Pakistan set to build new refinery as part of efforts to enhance energy security

ISLAMABAD: Minister of State for Petroleum, Musadik Malik, on Friday said the government has planned to build a new refinery to meet the country's energy needs.

"The Prime Minister Shehbaz Sharif has approved the project, which had been in development for some time, during a Cabinet Committee on Energy (CCoE) meeting," Malik told a news conference. The new refinery is expected to cost between $10-14 billion.

Malik emphasised the importance of energy for economic development and expressed his optimism that this new initiative would drive progress in Pakistan. The minister said Pakistan would soon receive its first shipment of inexpensive oil from Russia, which was made possible by the present government's successful negotiation with Moscow.

Furthermore, Malik said that the government has decided to stop supplying gas to power plants and instead provide 50 million cubic feet per day (MMCFD) of gas to low-income households. "We will take back cheap gas from the wealthy and provide it to the impoverished," he stated.

Malik did not elaborate on who the entities were that had been monopolizing the gas supply. The minister said the government has implemented a policy to provide less expensive energy by using liquefied natural gas (LNG), liquefied petroleum gas (LPG), and solar energy. This policy aims to promote energy conservation for sustainable development and to end the monopoly of a few companies that have been charging consumers exorbitant prices.

The new policy would encourage competition among energy companies, resulting in competitive prices for consumers, including tenants who have been overcharged for privately supplied energy resources by landlords and building owners.

"The new initiatives demonstrate the government's commitment to meeting the country's energy needs while prioritizing affordability and fairness for all," he added.

Meanwhile, The CCoE on Friday provisionally endorsed the refining policies' draft for new refineries and the enhancement of local refineries, the final approval has been deferred until the next CCoE meeting.

After the approval of the draft for green refineries by CCoE, the Kingdom of Saudi Arabia will move forward with the installation of a state-of-the-art refinery worth $10.5 billion in Pakistan.

This new refinery is expected to bring significant economic benefits, with Pakistan projected to gain a net foreign exchange of $9 billion over 25 years. The proposed refinery will rely on crude supplied entirely by Aramco, opening up opportunities for further investment from countries like China.

Additionally, the establishment of a new, greenfield refinery will help protect Pakistan from any future disruptions to the supply chain of petroleum products across the country. “The participants of the meeting were in agreement in principle with the refining drafts for both the brown and green refineries but there were some issues raised by the FBR. The chair of the meeting asked the relevant officials to settle said issues and bring the drafts of both refining policies in the next meeting for approval,” an official told The News.

The CCoE has approved the general framework for the National Energy Efficiency and Conservation Policy of 2022. However, the specific details and implementation procedures will be finalized at a later date.

In the meeting, it was decided that the government will not procure electricity from captive power plants for the national grid. The CCoE has also approved the continuation of old gas development schemes that were initiated by the previous PML-N government but have yet to be completed due to the ongoing gas crisis in the country.

“The National Electricity Plan 2023-27 could not be taken up as most of the time was consumed in discussing the refining policy drafts,” the official said

Quoting the Prime Minister, the official said the new refinery, which has a capacity to refine 350,000 barrels of crude oil per day, will create numerous job opportunities for Pakistanis.

“The $10.5 billion state-of-the-art deep conversion refinery would be built under 70:30 loan equity ratio and Saudi Aramco would share 30 percent equity with Pakistan State Oil (PSO) on a 50 percent basis. The EPC mode would be adopted to complete the project, and a Chinese company will also be a part of the refinery project.”

Saudi Arabia, the official, said had earlier has communicated that it will not invest in the refinery until Pakistan extends the deemed duty of 7.5 percent on gasoline and diesel for 25 years, along with a tax holiday of 20 years.

Pakistan has agreed to meet the demands of Saudi Aramco to secure investment in the country's refining sector and incentives requested by the Saudi oil giant have been included in the draft of refining policy, which is set to be approved by the CCoE and federal cabinet.

Officials, however, said meeting the conditions set by Saudi Arabia would have a significant impact on the country's revenue from finished petroleum products and crude oil. Additionally, Saudi Arabia has requested a waiver of the 5 percent customs duty that has already been imposed on imported crude oil used for the refinery.

Pakistan previously offered a deemed duty of 10 percent for the first 10 years of the operational project along with a tax holiday lasting 10 years. However, it appears that the Kingdom has refused to accept these conditions.

The official said the mega project of 300,000 barrels per day capacity would be built on EPC (engineering, procurement, construction) mode. And 70 percent of the cost of the project is to be arranged through loans.

“Saudi Aramco would provide $1.5 billion as equity and the same amount would be arranged by Pakistan State Oil.”

“Saudi Aramco and PSO would finance $3 billion equity ($1.5 billion each) and the rest of the amount would be arranged through loans under EPC mode,” the official added.

“Once Saudi Aramco becomes part of the project, then many international players would easily join the project, and IFIs and banks of Saudi Arabia and China would be ready to provide loans.” About, the draft for the upgradation of local refineries, the refineries will be allowed tariff protection equal to the existing custom duty 10 percent on imported Mogas and Diesel.

Local refineries will be required to up-grade for producing Euro-V specification fuels and minimizing the production of residual fuel (Furnace oil), requiring huge capital investment of around US$ 4 to 4.5 billion requiring government fiscal support.

The fund that is to be generated is to be utilized after financial close for six years for the purpose of refinery’s up-gradation which may absorb about 25 percent to 30 percent of the project cost.

OGRA will monitor the fund utilization process as per their committed work plan and milestone subject to verification by one of the top four audit firm. Local refineries produce refined products around 11 MTPA (inclusive of 30 percent local crude processing) and the Deficit Crude Oil and Petroleum products worth about US$ 10 billion are annually imported.

The indigenous and imported crude is refined by five (05) local refineries. Refineries are strategic asset and catering fuel requirement of transport, energy, defense, playing an effective role in emergency situation such as pandemic and war conditions.