Refineries demand action on key issues before upgrades

KARACHI: The five local refineries have linked the signing of upgrade and escrow agreements with the Oil & Gas Regulatory Authority (Ogra), ahead of the October 22 deadline, to the resolution of several critical issues that are threatening the sector.

In a meeting held under the direction of the PM Office, Ogra urged the refineries to expedite the execution of the Upgrade and Escrow Agreements before the deadline, as stipulated under the refining policy. However, the refineries, in a letter to Ogra, said: “Certain issues require prior resolution before the refineries can proceed with executing these agreements, which were highlighted and explained during the meeting.”

One of the key issues raised by the refining sector is related to sales tax on petroleum products. The Federal Board of Revenue (FBR) recently changed the status of petroleum products -- such as Mogas, diesel, kerosene, and LDO -- from taxable supplies to exempt supplies through the Finance Act, 2024.

“This change has severely impacted both the current operations of refineries and their future upgrade projects. The amendment to the sales tax law has effectively nullified the incentives envisaged under the Brownfield Refining Policy,” the refineries noted in the letter. While there have been positive discussions with the government, the matter remains unresolved and needs urgent attention before the October 22 deadline.

The letter also highlighted the threat posed by the unchecked influx of smuggled petroleum products into the country, which jeopardizes the refining sector and government revenue. The sale of smuggled high-speed diesel (HSD) and motor spirit (MS) undermines legitimate sales, particularly when the government desperately needs revenue to manage the country’s affairs.

“The local refineries have been consistently reporting declining capacity utilization and sales due to the continuous influx of smuggled petroleum products. According to government agency reports, approximately 10 million litres of petroleum products are smuggled into Pakistan daily via land and sea routes. This accounts for around 20 per cent of the country’s annual consumption, leading to a revenue loss of nearly $1 billion annually,” the letter said. It also noted that the spread of smuggled products, once limited to border areas, has now reached Rawalpindi, Islamabad and even Peshawar.

The refineries requested Ogra’s continued support in coordinating with relevant authorities to take stronger actions to curb smuggling in the national interest. They emphasized that decisive measures are necessary not only to safeguard the oil refining industry, which has made significant investments, but also to protect consumers.

Over the past few years, the demand for HSD has dropped drastically -- from 750,000 tonnes per month to just 500,000 tonnes -- due to several factors, including smuggling. “With the reduced demand, local refineries can easily meet about 80 per cent of the country’s needs. There is no justification for importing excessive HSD cargoes, yet imports were allowed in recent months, leading to a serious glut and operational challenges for local refineries,” the letter stated.

The refineries reiterated their commitment to upgrading their facilities, subject to approval from their respective boards. However, the planned investments, which total over $6 billion, hinge on the urgent resolution of the sales tax issue on petroleum products, the inclusion of a stability clause in the upgrade agreements, and other outstanding matters before they can proceed with signing the Upgrade and Escrow Account Agreements with Ogra.