Refineries upgradation policy: Implementation contracts hit snags

ISLAMABAD: The issue of impediments in the smooth implementation of local refineries’ upgradation policy has attracted attention of Special Investment Facilitation Council (SIFC).

The local refineries have sought perpetuity in incentives even after their upgradation get completed apart from inclusion of clauses in the implementation agreements on arbitration, force majeure, taxation and import duty incentives.

“Ogra has not shown its readiness to accommodate the refineries, arguing it will not agree to write anything in the agreements with refineries that are not mentioned in the approved and notified brownfield refinery policy. The agreements of the refineries for upgrade projects were supposed to be signed with Ogra by November 15, 2023,” Energy Ministry, Ogra and refining industry top sources told The News.

They said Pakistan Refinery Limited (PRL) has signed upgrade agreement with the regulator within the stipulated time. The remaining refineries are not willing to sign unless until the issues are resolved, they said.

However, the government has extended the 2-month extension for agreements, and SIFC has shown its concern over the delay in implementation of upgradation of local refineries. It asked the relevant authorities to do away with all hiccups on time.

When asked why PRL has signed agreement with Ogra in the presence of issues other refineries have flagged, they said PRL has the capacity to produce 24,000 tons petrol per month. When production is increased, it will get the share of $400 million on its upgrade project, they said.

But, Attock Refinery Limited, which has the capacity to produce 50,000 tons of petrol in a month, will get $700 million on its upgrade project, and other refineries will also get the major chunk of the incentives, they added.

The PRL is not in a position to delay one day to qualify for incentives, which is why PRL has signed the agreement with Ogra, as it wants to intimate the work on its upgrade project at the earliest.

The PRL management says the issues highlighted by other refineries are justified. When the said issues are resolved, these will be part of brownfield refinery policy, and PRL will become part of changes to be made in the policy on the implementation agreements.

Local refineries argue government has extended to investors for setting up the newly branded green refinery with incentives of 7.5 percent deemed duty for 25 years and a tax holiday of 20 years. But, when it comes to the local refineries, the incentives are quite limited at 25 percent of upgradation cost. After 46 percent taxation, the net incentives will come down to just 13 percent, they say.

After the upgrade in six years, the existing refineries have been given the targets mentioned in the policy under which they would produce Euro-V diesel of 31,288 tons per day against the production of 21,237 tons.

Likewise, existing refineries would produce 21,251 tons of Mogas (Petrol) of Euro-V per day against volume of 10,702 tons of Euro-III petrol per day. Furnace oil production will plummet to just 3,414 tons per day from the 15,417 tons.

However, Ogra insists refineries need to ensure achievement of targets mentioned in the brownfield policy. The refineries say once the Front-End Engineering Design (FEED) of their respective upgrade projects is conducted for the upgrade projects, the targets will be finalised, and these may be over the targets mentioned in the policy.

Refineries are also asking the authorities to include in their implementation agreements the clause of arbitration in case any dispute arises.

They say the arbitration should be as per the law of the land, but the arbitrators should be appointed with consultation of refinery concerned and the Ogra /government. Ogra says it is not mentioned in the policy.

Under the brownfield refinery policy, the refineries shall be allowed 10pc tariff protection/deemed duty applicable on Motor Gasoline and Diesel’s ex-refinery price for six years.

However, 2.5pc of deemed duty on Diesel and 10pc on Motor Gasoline (incremental incentive) shall be deposited by refineries in Escrow Account maintained by Ogra and the respective refinery jointly in National Bank of Pakistan for utilisation of upgrade projects only.

The respective refinery and Ogra will open the requisite joint Escrow Account within three months after notification of this policy. Until the opening of the said account, the incremental incentive shall be deposited in the IFEM.

Right now, the government functionaries and refineries representatives are in talks for contracts that include i) a legally binding Upgrade Agreement with Ogra in six years’ time, ii) an agreement on an ESCROW account between the refinery, National Bank of Pakistan and Ogra and, iii) agreement on Rs1 billion to be deposited as a guarantee by the refinery.

The officials involved in the talks said refineries want inclusion of clauses about termination of agreements and force majeure in the agreements. They argue in case of non-obligation by the government for a long time, every refinery should be given the right to terminate the agreement. In a calamity such as COVID-19, the refinery can’t meet upgradation deadline. Then, it should be given the right to seek force majeure, they say.

However, Ogra authorities say clauses about termination of agreements and force majeure are not mentioned in the brownfield refinery policy.

The refineries are also agitating the issue of taxation, saying 46 percent of taxation on incentives will decrease the impact of an incentive package to just 13 percent instead of 25.

After the financial close, every local refinery will be able to utilise the government monetary incentive from the ESCROW account for upgrade purposes. The local five refineries will have to arrange 75 percent financing of $4.5 billion for their upgradation to ensure all fuels, as per Euro-V specification in six years’ time.

However, the government would provide $1.5 billion (25 percent) of total upgrade of refineries from the ESCROW account. This is how the total cost on the upgradation of five local refineries will stand at $6 billion.

Each refinery will also have to come up with feasibility and Front-End Engineering Design for their respective upgrade project, and the timelines for the execution of the project.