ISLAMABAD: Pakistan’s drive towards deregulating petroleum prices has brought the refinery sector to a critical policy crossroads, with industry stakeholders warning that uncertainty over incentives, deemed duties and regulatory controls could jeopardise billions of dollars in planned refinery upgrade investments.
The debate has intensified as the government moves to finalise long-delayed implementation agreements under the Brownfield Refinery Policy while simultaneously considering greater deregulation of petroleum-product prices. Industry and government sources say the two approaches are increasingly difficult to reconcile without a clear transition framework.
Experts argue that under a genuinely deregulated model, the government should gradually move away from determining refinery returns through tariff protection and instead focus on fuel-quality standards, environmental compliance, market competition and supply security.
They have proposed a six- to seven-year transition period for existing refineries to complete mandatory upgrades and meet prescribed standards. Refineries that fail to comply within the stipulated period could face regulatory action, including possible cancellation of their operating licences.
Under such a framework, the government’s role would shift from protecting refinery margins through deemed duties and administering the resulting revenues through escrow arrangements to ensuring that refineries invest in modernisation, meet required fuel specifications and compete effectively.
“The government should establish a transparent transition towards deregulation instead of simultaneously deregulating one part of the market and increasing controls over another,” an industry source said.
The issue has become more contentious over the government’s proposal to reduce the deemed duty on High-Speed Diesel (HSD) by 2.5 percentage points, from 7.5% to 5%. The proposed reduction is estimated to have a financial impact of around Rs29-30 billion on refineries.
Refineries have opposed applying the reduction retrospectively, arguing that they had been prepared to sign the implementation agreements but the government did not hold the planned signing ceremony on October 22, 2024.
According to senior officials, the initial draft of the upgrade agreements requires refineries to absorb the Rs29-30 billion impact of the deemed-duty reduction while also maintaining 20 days of crude oil stocks before signing their upgrade agreements.
Industry representatives contend that these requirements undermine the investment certainty promised under the Brownfield Refinery Policy.
They claim documentary evidence shows that refineries were ready to sign the upgrade and escrow agreements as early as March 2024. However, the government delayed the process over its demand that Pakistan Arab Refinery Company (PARCO) become a party to the agreements.
The situation was further complicated by sales tax measures introduced in the June 2024 budget, which industry officials say affected the commercial viability of the proposed $5 billion refinery upgrade programme. They estimate that refineries and oil marketing companies have faced combined annual losses of around Rs34 billion because certain sales-tax inputs could not be adjusted.
Although the government subsequently set October 22, 2024 as the signing date, the ceremony did not take place. Refiners argue that imposing the deemed-duty reduction retrospectively would effectively penalise them for delays resulting from government policy and administrative decisions.
Attock Refinery Limited CEO Adil Khattak said his company was paying around Rs7.5 million per day as a penalty despite being ready to sign the agreement. He called for the government to immediately complete the signing process so that the upgrade project could commence.
Meanwhile, the Petroleum Division has proposed that state-owned Inter State Gas Systems (ISGS) sign and monitor the refinery-upgrade agreements on its behalf. This would replace an earlier proposal under which the Directorate General of Oil was to serve as the signing authority.
The proposal has raised concerns within the refinery industry over ISGS’s suitability for the role. The company was primarily established for gas transmission and international pipeline projects, including the TAPI and Iran-Pakistan pipeline projects, and has limited experience in administering refinery modernisation programmes.
“Instead of simplifying the regime, we are creating another layer of administration,” an industry executive said.
The government is also finalising arrangements for operating the escrow accounts associated with the refinery incentive package. The petroleum secretary is expected to meet the law and finance secretaries to further refine the implementation agreements, while the accounts controller will determine the mechanism for operating the incentive-package account.
Federal Minister for Petroleum and Natural Resources Ali Pervaiz Malik is scheduled to visit Karachi on Wednesday and meet senior management of PARCO, Cnergyico PK Limited, National Refinery Limited (NRL) and Pakistan Refinery Limited (PRL) for briefings on their upgrade projects and outstanding issues.
The meetings are expected to provide an opportunity to address long-standing disputes surrounding the upgrade agreements, deemed-duty reduction and implementation arrangements.
Industry officials, however, argue that the central issue extends beyond the size of the incentive package and concerns the overall predictability of Pakistan’s investment framework.
“The problem is not merely the incentive. The bigger issue is predictability,” an industry executive said, warning that investors would be reluctant to commit billions of dollars if the commercial framework could repeatedly change during the investment cycle.
Story by Khalid Mustafa
