As a new oil refining policy could not be finalized for a few years during the tenure of the Pakistani Tehreeke-Insaf (PTI) government, oil refineries are now looking to the new government, hoping that it will move forward quickly and will approve the well- expected policy.
This will pave the way for an increase in oil refinery production in the context of the shortage of diesel on the world market following the Russian-Ukrainian war. US sanctions on Russian oil supplies have triggered a rise in global crude oil prices, which is also fueling the shortage of diesel. In this situation, state-owned oil marketing giant Pakistan State Oil (PSO) struggled to secure diesel import contracts and succeeded in importing the fuel at higher premiums.
Previously, the PTI administration launched work on a new oil refining policy in 2020, but the document has become a sticking point between the Ministry of Petroleum and the Cabinet Committee on Energy (CCOE). According to sources, some cabinet members pointed out a few issues related to a refinery, which prevented the CCOE from approving the policy. Some of the reservations have been addressed in the budget while others remain unresolved, which are key to initiating refinery modernization projects for the production of environmentally friendly fuels.
Sources said a cabinet member had business interests in a refinery, which had been hit and had become a sticking point. Now refineries are counting on the new government, arguing that an oil refining plant could be upgraded with an investment of $4 billion to increase production capacity while a new refinery will require an investment of $10 billion. of dollars. Refineries play a central role in achieving the country’s strategic objectives, including ensuring a sustainable supply of refined petroleum products.
Refineries operating in Pakistan are referred to as base refineries, or “topping or simple hydro-skimming” refineries in technical language, which need to be upgraded to produce environmentally friendly Euro V fuels. Pakistani refineries produce 70% of country’s diesel needs and meet 30% of gasoline demand. Since refining projects are capital-intensive, there is a need to attract investors through investment-friendly policies.
The industry claims that refineries are being wrongly accused of abusing the collection of alleged duties without understanding the relevant guidelines. Industry officials point out that refineries were initially allowed to include tariffs (deemed duties) in the ex-refinery prices of high-speed diesel (HSD) and three other petroleum products, but the duty was later waived. limited to the ex-refinery price of the HSD only. Additionally, the full amount of duty deemed collected was not to be retained by the refineries, but the remaining revenue was to be deposited in a special reserve, which could be used to upgrade refineries.
The upheaval of the international oil market over the last ten years has strained refining margins and placed hydro-skimming refineries in a precarious situation. Over the past 20 years, refineries have suffered a cumulative loss of about Rs 60 billion. Due to the extremely high capital injection requirement, tight margins and lack of growth opportunities, new investment in the sector has been limited over the past 50 years.
Only Pak-Arab Refinery Limited (Parco), with 60% government ownership, and Byco factories were installed. With low demand for heating oil, refineries are operating at only 60-65% capacity and have recently been forced to close. Considering these factors, work on a new refining policy started in early 2020 with input from refineries and other stakeholders, but its approval was delayed due to frequent changes in the petroleum ministry.
There has been no progress in the past two months and it appears that upgrading refineries and attracting new investment to the sector is no longer a government priority. The players in the sector stress that the refining policy is the need of the hour to help the government achieve its strategic objectives, including compliance with environmental protocols. Under this policy, it will be mandatory for refineries to upgrade their plants and produce Euro V compliant fuels as a minimum. At the same time, the policy will provide incentives to invest billions of dollars in refinery megaprojects.
Commenting on the situation, Chairman of the Board of Pakistan Refinery Limited (PRL), Tariq Kirmani, argued that PRL and other refineries were vital to the oil supply chain in Pakistan as the country could not afford the closure of any of the existing refineries. “The new policy will bring in $4 billion to upgrade existing refineries and attract $10 billion in investment for establishing a new refinery,” he expressed his hope. He pointed out that PRL was important to PSO, which was the largest oil marketing company and had acquired PRL for the sole purpose of backward integration to ensure uninterrupted supply from a refinery, rather than relying only on imports.