CCoE approves policy to upgrade local refineries, boost fuel quality

KARACHI/ISLAMABAD: The Cabinet Committee on Energy (CCoE) approved on Monday a policy to upgrade local refineries and produce cleaner fuels.

The policy, which will be notified after final approval by the federal cabinet on Tuesday, would boost refining capacity of petrol and diesel to 100 percent and 50 percent in the next six years with the upgrade of local refineries under the brownfield refinery policy.

During the fiscal year ended June 30, 2023, local refineries produced 2.48 million tonnes of petrol, up from 2.197 million tonnes refined in the preceding fiscal. Diesel production on the other hand stood at 4.698 million tonnes in the fiscal year ended on 30 June, 2023 compared to 3.89 million tonnes in the previous year.

Under the approved brownfield refinery policy, the incentives include 10 percent deemed duty on petrol and an additional 2.5 percent deemed duty on high-speed diesel for the local refineries.

According to the refining sector people, the approval of the policy for the local refineries would attract $5 billion investment in the sector. They said such investments were long overdue and were pending due to the delay in policy approval.

The mechanism for this involves the establishment of an Escrow account in the National Bank of Pakistan, to be jointly managed by the Oil and Gas Regulatory Authority (OGRA) and the refineries. Refineries would have to deposit 2.5 percent of the deemed duty on diesel and 10 percent on motor gasoline in the escrow account. The amount would be used only for upgrade projects.

The respective refinery and OGRA will open an escrow account within three months after the notification of this policy. Until the opening of the said account, the incremental incentive will be deposited in the Inland Freight Equalization Margin (IFEM).

There will be an exemption from the levy of customs duties, levies, surcharges, withholding taxes, general sales tax, and any other ad valorem tax or any other levies, duties, taxes on the import of new equipment to be installed or material to be used by the participating and qualified refinery for the upgrade projects. To avail the said exemptions, the refinery will provide the details of said equipment or machinery to the Federal Board of Revenue (FBR) for approval once the front-end engineering design (FEED) study for the upgrade project is concluded.

According to the policy, there should be minimum customs duty of 10 percent for a period of six years from date of notification of policy on motor gasoline and diesel imported in the country. Any custom duty imposed over 10 percent and reflected in the ex-refinery price would be deposited in the Inland Freight Equalization Margin (IFEM) pool.

In case any refinery is not eligible to avail the incentives provided in the policy, it would be bound to deposit the same IFEM, the policy said, while adding that any custom duty on crude oil should be reimbursed to refineries through IFEM.

The selection of equipment, technology, or process would be on project-to-project basis by the concerned refineries to ensure that the final finished products meet the notified Euro-V specification, while minimising the production of furnace oil.

The policy said that the generated funds would be utilised after the financial close of six years for the purpose of the refinery’s upgrade, which would absorb up to 25 percent of the project cost capped by the government.

Local refineries would invest $4-4.5 billion for upgradation to make them able to produce Euro-V specification fuels and minimising the production of residual fuel (furnace oil). To be eligible for the fiscal incentives under the proposed policy, the local refinery will, within three months after the notification of the policy, execute a legally binding upgrade agreement with OGRA. The regulator would monitor the fund utilisation process as per their committed work plan and milestones, subject to verification by one of the top four audit firms.

This upgrade could include addition or integration of petrochemical production, whether individually or jointly by the existing refineries. The objectives of this policy are to provide an enabling environment for long-term sustainability of the existing refineries and to attract foreign investment in new refinery projects. This should help achieve energy security through gradual increase in self-reliance in petroleum refining capacity of the country and reduce dependence on imports of refined products by incentivising investment in up-gradation and modernisation of existing refineries.