ISLAMABAD: The federal government has revised incentives in the recently approved brownfield refining policy, capping the utilisation of funds to be collected from tariff protection at 22 per cent for the import of used refining equipment and 25pc for new equipment to upgrade infrastructure.

The outgoing government approved the new policy earlier this month under which existing refineries will be provided benefits for the duty-free import of machinery that can help boost production of more environment-friendly Euro-5 grade fuels — a move that is expected to help cut fuel imports.

According to a notification issued by the Cabinet Secretariat, the Ministry of Energy (Petroleum Division) has been directed to revise some incentives. The 22pc cap will be on funding from an escrow account — a financial account where funds are held by a third party — for refineries importing used plant, machinery and equipment (PME) for upgrading, and 25pc for those importing new PME.

The policy mandates a minimum customs duty of 10pc for a six-year period on imported petrol and diesel. Any customs duty imposed over 10pc and reflected in the ex-refinery price — the price at which refineries sell fuel — will be deposited in the Inland Freight Equalisation Margin (IFEM), used to equalise the price of petroleum products across the country.

Petrol, diesel prices may go up under new policy, refineries expected to become more environmentally friendly

The “refineries shall be allowed 10pc tariff protection/deemed duty applicable on motor gasoline (petrol) and diesel’s ex-refinery price for six years from the date of notification of the refining policy and opening of the joint escrow account with the Oil and Gas Regulatory Authority (Ogra)”, the revised policy said.

“However, 2.5pc of the deemed duty on diesel and 10pc of motor gasoline (incremental incentive) shall be deposited by refineries in the escrow account maintained by Ogra and the respective refinery jointly in the National Bank of Pakistan for the utilisation of upgrade projects only,” it said.

This policy is expected to result in price increases of Rs5.64 per litre for petrol and Rs3.07 per litre for diesel, although these figures may change based on market conditions. However, this will help upgrade the existing refineries to deep conversion facilities with Euro-5 standards at an estimated cost of $4bn each — a significant savings compared to the $10bn required to establish a new (greenfield), comparable refinery and maximise petrol and diesel production and reduce furnace oil output to almost negligible level.

A refinery and Ogra will open the requisite escrow account within three months. Until the account is opened, the incremental incentive will be deposited in the IFEM. New equipment and materials for refinery upgrades won’t attract certain taxes and fees when imported. However, to get these tax breaks, a refinery must show the equipment details to the Federal Board of Revenue for approval after completing the initial design study for the upgrade.

Besides, to qualify for these benefits, a refinery must sign a legally binding upgrade project agreement with Ogra within three months.

This agreement will describe the output and outcome of the committed upgrade, the proposed milestones deliverables with timelines — like feasibility; front-end engineering design; financial close; engineering, procurement and construction contract; and commissioning — and the potential configuration like unit and size and tentative product slate after upgradation.

Environment-friendly

A notable aspect of this upgrade is the expected drastic reduction in furnace oil output, making these refineries more environmentally friendly.

For example, under the agreement, the Parco refinery’s petrol production would increase to 5,500 tonnes per day from 3,700 at present, while the product of diesel would jump to 8,100 tonnes per day from 5,600. By contrast, its furnace oil production would shrink to just 212 tonnes per day from 3,300 now.

Almost similar improvements are expected for refineries like Attock Refinery Ltd, National Refinery Ltd, Pakistan Refinery Ltd, and Cnergyico.

Any refinery defaulting on government dues or levies will not be eligible for these incentives until a legally binding and enforceable settlement is signed with the government.

Ogra will allow the withdrawal of a maximum of 25pc of the refineries upgrade project cost based on final investment decision (FID). If the funds deposited in the joint escrow account are below 25pc of the amount spent on a milestone or on the entire project, there will be no obligation on the government or Ogra to meet the shortfall.

After the upgrade project is financially completed, money can be taken from the escrow account based on project milestones. The release from the joint escrow account will be made on a pro rata basis, i.e. a maximum of 25pc from the escrow account and 75pc from the refinery’s own resources. The accounts will be audited by internationally reputed firms to ensure transparency and accountability.

Finally, the policy allows refineries that sign an upgrade agreement with Ogra to continue producing and marketing their existing products below Euro-5 specifications until the agreed upgrade completion date, which must be within six years. After that, the waiver will expire.

The refineries that do not sign an agreement with Ogra will not have a waiver and will be prohibited from producing and marketing products that do not meet Euro-5 specifications six months from now.

Published in Dawn, August 21st, 2023