Aramco spells out terms for investment in greenfield refinery

ISLAMABAD: In a new development, the Saudi Aramco has finally linked its willingness to invest in a greenfield refinery with a capacity to refine 300,000 barrels per day of crude oil to its terms of 7.5 per cent deemed duty on Mogas and diesel for the life of the project and a tax holiday for 20 years including tax exemption on import of plant and equipment to ensure profit up to 15 per cent, one of the top mandarins of the Energy Ministry told The News.

The Aramco has communicated in clear terms that it will invest only when Pakistan’s authorities accept its terms and conditions. Prime Minister Shehbaz Sharif will be updated about the development for the final decision about the mega project in a meeting either to be held today (January 3), and in other meetings in the current week about energy sector issues.

Being an incharge minister of the Petroleum Division, the premier will also be told that the part of the refining policy pertaining to upgradation of existing refineries has been finalized and is ready to be submitted for ECC approval. As per the finalized draft for the local refineries upgradation available with The News, the existing refineries will be extended tariff protection equal to the existing customs duty (10%) on imported Mogas and diesel. The funds that are to be through tariff protections will be utilized after financial close for six years for the purpose of the refinery’s upgradation, which may absorb about 25% to 30% of the project cost.

The OGRA will monitor the fund utilization process as per their committed work plan and milestone subject to verification by one of the top four audit firms. Local refineries produce refined products around 11 MTPA (inclusive of 30% local crude processing). Deficit crude oil and petroleum products worth about $10 billion are annually imported. The indigenous and imported crude is refined by five local refineries.

Refineries are a strategic asset and catering fuel requirements of transport, energy, defence, etc, playing an effective role in an emergency situation such as pandemic and war conditions. Local refineries are required to be upgraded for producing Euro-V specification fuels and minimizing the production of residual fuel (furnace oil), requiring a huge capital investment of around $4 billion to $4.5 billion and government fiscal support.

However, to a question, an official, who remained part of talks with the Saudi Aramco, said the cost of the mega project would be in the range of $9.5 billion to $12 billion, depending upon the salient features of the project that were to be finalized once the premier took the decision on the terms and conditions of the Aramco. Authorities say if the Aramco conditions are accommodated, there will be a serious impact on the country’s revenue on finished POL and crude oil. Saudi Arabia has also asked for waiver of the customs duty already imposed at 5 per cent on the import of crude oil for the refinery.

The Saudi Aramco, the official said, had refused to accommodate the Pakistan State Oil’s offer of 10 per cent deemed duty for 10 years with a 10 years tax holiday for the new mega refinery.

“The Saudi Aramco in its charter of demands also asked for third-party investments in critical infrastructure to reduce CAPEX (capital expenditure) and stressed the participation of Chinese investment with their capability to de-risk the investment,” he said, adding that in case Shehbaz accepted the incentive package asked for by the Saudi Aramco, it would be made part of the refining policy for new refineries.

The official said if the incentive package for the new refinery asked by the Saudi Aramco was implemented, the pre-tax (internal rate of return) would stand at 15 per cent, but the post-tax IRR would be at 14.9 per cent and while meeting the Aramco’s hurdle rate of 12-15%, the reduction tankage requirement for crude and liquid products would further increase the IRR.

Mentioning the impact of accepting Saudi Aramco conditions, the official said Pakistan might avail net foreign exchange of $9 billion in 25 years. The Aramco would make entire crude supply for utilization in the proposed refinery. The first mega refinery of 300,000 barrels per day would be established in Pakistan and this would open the door for further investment from other parts of the world, especially from China.

“The establishment of the Greenfield refinery will shield Pakistan from any volatility in the supply chain of petroleum products across the country, in the future,” he said, adding that the incentives desired by the Aramco would also be applicable to all other potential investors to set up a Greenfield refinery. Therefore, consensus on the said terms of the Saudi Aramco is yet to be developed, which will subsequently be added to the draft Oil Refining Policy for Greenfield/new refineries.

Mohammad Bin Salman, the Saudi crown prince, was earlier scheduled to visit Islamabad on November 21, 2022, but postponed his trip. During the visit, apart from investment in the deep conversion refinery, MBS was to announce a bailout package of $4.2 billion for Pakistan. The state-of-the-art deep conversion refinery would be built under 70:30 loan-equity ratio and the Saudi Aramco will share 30 per cent equity with the Pakistan State Oil on a 50 per cent basis. The EPC mode will be adopted to complete the project, and a Chinese company will also be part of the refinery project. And 70 per cent of the project cost is to be arranged through loans.

“The Saudi Aramco will provide $1.5 billion as equity and the same amount would be arranged by the Pakistan State Oil. The Saudi Aramco and the PSO will finance $3 billion equity ($1.5 billion each) and the rest of the amount would be arranged through loans under the EPC mode,” the official said and added: “Once the Saudi Aramco becomes part of the project, many international players will easily join the project and IFIs and the Banks of Saudi Arabia and China will be ready to provide loans.”