SINGAPORE: Attock Refinery Ltd (ARL) plans to upgrade its refinery in northern Pakistan over the next two years by adding new units to produce more gasoline and feed a growing national supply deficit, the company's chief executive said on Thursday.

The $100 million upgrade to build an isomerization and a preflash unit will stall the company's naphtha exports in favour of more valuable gasoline, Adil Khattak, told Reuters on the sidelines of the Asia Refineries conference in Singapore.

For Attock, the investment in the two units will increase production of “a more added-value product, so that would be adding into our profits,” he said.

Attock earlier this month invited bids to build the units at its 45,000-barrel-per-day (bpd) refinery in northern Pakistan that will take capacity to more than 55,000 bpd by the end of 2013. Bids must be submitted by May and a winner and final investment decision is expected by July or August, Khattak said.

Pakistan's five refineries yield a naphtha surplus of about 650,000-700,000 tonnes per year (tpy) because the country lacks a petrochemical industry to use it as a feedstock, according to Khattak.

At the same time, the country's demand for oil products stands at more than 20 million tpy compared with domestic output of about 12 million tpy, Khattak said. Much of that growing deficit is in gasoline, as smuggling from Iran receded in the past year and a natural gas shortage rendered compressed natural gas (CNG) vehicles unpopular.

But the existing pricing regime in Pakistan discourages the construction of new refineries and the gasoline deficit may keep growing, Khattak said.

“The prices are determined by the government, so the pricing mechanism does not give enough return on investment to the potential investors in the refinery,” he said.

“We are having negotiations with the government for some positive change in the price mechanism. Unless that happens, I don't expect any new investment to come into new refinery projects.”

Most countries in the region from India to Indonesia subsidise fuel sales with retail prices capped by the government to tame inflation, a move that can pare income for refineries and potentially threaten their investment plans.

Attock procures the entirety of its crude supply from Pakistan's domestic production in the north of the country, where output is increasing, the CEO said.