- SIFC proposes refineries should not be penalised for missing Oct deadline.
- 129-page summary proposes overhaul of Pakistan’s refinery policy.
- Summary offers refineries fresh 7-year package of fiscal incentives.
ISLAMABAD: The Petroleum Division has proposed six new insertions, including stability and parity clauses designed to reassure foreign investors financing nearly $6 billion in refinery upgrades, in the amended Brownfield Refining Policy 2023, which it submitted to the Cabinet Committee on Energy (CCoE) for approval.
Prior to its submission to the CCoE, the summary was circulated among the Special Investment Facilitation Council (SIFC), Finance Division, National Crisis Management Committee (NCMC), Law and Justice Division, Federal Board of Revenue (FBR), Board of Investment (BoI) and the Oil and Gas Regulatory Authority (Ogra) for comments.
According to official documents, the SIFC has proposed that the refineries, which had demonstrated, through documented correspondence, their willingness to sign Upgrade Agreements, should not be penalised for missing the October 22, 2024 deadline.
It recommended that the reduction in deemed duty on high-speed diesel from 7.5% to 5% for such refineries should become effective from the actual date of signing the Upgrade Agreement rather than retrospectively. However, officials said the contentious issues would be taken up by the CCoE before a final decision is made.
The 129-page summary proposes a comprehensive overhaul of Pakistan’s brownfield refinery policy, offering existing refineries a fresh seven-year package of fiscal incentives in exchange for multi-billion-dollar investments to produce Euro-V-compliant fuels, while introducing an elaborate compliance, monitoring, and enforcement regime through legally binding Upgrade Agreements with the Ogra.
The amendments, which will supersede the Refining Policy 2023 after approval, are intended to modernise the country’s ageing refining sector by increasing the production of motor gasoline (MS) and high-speed diesel (HSD), significantly reducing furnace oil output, improving fuel quality and enhancing Pakistan’s energy security.
The proposed changes follow months of negotiations between the government and refining industry after refiners argued that the changes introduced through the Finance Act 2024 had adversely affected the commercial viability of planned investments estimated at around $6 billion.
Under the draft policy, all existing refineries opting for upgradation, modernisation or expansion will become eligible for incentives provided they execute a legally binding Upgrade Agreement with Ogra within 90 days of notification of the amended policy. The agreement will specify project configuration, refinery capacity, Euro-V production commitments, reduction in furnace oil production, implementation milestones, project timelines, Front-End Engineering Design (FEED), financial close, engineering, procurement and construction (EPC) schedules, project management arrangements and expected product slate after completion.
Stability and parity clauses: Among the six new insertions proposed by the Petroleum Division are stability and parity provisions designed to provide confidence to international lenders and foreign investors financing refinery upgrade projects.
The proposed stability regime seeks to protect refiners against adverse changes in taxation, fiscal policies, environmental regulations, licensing requirements, foreign exchange regulations and other government actions that could negatively affect project economics or implementation timelines.
The Upgrade Agreements will also include provisions dealing with political force majeure, prolonged force majeure, government-related delays and mutually agreed exit mechanisms.
The policy further allows refineries to open onshore foreign currency accounts to service foreign debt obligations and maintain balances equivalent to one year’s debt servicing requirements. These accounts may be funded through export proceeds, including exports of furnace oil.
Following upgradation, the refineries will also be required to maintain crude oil inventories equivalent to 14 days of nameplate refining capacity, while refineries relying on imported crude will maintain an additional five days’ crude cover at sea.
The proposed amendments also require all refineries, irrespective of whether they availed incentives under the 2023 policy, to surrender earlier benefits and become eligible for a fresh seven-year incentive package upon execution of Upgrade Agreements under the amended framework. Relevant laws and regulations will also be amended wherever necessary to implement the revised policy.
Major capacity enhancement planned: The policy envisages significant changes in refinery configuration and product mix across the country’s five refineries.
Pakistan Arab Refinery Limited (Parco), which currently produces Euro-III gasoline and diesel, plans to shift entirely to Euro-V specifications. Its motor gasoline production is projected to increase from 3,678 tonnes per day to around 4,023 tonnes per day, while diesel production is expected to increase substantially following completion of the project.
Attock Refinery Limited (ARL), which currently produces Euro-V gasoline and Euro-III diesel, will upgrade its diesel production to Euro-V standards.
Pakistan Refinery Limited (PRL) also plans to produce Euro-V diesel alongside Euro-V gasoline under its upgradation programme.
National Refinery Limited (NRL) plans one of the most significant improvements in product mix by reducing furnace oil production from 2,253 tonnes per day to only about 250 tonnes per day while substantially increasing production of cleaner petroleum products.
Cnergyico (formerly Byco), identified in the policy as CPL, plans the largest capacity enhancement among domestic refineries. Its gasoline production is projected to increase to around 6,500 tonnes per day, diesel production to nearly 11,000 tonnes per day, while furnace oil production is expected to decline sharply to approximately 1,000 tonnes per day.
The policy notes that all production estimates are based on detailed feasibility studies and may change after completion of FEED. It also clarifies that current Euro-V compliant production by domestic refineries relates only to sulphur content.
Seven-year fiscal incentives: To facilitate these investments, the government has proposed a minimum customs or regulatory duty of 10% on imported motor gasoline and diesel for seven years from notification of the amended policy.
Where customs duty exceeds 10% and is reflected in ex-refinery prices, the additional amount will be deposited into the Inland Freight Equalisation Margin (IFEM) pool.
Customs duty paid on imported crude oil will continue to be reimbursed through IFEM.
Eligible refineries will also receive 10% deemed duty or tariff protection on ex-refinery prices of motor gasoline and diesel for seven years from the date of signing the Upgrade Agreement and opening a joint escrow account with Ogra.
However, the refiners will not retain the entire benefit. Under the proposed mechanism, 2.5% of the deemed duty on diesel and the entire 10% deemed duty on motor gasoline, termed the incremental incentive, will be deposited into jointly operated escrow accounts maintained by Ogra and the respective refinery at the National Bank of Pakistan. Until these accounts are established, the incremental incentive will continue to be deposited into IFEM.
The existing 7.5% deemed duty available on HSD for refinery sustainability will continue after the expiry of the seven-year incentive period for another 20 years or until deregulation, whichever occurs earlier.
The policy also proposes continuation of reimbursement through IFEM of disallowed sales tax confirmed by the Federal Board of Revenue (FBR) due to the exempt status of petroleum products for FY2026 until the validity of the Upgrade Agreements.
In another major incentive, all plant, machinery, equipment and material imported for refinery upgradation projects will be exempt from sales tax.
Escrow mechanism introduced: A key feature of the proposed policy is establishment of jointly operated escrow accounts to ensure that fiscal incentives are utilised exclusively for refinery upgrade projects.
Refineries importing used plant, machinery and equipment will be allowed to withdraw up to 24.5% of total project cost from the escrow account, while those importing new equipment will be allowed to withdraw up to 27.5%.
Withdrawals will only be permitted after financial close and completion of at least 25% physical progress or opening of matching letters of credit for imported equipment.
Payments from escrow accounts will be made on a pro-rata basis, with the remaining project cost to be financed by the refinery. Interest earned on escrow balances will also be utilised for financing eligible project expenditure.
The policy specifically prohibits the use of escrow funds as collateral, lien or security for borrowing.
Strict enforcement provisions: The draft incorporates stringent enforcement measures to ensure compliance. Incremental incentives collected in any month must be deposited into the escrow account within 10 days of the following month.
Eligibility conditions: Refineries having outstanding government liabilities, including petroleum levy or climate support levy dues, will not qualify for incentives until they enter into legally enforceable settlement agreements with the federal government. Until settlement, incremental incentives will continue to be deposited into IFEM instead of the escrow account.
Euro-V transition: Upon signing the Upgrade Agreement, the Ogra will grant refineries temporary waivers permitting production and marketing of fuels that do not yet comply with Euro-V specifications until completion of the upgradation projects.
The waiver, however, cannot extend beyond six years from signing of the Upgrade Agreement and opening of the escrow account unless extended because of an approved cure period or force majeure. After expiry of the waiver, refineries producing fuels below Euro-V specifications will no longer qualify for deemed duty incentives.
Penalties for delayed participation: The draft also introduces financial disincentives for refineries that failed to sign Upgrade Agreements before October 22, 2024.
The deemed duty on HSD for such refineries will immediately decline from 7.5% to 5%.
The regulator will appoint independent technical consultants to verify project milestones, engineering progress, expenditure and compliance with Euro-V specifications through approved laboratories, including HDIP.
Leading audit firms — PwC, EY, KPMG and Yousaf Adil — will undertake biannual audits, while semi-annual project progress reports will also be mandatory.
Ogra may grant a cumulative cure period of up to one year where delays occur. However, failure to meet revised milestones beyond the cure period will lead to suspension of escrow withdrawals and eventual encashment of the bank guarantee.
In case a refinery abandons the project, all remaining escrow balances will be transferred to IFEM and any funds already withdrawn will have to be repaid.
Originally published in The News
