FBR opposes proposed tax incentives for refineries

ISLAMABAD: Federal Board of Revenue (FBR) opposed draft refining policy proposal offering 7.5 percent duty on mogas and high speed diesel for 25 years and tax holiday of 20 years fearing International Monetary Fund (IMF) conditions on exemptions.

The FBR opposition comes prior to the pitching of the much-awaited policy for refineries in the Cabinet Committee on Energy (CCoE).

The tax collecting agency argued that the exemptions for brown industry (existing local refineries) should be extended to the new refineries (greenfield), a senior official of the Energy Ministry told The News.

However, the official also disclosed that the Planning Commission endorsed the draft for new refineries policy arguing that the country badly needed a new refinery with the capacity to refine 350,000 barrels per day.

Investment for the new refinery would come from the Saudi Aramco. So extending the incentives of 7.5 percent deemed duty for 25 years and tax holiday of 20 years as has been asked by Saudi Aramco would be a win-win situation for both countries.

The official said if the incentive package for the new refinery asked by Saudi Aramco was implemented, the pre-tax (internal rate of return) would stand at 15 percent, but the post-tax IRR would be at 14.9 percent. While meeting Aramco’s hurdle rate of 12-15 percent, 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. Aramco would make the entire crude supply for utilisation in the proposed refinery.

The first mega refinery of 350,000 bpd would be established in Pakistan and this would open the door for further investment from other parts of the world, especially from China.

Authorities said that if the Aramco conditions were accommodated, there would be a serious impact on the country’s revenue on finished POL and crude oil.

Saudi Arabia has also asked for a waiver of the customs duty already imposed at 5 percent on the import of crude oil for the refinery. However, the official said, Pakistan had no option but to extend the incentives asked by Aramco as a new refinery was badly needed for the country.

Once the comments from all stakeholders have been received on a circulated draft of the portion of the refining policy that deals with the greenfield refineries, the summary would be sent to CCoE for approval.

However, the draft refining policy that deals with the upgradation of brown refineries was ready to be tabled before the CCoE for approval. As per the finalised draft for the local refineries upgradation available with The News, the existing refineries would be extended tariff protection equal to the existing customs duty (10 percent) on imported mogas and diesel.

The funds that would be arranged through tariff protections would be utilised after financial close of six years for the purpose of the refinery’s upgradation, which should absorb about 25-30 percent of the project cost, the official informed.

Oil and Gas Regulatory Authority (OGRA) would monitor the fund utilization process as per their committed work plan and milestones, subject to verification by one of the top four audit firms.

Local refineries produce refined products around 11 MTPA (inclusive of 30 percent local crude processing). Deficit crude oil and petroleum products worth about $10 billion are annually imported.

Indigenous and imported crude is refined by the five local refineries. Refineries are a strategic asset and cater to the fuel requirements of transport, energy, defence, etc. Refineries play 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 minimising the production of residual fuel (furnace oil), requiring a huge capital investment of around $4 billion to $4.5 billion as well as the government’s fiscal support.

Saudi Aramco, the official said, had refused to accommodate Pakistan State Oil’s offer of 10 percent 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.

“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.