Oil refining policy offering incentives notified after cabinet nod

ISLAMABAD: The government notified on February 23, 2024, the oil refining policy for the upgradation of local refineries after getting a nod from the federal cabinet on February 15, 2024. Under the policy, brownfield refineries will be allowed 10% tariff protection/deemed duty applicable on motor gasoline and diesel’s refinery price for 6 years from the date of notification and opening of the joint Escrow Account with Ogra.

This will enable the local refineries to produce Euro-V fuels and maximize the production of motor gasoline and diesel by minimizing the production of high sulphur furnace oil.

However, 2.5% of the deemed duty on diesel and 10% on Motor Gasoline (incremental incentive) shall be deposited by refineries in the Escrow Account maintained by Ogra and the respective refinery jointly in the National Bank of Pakistan for utilization of Upgrade Projects only. The respective refinery and Ogra will open the requisite joint Escrow Account within three months after the notification of this policy. Until the opening of the said account, the incremental incentive shall be deposited in the Inland Freight Equalization Margin (IFEM).

There shall be a minimum customs duty of 10% for 6 years from the date of notification of this policy on Motor Gasoline and Diesel imported into the country. Any customs duty imposed over 10% and reflected in the ex-refinery price will be deposited in the IFEM pool. In case any refinery is not eligible to avail of the incentives provided in this policy, it will be bound to deposit the same in IFEM. Any customs duty on crude oil shall be reimbursed to refineries through IFEM.

The notified policy also highlights the implementation mechanism which says: “For an existing refinery to be eligible for the fiscal incentives provided in this policy, it shall within 3 months after the notification of this policy, execute a legally binding Upgrade Agreement with Ogra. The said Upgrade Agreement shall include: (i) output and outcome of the committed upgrade (at least as provided in clause 6.1) (ii) the proposed milestones/deliverables with tentative timelines (including Feasibility study, FEED, Financial Close, EPC & Commissioning); (iii) the potential configuration/units/size; (iv) the tentative product slate after upgradation; and (v) a project management methodology/firm for on-time delivery, as per approved cost and specification.”

The milestones and timelines will be firmed up in front-end engineering design (FEED) of the Upgrade Project. Refinery defaulting on any government dues/petroleum levy on Petroleum Products would not be eligible to avail this policy until a legally binding and enforceable (with a recourse) settlement is reached with the government of Pakistan. Till such time, the defaulting refinery will deposit the incremental incentives into the IFEM pool. Once a settlement is reached with the GOP, the refinery will be eligible to open a joint Escrow Account with Ogra and start depositing the incremental incentives on a prospective basis. The funds available in the joint Escrow Account can only be drawn and used by the respective refinery on the Upgrade Project after payment of all outstanding government dues/petroleum levy on petroleum products.

As soon as a refinery defaults in payment of the government’s revenue or petroleum levy on petroleum products promptly after the execution of the Upgrade Agreement, the refinery’s right to claim expenditure out of the joint Escrow Account will be suspended by Ogra till the time the refinery deposits the outstanding amount.

The eligible refinery importing used Plant, Machinery & Equipment (PME) for the Upgrade Project, will be allowed to withdraw a maximum of 22% of the total project cost from the joint Escrow Account, whereas, the refineries importing new PME for the Upgrade Project, will be allowed to withdraw maximum of 25% of the total project cost from the joint Escrow Account.

The funds from the joint Escrow Account will be available for withdrawal, post-financial close of the Upgrade Project, against expenditure made for each milestone/deliverables of the respective refinery Upgrade Project. The release from the joint Escrow Account shall be on a pro-rata basis, meaning that a maximum of the respective capped limit from the joint Escrow Account and the remaining from the refineries’ resources. The interest accrued in the joint Escrow Account will also be used for the respective capped limit of the payment of the Upgrade Project from the joint Escrow Account, as referred above.

The refineries’ upgrade will fetch an investment of $5 -6 billion and not only result in cleaner environment-friendly fuels but also major savings of precious foreign exchange.

Oil Companies Advisory Council (OCAC) Chairman Adil Khattak and Chief Executive Attock Refinery Ltd stated that the notified Amended Refineering Policy will enable the 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 99% and 47% respectively and also reduce the production of furnace oil by 78%, which because of drastically reduced demand in recent years often results in storage constraints forcing the refineries to reduce capacity utilization.

The policy originally notified on August 17, 2023 has now been amended after taking into consideration genuine concerns of the refineries on some of the clauses that would have made the proposed upgradation projects unviable. The amendments were made after intense and prolonged consultation between the government, refineries and independent financial and legal advisory firms.

Khattak further said that the Refineries Upgradation 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. The policy, which took more than four years in the making mainly due to changes in the governments and bureaucracy, was initiated by Nadeem Babar as Special Adviser to the-then prime minister, supported throughout by Shahid Khaqan Abbasi in his various pcapacities and the final credit for taking on board all stakeholders after due diligence and independent professional input goes to Muhammad Ali, the outgoing Minister for Energy.

Khattak also pointed out that Ogra and Directorate General Oil’s role has been pivotal in the formulation of the policy and will remain so in the successful implementation of the policy.

Meanwhile, the Petroleum Division has notified an amended policy for its brownfield refineries, offering them fiscal incentives to upgrade their facilities and produce cleaner fuels, according to a document seen by The News on Saturday. The Petroleum Division has also asked the Oil & Gas Regulatory Authority (Ogra) to implement the amended policy, which was approved by the federal cabinet last month.

Pakistan Refinery Limited (PRL) has already executed the upgradation agreements with Ogra and official sources said, three out of four refineries in the country will not face any hurdle in executing the upgrade agreements urgently, but Cnergyico, which has defaulted on a petroleum levy of Rs47.5 billion, is in the process of settling the amount and may take time if its deed of settlement is not approved early by the Finance Division.