Refineries ask PM to clear hiccups in upgrade

ISLAMABAD: Five refineries, one oil pipeline, and 22 oil marketing companies (OMCs), under the platform of Oil Companies’ Advisory Council (OCAS), have sought intervention of Prime Minister Shehbaz Sharif for removal of hurdles in $6 billion upgrade projects of refineries.

The OCAS sought resolution of the issue of sales tax exemption on petroleum products, a budgetary measure imposed in the finance bill for FY25 that virtually halted initiation of the projects.

In the letter, dispatched to the prime minister on January 15, 2025, Pak-Arab Refinery Company (PARCO), Attock Refinery Limited (ARL), National Refinery Limited (NRL), Pakistan Refinery Limited (PRL) and Cnergyico PK Limited (CPL) mentioned that the Finance Act 2024-25 changed the sales tax status of petroleum products from zero-rated to exempt supplies, which led to disallowance of input sales tax claims, causing a substantial increase in operational and capital costs.

“The change in sales tax law is severely impacting the financial viability of our planned upgrade projects, infrastructure development, and day-to-day operations. The continuation of this exemption will result in significant erosion in profitability and severe financial strain on the Industry, jeopardising the progress and sustainability of crucial capital-intensive projects essential for uninterrupted supply of petroleum products nationwide, thus nullifying the objectives of the Brownfield Refining Upgradation Policy, which was approved by the government under your dynamic leadership in August 2023,” said the letter.

Despite continuous follow-ups over the past seven months and active coordination with the Ministry of Energy-Petroleum Division (MEPD), Oil and Gas Regulatory Authority (OGRA), Federal Board of Revenue (FBR), Ministry of Finance (MOF), and the Special Investment Facilitation Council (SIFC), the issue remains unresolved. OCAC Chairman Adil Khattak, who is also Managing Director of Attock Refinery Limited, told

The News consultation on refineries upgradation policy was initiated in December, 2019; the first draft was finalised in March 2021 and presented to Cabinet Committee on Energy (CCOE) in August, 2021. It took another two years till its approval by the PDM government in August 2023. After intense and prolonged consultation between the government, refineries, independent financial and legal advisory firms, the Policy for Upgradation of Brownfield Refineries was amended in February, 2024. The policy, if implemented, will bring in US$5-6 billion investment to 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 100pc and 50pc, respectively, and also reduce production of furnace oil by 80pc, which because of drastically reduced demand in recent years often results in storage constraints forcing the refineries to reduce capacity utilisation. He said the latest hurdle was exemption of petroleum products from sales tax in the Finance Act 2024, which deprived the refineries from claiming most of the sales tax, paid at the input stage making not only their upgradation projects unviable but also their current operations unsustainable. Numerous meetings have been held at the Petroleum Division, OGRA and FBR over the past six months, but the issue remains unresolved.

Even directives and deadlines given by the PM office and SIFC went unheeded, he lamented. The oil marketing companies in the same OCAC letter also sought the attention of the premier for revision of OMCs margin, saying that the margin revision was due in September 2024, nevertheless, it has not been finalised yet. In June 2024, the OCAC had recommended the increase based on critical cost considerations, including financing costs of maintaining a 20-day stock cover, turnover tax, handling losses, demurrage costs, financing cost of unadjusted Sales Tax and operating expenses incurred by OMCs. The letter stressed immediate revision of the margin, which is essential to prevent further financial losses.