bpd)”, which is being established with the cooperation of Saudi Arabia. The Policy does not allow any other refinery project in future, either based on a different oil refining process or technology but deep conversion only, or of a capacity less than 300,000-bpd, and, above all, it has to be an integrated refinery and petrochemical complex, whether possible or not. Refinery projects of less than 300,000-bpd capacity, if considered, will have another package of lower incentives and concessions.
During a visit to Islamabad in February 2019, Saudi Crown Prince Mohammed bin Salman had announced plans to set up an oil refinery in Pakistan. However, the $10-billion project was stalled for several years due to a variety of factors including the issues on techno-commercial feasibility and proposed location of the refinery. The past government revived the strategic project, and discussed with the Saudi side the modalities for implementing the refinery project to be established in Gwadar (Balochistan) or near Karachi (Hub, Balochistan). Four state-owned petroleum companies in Pakistan were roped into this venture who have also agreed to contribute to project equity, while major investment will be by the state-owned Saudi Aramco, one of the world’s largest integrated energy and chemicals companies, who will execute the project and also operate the refinery complex on completion.
It has been decided to construct an integrated complex employing state-of-the-art deep conversion technology for petroleum refining of 300,000 bpd capacity and petrochemicals production facilities at Gwadar Port. The complex is envisaged to have marine infrastructure, storage for crude oil and refined utilities, other auxiliary units, and pipeline connectivity. The cost of the refinery complex is expected to be revised as a pipeline, costing additional $2 billion, to transport finished products from Gwadar to different parts of the country will be required. There are also speculations that installed capacity of Saudi Refinery will be enhanced to 400,000-bpd, and thus project cost will go up to $15 billion. Perhaps this stance taken later has necessitated partnership with major Pakistani companies operating in the oil & gas sector, namely Pakistan State Oil (PSO), Oil & Gas Development Co Ltd (OGDCL), Pakistan Petroleum Ltd (PPL), and Government Holdings (Private) Ltd (GHPL), for participation in project equity.
The government however has not yet disclosed details of the agreement/Memorandum of Understanding (MOU) signed last month by Saudi Aramco, on Saudi side, and PSO, OGDCL, PPL, and GHPL, on Pakistan side, such as revised cost of the project, ratio of equity participation, division of responsibilities, and other parameters for cooperation and collaboration. According to earlier reports an investment of $10 billion, that is original project cost, was to be made by the Saudi government however it is not certain now if the entire project equity will be injected by Saudi Aramco. Some sources claim that Saudi Aramco will now have 30pc shareholding in the project, whereas PSO will have 50pc and other Pakistani companies 20pc as joint venture partners.
It is understood that Saudi Aramco had proposed stringent terms and conditions to the Government of Pakistan, asking for a special fiscal, financial and regulatory framework for the project, which has been agreed to and covered under the 2023 Refining Policy. Saudi Refinery shall be eligible for a custom duty of 7.5pc on petrol and diesel of all grades produced for 25 years effective from the date of commencement of production---one of the incentives demanded by Saudi Aramco. It shall enjoy a 20-year tax holiday and will be entitled to exemption from levy of duties and various taxes on import of machinery, equipment and materials for 25 years, besides other concessions. The project will also be declared a Single Entity Special Economic Zone, to be protected under the Special Economic Zones Act, 2012. The then State Minister for Petroleum Dr Musadik Malik is reported to have said in April that the new Petroleum Policy was being finalised basically to facilitate the Saudi Oil Refinery project.
Another disturbing aspect of the Refining Policy is that there is no room for any other investor to set up a refinery project even if the investor fulfils all the criteria given in the Policy. On completion of this refinery complex, which will be the largest refinery in the country, there will be no need for establishing another similar unit until 2035. The domestic demand of main oil products i.e. petrol (motor gasoline) and diesel will be fully met by then, by existing oil refineries which are going for upgradation and modernisation in a big way, complimented by the operational Saudi Refinery mega project. Thus, domestic refineries will achieve cumulative annual installed capacity of 34 million tons of petrol and diesel while the forecast for domestic demand is 33 million tons by 2035, as per the Policy document, or even beyond according to energy experts. Initially the Saudi Refinery will be allowed to export 35-40pc of its petroleum products.
Currently, the six oil refineries have an installed capacity to process 450,000 bpd crude oil which is translated into annual production of 20.5 million tons refined oil products, though capacity utilisation at present is about 60pc due to constraints of outdated technology, decreasing demand of furnace oil and other operational factors. Plans are therefore underway for quite some time for restoration of original installed capacity of these refineries within six years with an investment of $5 billion. A separate policy to upgrade the brownfield refineries and to encourage production of cleaner and higher-value fuels has already been approved, with a different set of incentives.
There are various refining processes and configurations, such as topping refinery (with no conversion), hydro-skimming (or cracking oil refinery), conversion (to treat and convert heavier oil), and deep (full) conversion. Pakistan-Arab Refinery (PARCO) is the most modern and largest refinery in Pakistan having 120,000-bpd capacity, which was last upgraded in 2020, employing conversion technology. All other refineries in the country are based on hydro-skimming technology. Deep conversion refinery is the last level of refining and a combination of all components of a conversion refinery and an additional unit (coking unit) to treat and convert extremely heavy crude oil fractions into lighter products, and also converts other hydrocarbon feedstock into petrochemicals.
Way back in 2007, PARCO, a joint venture of Pakistan and Abu Dhabi, had planned to construct a greenfield oil refinery of 250,000-300,000 bpd capacity based on deep conversion technology at the Khalifa Point, near Hub, Balochistan. A joint venture between PARCO and OMV (Austria), the refinery was to cost less than $6 billion—almost at half the cost of the Saudi Refinery project. The project feasibility study was done, and the ECC of the Cabinet had approved the project, but it could not materialise though it was actively followed until 2017. Other proposed or pipeline projects include a 250,000-bpd refinery and industrial park to be constructed at Gwadar in 2019 by Sino Infrastructure Hong Kong Oriental Times Corporation as a China Pakistan Economic Corridor (CPEC) project. A deep conversion refinery by the Government of Khyber Pakhtunkhwa (KP), PSO, and Power China International Group was proposed to be established utilising indigenous crude oil, and a 100,000-bpd deep conversion Khyber Refinery at Kohat (KP) was planned with the cooperation of China and Russia.
Another 40,000-100,000-bpd deep conversion refinery, partially using indigenous crude oil, was to be set up at Dera Ismail Khan (KP) by Falcon Oil (WAK Group, Pakistan) for which the contract valuing $3.58 billion was signed in 2017 with GEDI, a subsidiary of China Energy Engineering Corporation. Sadly, there are likely no prospects of these pipeline projects ever being materialised in the wake of the myopic 2023 Refining Policy, which focuses only on a single project i.e. Saudi Refinery. It is worth noting that the last Petroleum Policy 1997 could attract only one investor, Cnergyico Pk Limited (formerly BYCO Petroleum Pakistan), who initially established a second-hand refinery plant. The failure of the last Policy of 1997 has resulted in deficiency of domestic oil refining capacity to the extent that today Pakistan imports 430,000 tons of petrol and 200,000 tons of diesel each month, costing millions of dollars.
The writer is retired chairman of the State Engineering Corporation
