Cabinet energy panel okays refinery policy

ISLAMABAD: In a well-directed decision, the Cabinet Committee on Energy (CCOE) here on Tuesday accorded approval to the much-touted brownfield refinery policy for upgradation of local refineries with some material changes and inclusion of some vital clauses in the Implementations Agreements.

“CCOE has approved it and the federal cabinet in its next meeting will ratify the CCOE decision and then the notification will be issued,” Federal Minister for Energy Mouhammad Ali told The News.

However, according to sources, in the CCOE meeting, the Ministry for Planning and Special Initiatives objected to the continuation of 7.5pc deemed duty but Managing Director of Attock Refinery Limited and OCAC Chairman Adil Khattak explained that it is critical for the sustainability of local refining sector as it cannot compete with Middle Eastern refineries, which have advantages of economy of scale, no or very low-income tax and duty-free import of equipment and chemicals.

It was also pointed out that foreign shareholders of Attock Group and PARCO should be praised for their willingness to invest in refineries’ upgradation despite the high country risk and restrictions on dividend remittance. The top officials of Petroleum Division prevailed with their weighty arguments in favour of material changes and got the brownfield refinery approved.

While talking to The News, OCAC Chairman Adil Khattak said that the policy approved by CCOE will enable oil refineries to undertake major upgradation projects to not only comply with Euro-V specifications but also increase production of deficit products of petrol and diesel by 99pc and 47pc respectively and also reduce the production of furnace oil by 78pc. The furnace oil because of its drastically reduced demand often results in storage constraints forcing the refineries to reduce capacity utilization.

The refineries’ upgrade will bring in an investment of $5-6 bn and not only result in cleaner environment-friendly fuels but also lead to major savings of precious foreign exchange. The policy would surely be termed as the most important achievement of the caretaker government and it is hoped that it would be implemented in its true letter and spirit. However, the officials said that under the material changes, the upgrade would now take place in 7 years instead of six. This means that the incentive package would now be extended for 7 years instead of six. The local refineries will have to sign the implementation agreements (IAs) with OGRA in 60 days, once the federal cabinet ratifies it and notification is issued.

The amount of incentive package on behalf of the government for the upgrade of existing refineries has been enhanced to 27.5 percent from 25 percent to compensate the loss in incentives that are to be incurred because of 46 percent taxation. The refineries were of the view that if 40 percent taxation is imposed, then the incentive amount would be left to only 12-13 percent instead of 25 percent and at this meager amount, the refineries wouldn’t be able to upgrade themselves. Apart from the increased incentive package to existing refineries, under the amended brownfield refinery policy, the continuation of the existing 7.5 percent deemed duty on HSD to local refineries has been ensured even after their upgrade. In an earlier approved brownfield refinery policy for the 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.

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 financial health, so some refineries may take one year, some one and a half years, and some two-year time to come up with their respective financial closures.