ISLAMABAD: Following negotiations with the refining industry, the petroleum division has wiped out 10-year tax exemption protection, reduced government’s contribution to finance upgrades of existing oil refineries and enhanced compliance requirements.

The Cabinet Committee on Energy (CCoE) led by Planning Minister Asad Umar had earlier approved an incentives package for modern refineries that also included 20-year tax holiday but had refused to allow such protections to existing refineries for refurbishment.

Sources said the petroleum division has now removed both objections raised by the CCoE regarding incentives to old refineries currently operating in the country. The 10-year tax holiday has been abolished and upfront government contribution has been reduced to 30pc in the final draft as against 40pc rejected by the CCoE.

This contribution has to be generated through 10pc customs duty on petrol and diesel and to be kept in the special reserve account to finance upgrades of existing refineries and have already been covered in the finance bill for 2021-22. Under the revised policy, there will be no guarantee of rate of return for existing refineries provided by the regulator or the government of Pakistan and refineries shall be allowed to open and maintain foreign currency accounts. They shall be allowed to retain a certain portion of export proceeds in a foreign currency, if any, to meet operational requirements.

A special account for upgradation/expansion will be maintained by each refinery in NBP

“There shall be a tariff protection in the form of 10pc import duty on Motor Gasoline and Diesel of all grades as well as imports of any other white product used for fuel for any kind of motor or engine, effective from January 1, 2022 to December 31, 2027,” the policy said.

A ‘Special Reserve Account’ for upgradation/modernisation/expansion will be maintained by each refinery in a separate bank account to be opened in National Bank of Pakistan. Any incremental revenue (net of taxes) earned by the refineries based on the revised tariff structure (over and above the existing pricing mechanism for refineries), will be transferred to the ‘Special Reserve Account’.

This will appear separately in company’s books of accounts, which shall be exclusively utilised for upgradation, modernisation or expansion projects and will not be utilised for distribution of dividends or adjustment of losses or any other general corporate purposes of the existing refineries.

The refineries will be entitled to withdraw from the ‘Special Reserve Account’ once the EPC contract for the respective upgradation, modernisation or expansion project has been awarded. The drawdown from ‘Special Reserve Account’ would be utilised on proportionate basis.

These funds would be used exclusively for the upgradation, modernisation and expansion and petrochemical projects shall constitute no more than 30pc (net of taxes) of the total project cost, while the remaining 70pc will be funded by the refineries on their own balance sheets in the form of corporate debt or sponsors equity or both. Balance in the ‘Special Reserve Account’ exceeding 30pc of total cost of the project, verified by the independent auditors (from big four audit firms), shall be settled through a mechanism to be devised by the Oil and Gas Regulatory Authority.

To be eligible for these fiscal incentives for upgrade, modernisation or expansion, the existing refinery would have to commit upgrade or expansion plan with the government no later than December 31, 2021 and provide an undertaking to the petroleum division regarding proposed timeline, potential configurations, the tentative product slate after upgradation (ensuring production of EuroV Mogas and Diesel), the size, as well as all other relevant information. Upon receipt of this undertaking, the petroleum division shall provide a ‘waiver’ for the refinery to continue marketing its products, until the agreed completion date of the upgradation but not later than December 31 2026, from the fuel specifications to be notified by the petroleum division by October 31, 2021.

Refineries that do not provide such undertaking, and do not have a ‘waiver’, shall not be allowed to sell their products in Pakistan if not meeting the notified fuels specifications, after June 30, 2022.

Published in Dawn, October 14th, 2021