Refiners cry foul as govt seeks fresh legal advice on upgrade policy

ISLAMABAD: Pakistan's oil refining sector is unhappy with the government's move to hire a new local law firm to review the implementation of a policy and Joint Escrow Account Agreement aimed at upgrading the country's ageing refineries, saying it will cause further delays and uncertainty.

The Petroleum Division, in a letter dated Dec. 25, 2023, told the local refineries that the law firm would provide a report on the alignment of the legally binding clauses of the proposed Upgrade Agreement with the laws, rules and regulations under the Pakistan Oil Refining Policy 2023.

The clauses include committed output, force majeure, termination, project relinquishment, duration of the agreement and arbitration.

The law firm would also review the proposed settlement deed of the defaulting refinery with the government and coordinate with the refineries and the Oil and Gas Regulatory Authority (OGRA).

The industry sources said that the four refineries - PARCO, Cnergyico Pk Limited, NRL and ARL - were already frustrated by the inordinate delay in the implementation of the Refining Policy 2023, which was approved by the cabinet in June 2023.

They said the government's efforts to appoint a new law firm were a delaying tactic and a sign that the caretaker regime did not want to implement the policy in its tenure.

They said OGRA had already hired a legal firm on the same issues and that the Special Investment Facilitation Council (SIFC), a body set up by the prime minister to expedite investment projects, had directed the Petroleum Division to remove all hurdles in the smooth implementation of the policy.

But apprently the top mandarins want to delay implementations by hiring new legal consultant as they want new elected government should take actions on the demands of the refineries, they added.

For the finalization of the implementation agreements between OGRA and refineries, the earlier deadline was November 15, 2023, which was later extended by 60 days to January 15, 2024 by CCOE. Only Pakistan Refinery Limited has signed the implementation agreements.

Earlier following the directives from SIFC about doing away with all hurdles in the implementation of policy on local refineries’ upgradation, the KPMG had been assigned by the government to come up in the current week as to how much the local refineries’ upgrade plans are sound and perfect to qualify for the demands, refineries have put in for the smooth implementation of the refinery policy for upgradation purposes.

The officials at the Energy Ministry told The News that KPMG has also submitted its report to the petroleum division terming the continuation of 7.5 percent deemed duty on diesel after implementation of the upgradation policy in 6 years as demanded by the refineries is justifiable.

KPMG also endorsed the refineries’ viewpoint that the FBR should not collect the 46 percent tax on the amount to be collected under incentives as per the policy for local refineries’ upgradation to be through ESCROW accounts. Refineries want the incentive amount to be treated as a grant, not revenue.

Refineries are of the view that 25 percent ($1.5 billion) of the amount of the incentives is to be used for upgrade plans by the refineries and if the 46 percent tax is imposed, then the incentives will be curtailed to just 12-13 percent from 25 percent and the upgradation of the refineries will suffer the most.

Refineries also want the inclusion of clauses in the implementation agreements on arbitration, the right to terminate the agreement if the government introduces some material changes, force majeure, and taxation, and import duty incentives.

“The local five refineries will have to arrange 75 percent financing of $4.5 billion for their upgradation to ensure all fuels, as per Euro-V specification in six years.” However, the government, the officials said, would provide $1.5 billion of the total upgrade of refineries from the ESCROW account. This is how the total cost of the upgradation of five local refineries will stand at $6 billion.

They said Pakistan Refinery Limited (PRL) has signed an upgrade agreement with the regulator within the stipulated time on November 15, 2023. The remaining refineries didn’t sign until the issues were resolved.

When asked why PRL has signed an agreement with Ogra in the presence of issues other refineries have flagged, they said PRL can produce 24,000 tonnes of petrol per month. When production is increased, it will get the share of $400 million on its upgrade project, they said.

But, Attock Refinery Limited, which has the capacity to produce 50,000 tonnes of petrol in a month, will get $700 million on its upgrade project, and other refineries will also get the major chunk of the incentives, they added.

The PRL is not in a position to delay one day to qualify for incentives, which is why PRL has signed the agreement with Ogra, as it wants to intimate the work on its upgrade project at the earliest.

The PRL management says the issues highlighted by other refineries are justified. When the said issues are resolved, these will be part of brownfield refinery policy, and PRL will become part of changes to be made in the policy on the implementation agreements.