ISLAMABAD: Pakistan’s latest moves to revise the petroleum pricing mechanism have triggered concern in the refining industry, with executives warning that repeated changes to refinery economics could weaken cash flows, undermine investor confidence and jeopardise billions of dollars in planned modernisation projects.
Sources familiar with the proceedings said KPMG proposed at a September 2 Pricing Committee meeting to further reduce the high-speed diesel (HSD) crack-spread cap, currently around $41.8 per barrel.
The proposal has raised concerns among refiners, particularly because the government has already modified various elements of the petroleum pricing mechanism seven to eight times over the past four months, according to industry sources.
Refineries accepted earlier changes despite their impact on sector economics, largely because they were intended to pass benefits on to consumers. However, industry executives now fear that continued adjustments could undermine the predictability of the policy framework on which billions of dollars of future investment depend.
Several refinery executives told The News that another reduction in the HSD crack spread could further weaken refinery economics. Some said they had not been consulted about the latest proposal and questioned whether its potential impact on cash flows, profitability, debt-servicing capacity and financing of Brownfield upgrade projects had been adequately assessed.
“What is the economic rationale for squeezing refinery margins further at a time when the same refineries, their shareholders and lenders are being asked to commit billions of dollars to upgrade their plants?” a senior industry official questioned.
Executives also highlighted what they described as an imbalance in the pricing mechanism, arguing that refineries remain exposed to losses when international refining margins decline while their potential gains are restricted when margins improve.
“If the refinery has to bear the downside when international cracks collapse, who compensates it for those losses?” another executive asked. “And if the downside belongs to the refinery, then on what economic principle is its upside repeatedly capped when margins improve?”
The uncertainty comes at a critical stage for implementation of the Brownfield Refinery Policy, under which existing refineries are required to undertake major investments to modernise their facilities and produce cleaner petroleum products.
The planned projects require substantial equity from refinery sponsors as well as long-term debt financing. Industry officials said prospective investors and lenders were closely monitoring changes to the pricing framework while assessing the bankability of the projects.
“You cannot ask somebody to commit billions of dollars for the next several years and simultaneously keep changing the economics on which that investment decision is based,” a senior refinery executive said. “Investors and lenders are watching every change. Policy certainty is fundamental to the bankability of these projects.”
The issue is particularly significant because refiners already have reservations over certain aspects of the refinery upgrade agreements. Industry officials fear that additional uncertainty over petroleum pricing could make strategic investors and international lenders more cautious.
An analyst at a leading investment firm said refineries and oil marketing companies (OMCs) had managed the country’s petroleum supply chain despite a highly volatile operating environment, but warned that continued inconsistency in the pricing formula could eventually affect the sector.
“If the rules of the game keep changing, no investor is going to take a positive view of this sector,” the analyst said.
Market sources said the uncertainty was also affecting investor sentiment towards listed refinery companies at the Pakistan Stock Exchange, as investors reassessed exposure to a sector facing repeated changes in its earnings framework.
This could have wider implications because the same companies will require significant equity and debt financing for their planned upgrades. If domestic investors become more cautious, attracting strategic investors and international lenders for large, long-term projects could become more difficult.
Industry officials said the issue had therefore moved beyond the debate over whether the HSD crack-spread cap should remain at $41.8 per barrel or be reduced further.
“It is now an issue of policy credibility,” an industry source said. “You cannot keep changing the rules and at the same time expect investors to put billions of dollars into the country.”
They warned that weaker refinery economics could have consequences beyond corporate profitability. Delays in refinery upgrades could leave Pakistan increasingly dependent on imported petroleum products, exposing the country to international price volatility and putting additional pressure on foreign exchange reserves.
Refineries and OMCs also require substantial working capital to maintain inventories and ensure uninterrupted fuel supplies. Industry officials cautioned that repeated interventions affecting margins and cash flows could eventually influence inventory management and supply-chain decisions.
They maintained that any short-term benefit to consumers from another reduction in the HSD spread should be weighed against its potential long-term impact on investment, financing, refinery viability and Pakistan’s energy security.
For an industry being asked to invest billions of dollars in modernising the country’s refining infrastructure, officials said, investors can price commercial risk—but find it far more difficult to price a policy framework that is repeatedly changing.
