KARACHI: Pakistan’s Oil Refinery Policy 2021 calls for the removal of the previously proposed 10-year tax exemption for existing refineries, while also offering zero taxes / duties on the import of crude oil, The News has learned.
According to the final draft of the policy, the new policy also calls for an extension, until December 31, 2022, to benefit from a tax holiday under clause 126B of the 2021-22 finance law, in order to obtain the Government approval for the establishment of new deep conversion refineries from the existing deadline. of December 31, 2021.
The new policy also states that there will be no tariffs or sales tax on the importation of crude oil, the primary raw material for refineries, from July 1, 2022.
It also proposes that the additional revenues from tariff protection, intended for the sustainability of the refining sector, contribute up to 30 percent of the cost of the project (reduced from the 40 percent previously proposed) and that the refineries will add additional costs. debt / equity (at least 70 percent) for the rest of the project cost in their own balance sheet.
The policy also aims to fine-tune the mechanism of the Special Reserve Account to ensure upgrade / modernization without withdrawing funds from the Special Reserve Account until award of EPC (Engineering, Procurement and Construction) contracts.
The new policy also suggests that the Oil and Gas Regulatory Authority (OGRA) monitor the progress of the project to ensure that the proceeds are only used for modernization and that the refineries have provided a bank guarantee. worth 500 million rupees until the start of business operations.
There will be no dividend payment and loss adjustment allowed from the special reserve account, the draft policy reads.
As it stands, the policy proposed to modernize five existing refineries and attract investment for a new refinery with a capacity of 300,000 barrels / day.
As the refinery business has become massively capital intensive ($ 10 billion required to install a new refinery), upgrading existing refineries (up to 80% conversion in depth) to meet the fuel target of Euro-V specification by 2026 through a redefined tariff protection regime appears to be the most viable and affordable option, according to the new policy.
In view of the above, the draft refining policy 2021 aims to ensure the sustainability and modernization of existing refineries.
The required tariff protection has already been incorporated into the finance law for 2021-2022 and adjusted in consumer prices, thus increasing government revenues.
It must be comprehensive to ensure that the proceeds of tariff protection are used for the upgrade through ring-fenced arrangements, the draft policy says.
From time to time, the policy says, the government has provided reasonable support to its local industry against dumping of lower priced imported products through adjustment of regulatory / customs duties at the level of imports. Fertilizers, textiles, automobiles and other sectors are an example, he added.
“In the case of the refining sector, due to its capital intensive structure, returns on equity have mostly remained in negative territory,” he said.
The impression of granting an initial incentive to refineries before their COD (commercial exploitation date) was not correct because these are brownfield projects (already operational) and the additional flows of tariff protection would be mixed up to new capital raised by refineries on their own balance sheets, says the draft policy.
In accordance with the policy, the major international oil and petrochemical players, through the adoption of the latest technologies and economies of scale, have posed an existential threat to the existing refineries in Pakistan.
Gross refining margins have fallen to historically low levels, jeopardizing the long-term viability of existing refineries in terms of existing tariff protection, which is insufficient to ensure a new injection of capital.
The draft policy was on the agenda of the Cabinet Committee on Energy (CCOE), which was due to meet on Thursday, but its meeting was postponed.