$5 Billion Refinery Upgrade Plan Faces Policy Uncertainty Over Govt’s Deregulation Push

In practice, the government's push to deregulate petroleum rates has put Pakistan's refinery sector at a policy crossroads, with industry experts calling for a clear choice between allowing market forces to determine refinery economics and maintaining the existing system of deemed duties.

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• They point to documentary evidence showing that refineries were prepared to sign the upgrade and escrow agreements as early as March 2024.

According to a report by a national daily, the matter has gained urgency as the administration moves to finalize long-delayed Brownfield Refinery Policy agreements while additionally considering greater deregulation of petroleum-product costs.

According to the report, the two approaches are becoming increasingly challenging to reconcile, creating uncertainty over billions of dollars in planned refinery investments.

Under a deregulated model, experts believe the administration could gradually move away from determining refinery returns through tariff protection and instead focus on fuel quality, environmental, competition, and supply security requirements.

Existing refineries could be given a six-to-seven-year transition period to complete their upgrades and meet prescribed standards. Refineries that fail to upgrade within the stipulated period could ultimately face regulatory action, including the loss of their licenses, experts suggested.

"The government should establish a transparent transition towards deregulation instead of simultaneously deregulating one part of the market and increasing controls over another, " the report stated.

For context, the matter has become particularly pressing as the administration seeks to impose a 2.5-percentage-point reduction in the deemed duty on High-Speed Diesel, from 7.5 percent to 5 percent, with the financial impact on refineries estimated at around Rs. 29-30 billion.

Refineries have rejected the retrospective application of the reduction, arguing that they were ready to sign the implementation agreements but the administration failed to hold the signing ceremony scheduled for October 22, 2024.

According to senior authorities, the first draft of the upgrade agreements shared with refineries requires them to bear the Rs29-30 billion impact of the deemed-duty reduction, along with maintaining a 20-day crude-oil stock before signing the upgrade agreements.

Industry authorities argue that the penalty undermines the investment certainty that the Brownfield Refinery Policy was intended to provide.

They point to documentary evidence showing that refineries were prepared to sign the upgrade and escrow agreements as early as March 2024. The administration, even so, delayed the process as it wanted PARCO to become a party to the agreements.

In practice, the situation was further complicated by sales-tax exemption measures introduced in the June 2024 budget. While refineries and oil marketing businesses faced an estimated Rs34 billion annual loss since sales-tax inputs could not be adjusted, according to industry authorities, the measures affected the commercial viability of the proposed $5 billion refinery-upgrade program.

Notably, the administration subsequently shifted the signing deadline to October 22, 2024, but the signing ceremony was not held. Refiners therefore argue that imposing the deemed-duty reduction retrospectively amounts to penalizing them for delays caused largely by administration policy and administrative decisions.

Notably, the administration is additionally working on the mechanism for operating the incentive-package escrow accounts. While the accounts controller is projected to determine how the incentive-package account will be operated, the petroleum secretary is scheduled to meet the law and finance secretaries to further fine-tune the agreements.

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 and Pakistan Refinery Limited for briefings on their upgrade projects and outstanding problems.

In practice, the meetings are projected to provide an opportunity for the administration to address the long-running disputes over the upgrade agreements, deemed-duty reduction and implementation mechanism.

Nevertheless, industry office-holders noted the larger problem is no longer simply the size of the incentive package but whether Pakistan can provide a stable commercial framework for long-term refinery investment. Stay Connected with ProPakistani.

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For now, $5 Billion Refinery Upgrade Plan Faces Policy Uncertainty Over Govt's Deregulation Push remains the part of the story worth watching, and further updates are likely as more details are confirmed.