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July 27, 2020

Pakistan Oil Refinery and Marketing Policy 2020: Incentive packages for refinery, OMCs in the pipeline

Top Story

July 27, 2020

ISLAMABAD: The government is making its mind to offer more incentives for both oil refinery and marketing sectors with an aim to build strategic petroleum reserves. The prices of kerosene oil, Jet Pilot (JP-1 and JP-8) will be deregulated. In addition, ex-refinery prices and margins on petrol and diesel will also be deregulated in a phased manner, unfolds the draft of the Pakistan Oil Refinery and Marketing Policy 2020 prepared by Petroleum Division.

The policy draft is under circulation among the ministries and stakeholders and after getting inputs from them, it will be submitted to the Economic Coordination Committee (ECC) and cabinet for approval. The OMCs and dealer margins deregulation is to take place in a phased manner, whereby till deregulation is complete, the margins will be increased in line with inflation.

Apart from strategic petroleum reserves, the government will also increase its focus on bonded storage trade development under which international oil supplier companies will be facilitated to make investment in storage and trade of petroleum products. International suppliers will be allowed to maintain inventory of POL products directly onshore in Pakistan within port areas under boded status.

The current deemed duty of 7.5 percent on high speed diesel and capping of dividends by refineries will be discontinued and instead ‘refinery margins will be introduced on the basis of 50 percent OMCs margins on motor spirit (petrol) and high speed diesel (HSD) being worked out on a consumer price index (CPI) on annual basis. The Import parity price formula of petrol and high speed diesel will be changed as it would also include the ocean losses and weighted average of the actual tender premium, freight and incidents of PSO’s cargoes from the last importing period of the prevailing pricing mechanism.

The refineries will also be allowed to open and maintain foreign currency accounts and retain export proceeds in foreign currency to meet operational and emergency requirements subject to the application regulations of State Bank of Pakistan and fulfilling codal formalities. And the petroleum products prices determination will be made on a fortnightly basis and to this effect the decision will be made after consultation with stakeholders.

And local refineries will be made bound by 2025 to produce the diesel as per the specifications of Euro IV and petrol as per Euro-V specifications. However, in future, no hydro skimming refinery will be allowed to be installed in the country as well as no second hand or relocated refinery projects of any sort will be allowed. The government will not provide any product off take guarantee. Only deficit products will be imported in the country. Refineries will be allowed to sell products to any marketing company or they and set up their own marketing and distribution companies.

The draft for policy 2020, of which copy is available with The News, mentions that many countries including developing countries such as India, China and Kenya keep strategic stocks. And it is high time for Pakistan to arrange strategic fuel stock for security of supply. Accordingly, there is a compelling need for Pakistan to formulate a specific policy maintaining strategic stocks to enhance the state of readiness in the event of any major oil supply crisis. Right now in case of war, the oil stocks of PSO and other OMCs will be considered as strategic stocks. However, at present there are no strategic petroleum reserves in Pakistan but India, China and Kenya have.

In order to encourage competition and efficiency, inter freight equalization margins (IFEM) system will be phased out at a time when the pipeline backbone of the country is completed from Karachi to Peshawar along with multiproduct movement (diesel plus gasoline) leading to substantial reduction in primary freight costs.

Investment in new petroleum products pipeline and special point mooring (SPMs) with sea pipeline projects will be encouraged. Issues of tariff, feasibility and third party access in such cases will be examined and determined by Ogra in accordance with Ogra Ordinance 2002 and rules mad under that. In this sector 10 years tax holiday for investors will be extended along with exemptions of all federal duties on import of equipment and machinery.

A roadmap for improvement of different product specifications will be developed by the end of 2021 in consultation with all stakeholders especially refineries as it entails a process of up gradation which is capital intensive in nature requiring necessary incentives and in line with the drive for fuel quality improvement. And import of Euro-IV (0.005 wt%)/Euro-V (0.001wt%) HSD and petrol shall be considered as per the regional and global availability, while the local refineries may gear up production of the same after provision of necessary incentives for up-gradation preferably by 2025.

Anti-adulteration laws and competition oriented marketing rules will be introduced in consultation with industry. The policy offers a number of incentives, including tax and duty exemptions, for investment in deep conversion refinery of minimum 100,000bpd within five years from announcement of the policy.

For the OMC sector, the policy proposes relaxation of storage capacity requirements for retail expansion, which would bode well for smaller OMCs.

The policy outlines incentives for investment in the refinery sector which have been classified in two categories which include Category-A and Category-B.

Under Category-A, for greenfield projects, incentives would be applicable to all new state-of-the-art deep conversion (not second hand/relocated) oil refinery projects of minimum 100,000 BPD (barrels per day) refining capacity to be set up anywhere in the country. Under Category-B, the proposed policy offers incentives for investment for expansion and up-gradation projects of existing oil refineries by a minimum of 100,000bpd).

For new projects, the policy provides duties waiver and taxes exemptions on property, machinery, equipment are applicable on new state-of-the-art equipment. The incentives for expansion/up-gradation are time-bound to five years of this policy and offer a 20 year tax holiday. Furthermore, the policy outlines that the incentives are only applicable on the new plant to be set up under the policy and not on the existing units. The incentives for investment in the refinery projects include i) Exemption from the application of the Companies Profits (Workers’ Participation) Act 1968 and Workers’ Welfare Fund Ordinance 1971. ii) Exemption from withholding tax and all other duties, taxes, surcharges and levies for foreign contractors for EPC, commissioning, operation, maintenance and repair of the refinery. Furthermore, this exemption will also be applicable to temporary imports of all machinery, vehicles, plant and equipment, other materials and spares in connection with engineering, procurement, construction, commissioning, operation, maintenance and repair of refinery; iii) Exemption from sales tax and excise duty on supply of locally manufactured building and construction material, equipment and services for setting up of refinery; iv) Provision of a pricing mechanism which shall be no less favorable than the prevailing mechanism; v) Facilitation in project infrastructure such as SPM), jetties, subsea/land pipelines etc. in coordination with various concerned ministries/government entities; vi) Waiver of applicable DEVELOPMENT SURCHARGE on the value of exports under the EPZA Rules 1981 in case the refinery project is set up in an export processing zone. In case of establishing a project in upcountry locations, the imported crude oil transportation pipelines and its storages will be an integral part of the refinery project and will also be eligible to avail all incentives; vii) In case of projects in upcountry locations, imported crude pipelines and their storages will also be eligible to avail the above incentives. The above incentives are expected to attract the much needed investment in the up-gradation of the refinery sector.