Questions raised about oil refining policy

One of the country’s intelligence agencies has raised questions over the Pakistan Oil Refining Policy 2021 being taken up by the Cabinet Committee on Energy for approval on Monday (today).

The committee, headed by Planning and Development Minister Asad Umar, will also consider cheaper electricity rates for domestic and commercial consumers for winter space heating, retention of some old power plants ordered by the federal cabinet for closure, policy guidelines for out-of-merit use of LNG-based power plants and revival of Asian Development Bank-funded smart metering for power companies.

Informed sources said the intelligence agency had raised a number of queries and objections and made suggestions for the refining policy, but the Petroleum Division had overruled all those observations and conveyed to the Prime Minister Office and other relevant forums that such observations did not warrant any changes to the draft policy.

The Petroleum Division has, however, explained to the intelligence agency how the policy had been formulated and what objectives it would achieve in the larger economic interest of the country.

The first objection was that the refining policy did not link with the emerging regional economies such as Iran, Russia, China and India — first two major oil producers and the other two significant consumers of oil.

The Petroleum Division responded that the policy had a brief description of comparable economies, including India, where the government provided incentives to upgrade refineries to produce Euro-V fuel. The incentives covered 75 per cent cost for upgrade. On the other hand, Iran and Russia have distinct economic environment than Pakistan, as Iran suffered sanctions and Russia had centralised economy.

The policy focuses on improving the overall health and prospects of Pakistan’s existing refining sector and provides a way forward for investment in new refineries and petrochemicals. This will create better market for crude-exporting countries and may also lead to export opportunities for product-importing countries.

Responding to another objection that local resources would not meet the standard of economies of scale for the refineries, the Petroleum Division said the local refineries produced around 400,000 tonnes of products which would be upgraded to Euro-V fuels as a result of the proposed policy in addition to bottom-of-the-barrel upgrades. This will lead them to become similar deep conversion refineries at a much lower cost of $3.5-4 billion against $10bn of this size refinery. This will enable the refineries to compete on the basis of efficiency of technology and scale. The investment in deep conversion refineries has also been incentivised to get benefit of economies of scale.

Another objection pertained to long-time income tax holiday from profits and gains, saying it would make the industries uncompetitive and less efficient. Exemptions from custom duties, surcharges, withholding taxes and levies will lead to a significant 50pc loss of revenues to the government exchequer. Hence, “the policymakers should provide cost-benefit analysis regarding revenue loss, tax exemption, etc”.

The Petroleum Division responded that income tax holiday was an international norm to support growth and attract investment in this sector which was lifeline for the economy and provided energy security to the country. No refinery could be established over the last 20 years and a meaningful long-term incentive policy was required to be offered to attract new investment and encourage the existing refineries to expand and upgrade. This will stimulate the refineries to become more efficient for availing the maximum profit during the period of holiday.

The intelligence agency also wanted a role of the Engineering Development Board in refining to ensure standardisation, but was told that the refining industry had specific standards (API, Euro, etc) applicable globally and also to Pakistan to ensure international standards and the EDB’s involvement would cause considerable delays in the procurement process.

The agency proposed developing multinational companies (MNCs) in oil refineries and demanded that concentrated efforts be made for revival and execution of delayed FDI projects in oil and gas sectors.

The Petroleum Division hoped the policy would attract major growth in the refining sector which has been lacking in this sector as no greenfield refinery project was materialised over the past two decades. Improved health of this sector will in turn also attract multinationals to invest in it. However, it should be noted that globally the investment in this sector was mostly made by the public sector and national oil and gas companies and the new policy promised an attractive incentive package to greenfield deep conversion refineries which may provide better return to the MNCs of Saudi Arabia, the UAE, China, etc.

The intelligence agency said the pricing provided in the policy would not be appropriate until economies of scale and competitive environment coordinate with major oil producers (Iran and Russia) and significant oil consumers (India and China) become part of policy prescription.

The Petroleum Division responded that crude and product prices were linked with the international market through Platts benchmark — a competitive pricing regime based on prices in regional countries. The intent is to modernise and upgrade the local refining industry. After such time, the policy envisages a deregulated market wherein supply and demand will determine the prices.

The Petroleum Division said the policy had been devised to attract investment for increased indigenous production of refined products, reduce import bill and ensure foreign exchange savings, besides providing environment-friendly quality product of international level. It also reminded that revenue loss or gain was a policy subject and the Federal Board of Revenue had supported the draft policy.

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