‘All hiccups’in upgrade of local refineries removed

ISLAMABAD: In a major development, all the hurdles between the government and local refineries regarding Implementation Agreements (IAs) for smooth upgrade of local refineries in six years were resolved here on Monday with the decision to defer the finalization of IAs date till the next CCOE meeting. The CCOE meeting is likely to be held next Friday to approve the summary with material changes in the upgrade policy.

Both refineries and government functionaries have agreed to remove all hurdles in a meeting with caretaker Energy Minister Muhammad Ali in the chair. The relevant government officials, OGRA top mandarins, representatives of local refineries, and representatives from SIFC (Special Investment Facilitation Council) also attended the meeting.

The earlier date for finalization of the Implementation Agreement between OGRA and Refineries was November 15, 2023, which was extended to January 16 (today). Now the date has been extended till the next CCOE meeting on January 19, 2024 when the officials believed local refineries would sign Implementation Agreements. The Pakistan Refinery Limited (PRL) earlier signed IA on November 15, 2023, but the remaining four refineries such as PARCO, ARL, NRL, and Cnergyico Pk Limited had linked their willingness to sign the implementation agreements with the inclusion of committed output, force majeure, termination, project relinquishment, duration of the agreement and arbitration and continuation of 7.5 percent deemed duty on diesel even after the upgrade gets completed. They also did not want 46pc taxation on incentive amounts.

According to one of the participants of the meeting, the government will now increase the incentive package by two and a half percent from 25 percent to 27.5 percent as FBR has refused to give tax exemption under the incentive package. FRB will impose a corporate tax of 46 percent on incentives amount which is why the government has offered to increase the incentive package so the refineries could have reasonable fiscal space for upgrade.

The official said the settlement deed with one of the refineries was also finalised, and that the particular refinery would pay the dues of Rs42 billion to the government in instalments to qualify for the incentive package from the ESCROW account. He said that refineries would respond by today (Tuesday) about the offer of increasing the incentive package. “The Board of Directors of each refinery would submit their response to the petroleum ministry and accordingly the summary would be moved to the next CCOE meeting for approval.”

In an earlier brownfield refinery policy for upgrade, the government had agreed to provide a 25 percent ($1.5 billion) amount as an incentive package and refineries would arrange 75 percent ($4.5 billion) financing on their own. Now under the new scenario, the incentive package would be at 27.5 percent and refineries would arrange 72.5 percent. The total amount to be used for the upgrade of refineries would be $6 billion.

The government would, he said, also ensure the continuation of the existing 7.5 percent deemed duty on HSD to local refineries even after their upgrade. After the upgrade, the existing refineries would produce Euro-V diesel of 31,288 tons per day. Likewise, the existing refineries would produce 21,251 tons of Mogas (Petrol) of Euro-V per day. The furnace oil production will plummet to just 3,414 tons per day. However, after that, every refinery will have to come up with financial closure about their plans for degradation. Every refinery has its own financial health, so some refineries may take one year, some one and a half years, and some two-years time to come up with their respective financial closures.

After the financial close, the refinery will be able to utilize the government monetary incentive. This is how the total cost to be incurred on the upgrade of five local refineries will stand at $6 billion, each refinery will also have to come up with feasibility and FEED (Front-End Engineering Design) for their respective upgrade project and give timelines for the execution of the project.