Refinery policy: Do it in a refined manner

The refinery policy is in the making for over a year. The idea of the policy is to incentivize new players to come in and jack up production of the country’s overall refining petroleum products to at least by cent percent, and to upgrade the existing five refineries to start production of Euro-5 specification products and also reduce the production of residual fuel – furnace oil, the demand of which is dying the world over, including Pakistan.

The policy, after deliberations with the existing players was circulated last fiscal year and some of the features were incorporated in the Finance Bill 2021 for the current fiscal. The incentives would have been applicable after the approval of the cabinet. When that issue came before the Economic Committee of the Cabinet (ECC), the Planning Minister, Asad Umar, raised some issues and underscored the need for routing the policy through Cabinet Committee on Energy (CCoE) which he heads. There are some reservations that Asad Umar, Ali Zaidi, the minster for maritime affairs, and others have, on which deliberation is ongoing and a decision is expected soon.

Before discussing the issues raised by ECC members, it is important to contextualize these for better understanding of the refining sector. The last refinery policy in Pakistan came in 1997, and it is of utmost importance to have a new policy for future investment. Right now, the existing refineries get a subsidy of 7.5 percent on diesel products in the form of deemed duty and the objective is for them to upgrade by using the amount raised by this duty. Some refineries did invest sporadically for upgradation, but overall investment was not satisfactory.

The new policy draft recommends having a 10 percent duty on both petrol and diesel for existing and new refineries, and the policy says the old refineries would benefit from day one provided they commit to invest. Right now, the customs duty on diesel is at 13 percent while it is 5 percent for petrol; but refineries get benefit of 7.5 percent for diesel and none for petrol.

Then there are tax holidays for green field investment and upgradation by the existing players. The income tax holiday for the new players is for 20 years with duty-free import of plant and machinery. For the existing, the tax holiday is for 10 years on the revenue streams emanating from additional volumes based on upgradation. Plus, the duty-free import of plant and machinery as is the case for new refineries.

The objection Asad Umer raised is valid. He plausibly asked why existing refineries are being incentivized (duty of 10% each for petrol and diesel) on mere promise of investment in the future. That is like consumers paying for the investment to be made by refineries, and in essence sharing the risk without any return. This is just like charging surcharge of Neelum Jehlum project from consumers on electricity bill. Asad argued, rightly so, that the incentive should kick in from the date of commencement of commercial operations (COD).

However, refinery players are saying that without the incentive, they would not commit investment. That is not right. The government is giving them incentives in the form of tax holidays and for future returns. The duty structure is to remain 10 percent till 2026 and it will reduce thereafter. The government can allow the duty incentive for five years after COD, but there should not be any upfront dole-out before COD.

Having said that, there is dearth of investment in the sector, and the country needs to ramp up its refining capacity and to upgrade the existing one. But the policy needs to be balanced. Refining companies are demanding that the government should have a midway where the duty collection is realized once they complete certain verifiable milestones on the new investment, but the benefit from the day they commit for investment is still asking for too much.

Then there are international consultants who are not fond of age-old technology and methods. They argue that deep oil conversion refining is doable but not preferable, as modern technologies are simpler. Another complication is that the oil importing lobby is dead against refining process in Pakistan, arguing that it is more economical to import refined products instead of importing crude oil and refining it locally due to economies of scale being adverse in the latter case.

We are of the view that national security considerations demand that we increase and upgrade our refining capacity and also massively expand the local ullage capacity for white and black oil. However, this must be done the right way. All the consultation that has been done is based on petroleum ministry discussions with existing players without involving any international independent expert and without doing any study to see what is right for Pakistan and what should be the incentives. There is no policy in the upstream oil segment for the past 25 years, and it should not be done in haste. The government should critically evaluate the matter both – from economic as well as national security considerations – before committing itself to the route to be taken.

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