Plan to upgrade local refineries under Brownfield Refinery Policy hits a snag

Government has failed in either implementing policy within April 22 deadline or allowing extension for refinery upgradation

ISLAMABAD   -  The plan to upgrade local refineries under the amended Brownfield Refinery Policy has hit a snag as the government has failed in either implementing the policy within the April 22 deadline or allowing extension for the refinery upgradation.

The Petroleum Division has proposed extension of six months in the deadline for the remaining two refineries Pak-Arab Refinery Company (Parco) and Cnergyico to sign the refinery upgradation agreement, however the extension has not yet been granted.

The Petroleum Division had moved a summary to Cabinet Committee on Energy (CCoE) on Feb 6, 2024 which had approved the proposed amendments in the subject policy. The said CCOE decision has also been ratified by federal cabinet. Accordingly, the amended “Pakistan Oil Refining Policy for Upgradation of Existing/ Brownfield Refineries 2023” was notified for implementation by OGRA and Refineries. The subject policy is aimed to upgrade the existing refineries to produce environment friendly Euro-V fuels and decrease the production of furnace oil. To achieve this objective, the policy provides incremental incentive of 2.5% on HSD (in addition to current 7.5%) and 10% on MS in the form of deemed duty for 7 years. The incremental incentive will be deposited in an escrow account maintained by OGRA with respective refinery for meeting up to 27.5% of the upgrade projects’ cost. OGRA will allow withdrawal of funds from escrow account by respective refinery, post financial close of the upgrade projects and against expenditure made for each milestone/deliverables.

To avail the said incremental incentive, the refineries are required to execute Upgrade Agreements, open an Escrow Account with OGRA and provide Rs. 1 billion bank guarantee to OGRA within 60 days of notification of the subject policy i.e. by 22 April, 2024. The Policy provides that deemed duty on HSD shall be reduced from 7.5% to 5% for refineries which do not sign the Upgrade Agreement (UA) within said deadline of sixty (60) days.

In this regard, OGRA has updated that ARL, NRL and PRL have conveyed their readiness to sign the Upgrade Agreement and Petroleum Division may coordinate for signing ceremony of the same. However, PARCO and Cnergyico Pakistan Limited (CPL), jointly contributing more than 50% of country’s refining output, have yet to finalize the Upgrade Agreements. It is also updated that PARCO is in process of updating its feasibility study after which PARCO Board of Directors will take decision on the planned upgradation.

The said activities may take 5-6 months. Similarly, a settlement agreement between CPL and the Government of Pakistan far payment of outstanding petroleum levy is also being negotiated, which may not be concluded before 22th April, 2024. In case of non-signing by due date, the prevailing deemed duty on HSD shall be reduced from 7.5% to 5% for PARCO and CPL, making operation of these refineries extremely challenging. In view of above, it is proposed that the deadline for signing of the Upgrade Agreement as required under Clause 6.1.3.5 and 6.1.3.1 of subject Policy and other associated deadlines may be extended by six months w.e.f. 22th April, 2024.

While talking to The Nation, Adil Khattak, Chairman Oil Companies Advisory Council (OCAC) and Chief Executive Officer Attock Refinery Ltd, said three refineries namely Attock Refinery Ltd,  National Refinery Ltd and Pakistan Refinery Ltd had given consent to sign the agreements before the deadline and two refineries Pak-Arab Refinery Company (Parco) and Cnergyico needed more time but the Petroleum Division didn’t arrange signing with the willing refineries nor extended the deadline date in time to accommodate PARCO’s request. He said that deadline for signing of upgradation agreements with Oil and Gas Regulatory Authority (OGRA) was April 22, 2024. It may be noted that the Refining Policy has already taken more than four years in the making causing about four billion dollars loss to the country.  ARL, NRL and PRL plan to invest three billion dollars on their upgradation projects. The total investment will go up to $ 6 billion when PARCO and Cnergyi co join in, Khattak maintained.

“We understand that Petroleum Division has initiated a summary to Cabinet Committee on Energy for extension of the deadline for signing of upgradation agreements by six months,” he maintained. The government seems to be more focused on attracting foreign investment, which is no doubt important but it needs to realize that foreign investment flows in only when existing foreign and local investors are listened to, he added.

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