Refinery upgrades crucial to overcome sector challenges: report

KARACHI: Refinery upgrade projects are essential to alleviate persistent challenges in the sector, which continue to heighten business risks in the absence of modernisation initiatives, says a report by the Pakistan Credit Rating Agency (Pacra).

The approval and implementation of refinery policies are critical for the sector’s growth, as these measures would not only enhance gross refining margins (GRMs) but also provide much-needed tax relief to the struggling industry.

GRM, a key indicator of a refinery’s operational efficiency, represents the difference between total revenue from refined product sales and the cost of crude oil. Higher GRMs indicate greater value addition per barrel of crude processed, underscoring the importance of policy support to achieve operational improvements.

The government is also exploring collaboration with Saudi Arabia to establish a new greenfield refinery. This facility, capable of producing hydrocarbons and renewables, would significantly bolster Pakistan’s refining capacity and align the country with global energy consumption trends, according to industry insights.

Although local petroleum product production increased by 7.7 per cent year-on-year in FY24, revenue per metric tonne (MT) of refined products grew by 27.6 per cent, a slowdown compared to the 44 per cent growth recorded in FY23. Local refineries, constrained by outdated hydro-skimming technology, have faced reduced refining margins. Between CY2017 and CY2022, the average refining margin stood at 23 per cent, significantly lower than refineries equipped with advanced deep-conversion technologies like cracking and coking.

To address these inefficiencies, the government has mandated all refineries to transition from hydro-skimming to deep-conversion technologies under the Brownfield Policy. This upgrade must be completed within six years from August 2023. Refineries are currently engaging with the government for further policy clarity and have expressed willingness to expand operations.

The Petroleum Division has required refineries to align their production processes with Euro-V specifications within the stipulated six-year period. To support this transition, the government has offered incentives and tariff protections a minimum customs duty of 10 per cent on imported motor gasoline and high-speed diesel for six years from the policy’s notification date; customs duties exceeding 10 per cent will be deposited into the Inland Freight Equalization Margin (IFEM) pool, while duties on crude oil will be reimbursed to refineries via IFEM; and a 10 per cent tariff protection (deemed duty) will be applicable to the ex-refinery price of motor gasoline and diesel for six years from the policy notification date.

These measures aim to modernise the refining sector, improve operational efficiency, and enhance the country’s