Refiners get 45 days to save their tariff cushion

WHY THIS POLICY EXISTS

Pakistan currently runs five refining organisations, PARCO, ARL, NRL, PRL and Cnergyico, with a combined installed capacity the Policy document puts at 450,000 barrels per day, or 20.5 million tons a year.

All but PARCO still run on decades-old hydroskimming technology; PARCO's own mild-conversion unit is now more than two decades old. Actual throughput is only around 10 million tons a year against that 20.5 million ton nameplate, a utilisation rate of roughly 49%, largely because shrinking domestic demand for furnace oil (FO) leaves refiners unable to run flat-out without producing FO nobody wants.

Source: Pakistan Oil Refining Policy for Upgradation of Existing (Brownfield) Refineries, 2023 (as amended).

The sector's own numbers, as stated in the Policy, are the case for intervention. Local refineries meet 45% of the country's total demand for petroleum products, supply more than 100% of the jet fuel needed for defence, save more than USD 1 billion a year in foreign exchange, run on about 70,000 bpd of domestic crude and condensate that would otherwise have to be exported, and support upward of 100,000 direct and indirect jobs. No new refinery has been built in Pakistan in over a decade, and only two have been added in the last forty years.

Strip away the cross-references and three changes stand out from this round of amendments.

1.  A hard reset, not an extension.

Section 7.3 of the amended Policy requires all refineries, "regardless of execution of Upgrade Agreement", to surrender any incentives already availed under the original 2023 Policy.

In exchange, every refinery becomes eligible for the incentive package afresh, for seven years measured from the date it signs the new Upgrade Agreement. In effect, whatever a refiner banked under the 2023 or February 2024 terms is now off the table; the seven-year incentive clock restarts only once they sign again under the amended terms.

2.  The tariff cushion is now on a shrinking fuse for holdouts.

HSD's deemed duty, the tariff protection refiners are allowed to retain in the ex-refinery price, was already cut from 10% to 7.5% back in August 2008.

Under the amendment, refiners that missed the original October 22, 2024 deadline see that 7.5% cut again, to 5%, with the 2.5-percentage-point difference redirected into their Refinery Upgradation Account once they do sign.

But the amendment adds two further tripwires: the duty drops again, to 2.5%, for anyone still unsigned by October 1, 2026, and is withdrawn altogether by November 15, 2026 for refineries that never sign. The 45-day window to execute the Upgrade Agreement (roughly October 25, 2026) sits inside that same countdown.

3.  Storage and localisation conditions are now explicit.

Post-upgrade, refineries dependent on imported crude must hold 20 days of nameplate-equivalent storage capacity and a 20-day crude inventory at commissioning (split 10 days physical, 5 days at the port dock, 5 days within 750 nautical miles).

Refineries running on domestic crude must hold 15 days of storage capacity, maintain an 8-day crude inventory, and secure confirmed local supply for at least 20 days, a clause that ties the upgrade directly to Pakistan's own crude fields rather than only to import security.

Deadlines as set out in Sections 6.1.3.1, 6.1.3.6 and 7.3 of the amended Policy. 

For refiners that do sign, the amended fiscal regime gives a 10% deemed duty on Motor Gasoline and Diesel's ex-refinery price for seven years from signing.

Of that, 10 percentage points on Motor Gasoline and 2.5 percentage points on Diesel, termed the "incremental incentive", must be deposited by the refiner into its own Refinery Upgradation Account, ring-fenced for capital spending on the upgrade itself.

The base 7.5% deemed duty on HSD, meanwhile, continues beyond the seven-year window for a further 20 years, or until deregulation, whichever comes first.

Refiners importing new plant and equipment can draw down a maximum of 27.5% of total project cost from that Account; those importing used equipment are capped at 24.5%.

There's a speed bonus, too, an additional 0.5% of reimbursable project cost for every year shaved off a three-year completion target. Each signatory must also post an unconditional, irrevocable Rs. 1 billion bank guarantee from an "AA"-rated bank, plus a letter of credit worth 10% of each milestone withdrawal, both released only once the Petroleum Division confirms successful commissioning.

The Policy's own feasibility numbers, refinery by refinery, show where the additional Motor Gasoline and Diesel, and the cut in Furnace Oil, is meant to come from.

Combined across the five refineries, planned post-upgrade Motor Gasoline output rises from 10,702 to 18,402 tons a day (+72%), Diesel rises from 21,237 to 29,517 tons a day (+39%), and Furnace Oil output is meant to fall from 15,417 to 5,714 tons a day, a cut of roughly 63%. PRL's plan is the most aggressive relative to its current base, more than quintupling its committed Motor Gasoline output; CPL's upgrade adds the largest absolute volumes of both Motor Gasoline and Diesel.

Figures in tons per day. Source: Policy Section 6.1.

The Policy's own demand tables explain the urgency, though they do not entirely agree with each other. In one place, the document cites an international consultant's forecast that combined Motor Gasoline and Diesel demand will reach 33 million tons a year by 2035.

Elsewhere, its own product-level exhibits show Motor Gasoline demand alone reaching 23.1 million tons and Diesel demand 16.9 million tons by FY2033-34, a combined 40 million tons, comfortably above the 33 million ton figure cited for 2035.

Both numbers appear in the same document; which one the Petroleum Division is actually planning against is not reconciled in the text.

A refiner that does not sign loses its remaining HSD tariff cushion entirely by mid-November and forfeits the waiver, with its OGRA licence exposed. The signing decision, and the FEED-stage capital cost estimates that follow it, are now the two numbers this desk will be tracking most closely into the fourth quarter.

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