Govt finally revamps oil refining policy; what does it mean?

ISLAMABAD: After six years of deadlock, the government on Tuesday approved the Brownfield Refining Policy to modernise the country’s petroleum refineries, with an estimated investment of about $6bn, to improve product quality and increase production. The Brownfield Refining Policy is a regulatory framework aimed at upgrading existing oil refineries, modernising their operations and improving their financial viability. The policy — approved by the Cabinet Committee on Energy (CCoE), led by Prime Minister Shehbaz Sharif — provides stability clauses to protect investment, offers tax incentives and foreign exchange accounts for the import of machinery against the export of furnace oil, besides enhancing offshore and onshore storage capacity for greater energy security. The policy, revised by amending the original 2023 legislation, now supersedes all previous refining policies. Under the Brownfield Refining Policy, the five existing refineries will improve product quality, quantity and product mix through upgradation. As a result, the total production of motor spirit (petrol) and high-speed diesel (HSD) will increase significantly, while furnace oil production will decline. The total petrol production would increase by 72pc to 18,400 tonnes per day (TPD) from the current 10,700 TPD. HSD output would rise by 39pc to 29,520 TPD from 21,240 TPD, while furnace oil production would fall by 63pc to 5,714 TPD from the current 15,417 TPD. All existing refineries are required to upgrade, modernise or expand their facilities under the Upgrade Project to produce environmentally friendly fuels meeting Euro-V emission specifications and maximise the production of motor gasoline, diesel and other value-added products, if any, by minimising furnace oil and other fuels.

Euro V standards permit only 10 parts per million (ppm) of sulphur in gasoline and diesel. Euro IV allows 50 ppm while Euro III allows 150 ppm in gasoline and 350 ppm in diesel. In 2020, the state-owned Pakistan State Oil (PSO) became the first oil-marketing company (OMC) to upgrade the fuel standard to Euro V. The petroleum ministry had noted then that Euro 5 standard fuels reduce harmful vehicle emissions by massively cutting down Sulphur and Benzene content. Under the newly approved policy, the government has also introduced incentives for refineries that commit to the Upgrade Project. The selection of equipment, technology or processes will be made on a project-to-project basis by the concerned refineries. Refineries will be allowed to sell their products to any OMCs licensed by the Oil and Gas Regulatory Authority (Ogra). They will also be allowed to export surplus petroleum products, subject to Ogra’s approval, after meeting domestic demand. There will be binding agreements between refineries and OMCs for the sale and purchase of major products (motor gasoline and HSD), based on product review meetings to ensure a smooth oil supply chain. The Petroleum Division will notify the Euro-V fuel specifications for compliance after the upgradation of refineries within one month. In case the government decides to improve fuel specifications beyond Euro-V, the timelines for the applicability of the revised specifications shall be devised and notified as required. Fiscal regime Under the Brownfield Refining Policy, a minimum customs duty/regulatory duty of 10pc will apply to motor gasoline and diesel imported into the country for a period of seven years from the date of notification of the new policy.

Any customs duty imposed above 10pc and reflected in the ex-refinery price will be deposited into the Inland Freight Equalisation Margin (IFEM) pool. In case a refinery is not eligible to avail the incentives provided in the policy, it will be bound to deposit the same amount into IFEM. Customs duty on crude oil will also be reimbursed to refineries through IFEM. The refineries will be allowed 10pc tariff protection/deemed duty applicable on motor gasoline and diesel’s ex-refinery price for seven years from the date of signing of the Upgrade Agreement and opening of a joint escrow account with Ogra within 90 days of notification of the new policy. An escrow account is a temporary account managed by a neutral third party to hold funds, documents, or other assets until specific contractual conditions are met. However, 2.5pc of the deemed duty on diesel and 10pc on motor gasoline (incremental incentive) will be deposited by refineries in the escrow account maintained by Ogra and the respective refinery jointly in National Bank of Pakistan (NBP) for utilisation of Upgrade Projects only. Until the opening of the said account, the incremental incentive should be deposited in the IFEM. The prevailing 7.5pc deemed duty on HSD for sustainability will continue after the 7-year incentive period for 20 years or till deregulation, whichever is earlier.

Any disallowed sales tax related to refinery operations, confirmed by the Federal Board of Revenue (FBR), due to exempt status of petroleum products will continue to be reimbursed through IFEM for FY26 till validity of Upgrade Agreements to be executed under the policy. Equipment to be installed or material to be used in the refinery upgradation project will also be exempted from sales tax. After upgradation, crude oil inventory on site is to be maintained for 14 days of name plate capacity of refinery at all times. Refineries relying on import of crude oil will ensure an additional five days cover at sea at all times. Implementation mechanism For an existing refinery to be eligible for the fiscal incentives provided in the policy, it shall execute a legally binding Upgrade Agreement with Ogra within 90 days of the policy’s notification. The said Upgrade Agreement shall include the output and outcome of the committed upgrade, including maximum production of Euro V-compliant petrol and HSD and other value-added products and significant reduction in furnace oil as firmed up in the front-end engineering design (FEED) of the Upgrade Project.

Next, the agreement will also include the proposed milestones/deliverables with tentative timelines, including a feasibility study, FEED, financial close, EPC (engineering, procurement and construction), the potential configuration, the tentative product slate after upgradation, and a project management methodology for on-time delivery, as per approved cost and specification. The milestones or deliverables and timelines will be firmed up in the Upgrade Project’s FEED. Refinery defaulting on any government dues (petroleum and climate support levy) on petroleum products would not be eligible to avail benefits under the policy until a legally binding and enforceable settlement is reached with the government. Till such time, the defaulting refinery will deposit the incremental incentives into the IFEM pool. Once a settlement is reached with the government, the refinery will become eligible to sign the Upgrade Agreement and open a joint escrow account with Ogra and start depositing the incremental incentives on a prospective basis. The funds available in the joint escrow account can only be drawn and used by the respective refinery on the Upgrade Project after payment of all outstanding government dues (petroleum and climate support levy) on petroleum products.

If a refinery defaults in payment of government dues on petroleum products in a timely manner after the execution of the Upgrade Agreement, Ogra will suspend the refinery’s right to claim expenditure out of the joint escrow account till the time the refinery deposits the outstanding amount along with a late payment surcharge. Eligible refineries importing used plant, machinery and equipment (PME) for the Upgrade Project will be allowed to withdraw a maximum of 24.5pc of the total project cost from the joint escrow account, whereas refineries importing new PME for the upgradation will be allowed to withdraw a maximum of 27.5pc of the project cost from the account. The release from the joint escrow account will be on a pro-rata basis, ie a maximum capped limit of 24.5pc, or 27.5pc as the case may be, from the escrow account, and the remaining from the refineries’ own resources. Ogra will allow withdrawal of a maximum of the respective capped limit of the refinery’s project cost for the upgradation, determined based on the Final Investment Decision (FID). In case the funds deposited in the joint escrow account are less than the respective capped limit of the expenditure made on a milestone/ deliverable and/or on the entire Upgrade Project basis, the government or Ogra will have no obligation to meet the shortfall, the policy says. The funds from the escrow account will be available for withdrawal, post financial close and upon completion of 25pc physical progress of the Upgrade Project or opening of matching letters of credit (LCs), against expenditure made for each milestone of the respective refinery Upgrade Project. The interest accrued in the joint escrow account will also be used for the respective capped limit of the payment of the Upgrade Project from the same account. Ogra will have a unilateral right to withdraw funds from the relevant joint escrow account in case of milestone failures.

The deposit in the joint escrow account will only be utilised for capital expenditure and revenue expenditure associated with the capital expenditure only on the Upgrade Project. The account will not be used as any charge/lien/collateral or other instrument of borrowing. Furthermore, under the policy, there will be a comprehensive monitoring mechanism for upgrade commitments through third-party evaluations and independent auditors. If a refinery at any stage decides to quit the Upgrade Project, the funds in the joint escrow account would be withdrawn by Ogra for use in IFEM, and those already spent would be recovered from the defaulting refinery. The dispute would be settled through an Islamabad-based arbitration tribunal, with one member each nominated by the disputing parties and a third to be nominated by those two members. Meanwhile, a difficulties committee comprising secretaries of petroleum, finance and law would address issues and anomalies during the course of implementation. Policy stability On the demand of the oil industry, the Upgrade Project will be entitled to a fixed stabilisation regime. Specific provisions are provided in the new policy to ensure an economic equilibrium for the Upgrade Project and protect and indemnify the refineries against any disruption or adverse changes in laws, regulations (including environmental standards, licensing regime, etc), fiscal regime, foreign exchange regulations, or tax laws (including imposition of new taxes), which could have an adverse economic impact or adverse impact on the timelines of the Upgrade Project.

This will include a comprehensive provision covering the refinery’s rights (eg material/reasons attributable to governmental bodies, including without limitation the stability/change in law undertaking, certain political force majeure, prolonged force majeure) and any mutual exit rights. Force majeure is a clause included in contracts that allows a party to be excused from its obligations due to circumstances that are beyond its control. At its option, the refinery will be permitted to open and maintain an onshore foreign currency account or accounts for servicing its foreign currency obligations and maintaining a credit balance equivalent to one year’s debt in relation to the Upgrade Project. The said onshore foreign currency account may be fed with the refinery’s export proceeds, including all the export proceeds from sales of furnace oil.