SIFC approves revised timelines for refinery upgrade agreements

ISLAMABAD: The Special Investment Facilitation Council (SIFC) has directed the petroleum division to remove all obstacles in the way of smooth implementation of the local refineries upgradation project.

The SIFC also approved the revised timelines of Implementation Agreements between refineries and the Oil and Gas Regulatory Authority (OGRA) and asked the petroleum division to submit its final report to its next Apex Committee meeting, which will be chaired by Prime Minister and attended by Chief of Army Staff.

“Yes, we have received the SIFC directions and the petroleum division is currently in the process of making the summary about resolving the issues highlighted by the refineries, which emerged as hurdles in the implementation of the Upgrade Refinery Policy," a senior official at the Energy Ministry told The News. "The top mandarins of the petroleum division have also agreed to the assertions of the local refineries in principle.”

Officials said the local refineries want the continuation of the existing incentives of deemed duty of 7.5 percent even after their upgradation is completed, apart from the inclusion of clauses in the implementation agreements on arbitration, force majeure, taxation, and import duty incentives.

The refineries also want to end the taxation on the amount to be utilized by them from the ESCROW account under the upgradation incentives package, arguing that the presence of 46 percent taxation on the incentives amount will serve nothing.

They also argue that 46 percent of taxation on incentives will decrease the impact of an incentive package to just 13 percent instead of 25.

"The local five refineries will have to arrange 75 percent financing of $4.5 billion for their upgrades to ensure all fuels meet the Euro-V specification in six years’ time."

However, the government, the officials said, would provide $1.5 billion (25 percent) of the total cost of upgrading the refineries from the ESCROW account. This is how the total cost for the upgrade 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.

Cabinet Committee on Energy in its recent meeting has extended the deadline for another sixty days to reach agreement with refineries and OGRA for the implementation of the upgrade refinery policy.

"Ogra earlier did not show its readiness to accommodate the refineries, arguing it would not agree to write anything in the agreements with refineries that were 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) had signed an upgrade agreement with the regulator within the stipulated time. The remaining refineries didn’t show willingness to sign until the issues were resolved, they added.

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 tonnes petrol per month. When production is increased, it will get the share of $400 million on its upgrade project, they said.

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

The PRL was not in a position to delay one day to qualify for incentives, which was why PRL had signed the agreement with Ogra, as it wanted to initiate the work on its upgrade project at the earliest.

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

Local refineries argue the 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 the upgrade cost. After 46 percent taxation, the net incentives would 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 tonnes per day against the production of 21,237 tonnes.

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

However, Ogra insisted refineries needed to ensure achievement of targets mentioned in the brownfield policy. The refineries said once the Front-End Engineering Design (FEED) of their respective upgrade projects was conducted for the upgrade projects, the targets would be finalised, and these might 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 said the arbitration should be as per the law of the land, but the arbitrators should be appointed with consultation of the refinery concerned and the Ogra/government. Ogra said it was 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, 2.5 percent of deemed duty on diesel and 10 percent 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 of the 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 refinery representatives are in talks for contracts that include i) a legally binding Upgrade Agreement with Ogra within six years, ii) an agreement on an ESCROW account between the refinery, National Bank of Pakistan and Ogra, and iii) an agreement on Rs1 billion to be deposited as a guarantee by the refinery.

The officials involved in the talks said refineries want the inclusion of clauses about the termination of agreements and force majeure in the agreements.

They argue that in case of non-compliance 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 may not meet the upgradation deadline. Then, it should be given the right to invoke force majeure, they say.

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

After the financial close, every local refinery will be able to utilise the government monetary incentive from the ESCROW account for upgrade purposes.