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June 19, 2019

No deemed duty, oil lifting if refineries fail to upgrade operations

National

June 19, 2019

ISLAMABAD: The government has asked the existing refineries that it has decided not to lift the furnace oil and will also to do away with the deemed duty if they did not upgrade themselves.

“We have asked the existing refineries to avail all the tax facilities that will be available to the new refineries -- one is being set up at Khalifa Point by Parco at Hub, Balochistan and other will be established by Saudi Arabia once the feasibility study is completed,” a senior official of Petroleum Division told The News.

“If the existing refineries fail to upgrade their operations, the government will never lift their furnace oil and will also erase deem duty. We have conveyed the OCAC (Oil Companies Advisory Council) and refineries about our decision,” he said.

However, many refineries have started working on their respective upgradation plan to ensure Euro-II standard diesel and motor spirit. Currently the additives are being used to convert the petroleum products into Euro-II products.

Since power sector in the near future will not be able to consume furnace oil as the LNG-based power plants are not only ensuring electricity at cheaper rates, but also providing environment-friendly electricity. The RLNG-based power plants have replaced diesel-run and furnace oil-run plants.

The ban was first announced by the PML-N government in late 2017 but then allowed an exemption for three months to cope with peak summer electricity demand.

As part of deregulation of the petroleum sector, the Musharraf government had allowed in 2002 about 10 percent ‘deemed duty’ on local production of diesel and petrol and 6 percent on other products to ensure price parity with imported products that carried 10 percent customs duty, replacing the previous arrangement of guaranteed 10 percent return on refining. The deemed duty was linked with the commitment that part of the funds so collected would be utilised by refineries to upgrade their facilities.

The deemed duty on all petroleum products was abolished in 2007-08 except for diesel on which it was reduced to 7.5 percent that remains in place even at present. A judicial commission had concluded in 2009 that refineries had collected more than Rs80 billion through ‘deemed duty’ but not spent on improving infrastructure and sought doing away with the duty altogether.

He said Byco Refinery had already started the FO export with its first consignment departing last week. He said National Refinery, Pakistan Refinery and Enar Refinery would also start exporting their product for the time being till such time a big deep conversion refinery near Khalifa Point is completed in a few years by Parco -- a joint venture of Pakistan and the UAE – to absorb surplus FO for high-end petroleum products.

The country’s six refineries were producing 10,000 tonnes of furnace oil but the power sector has been reducing its consumption because of being the most expensive generation. Power plants had a storage capacity of more than 1.2 million tonnes. The oil marketing companies, mostly the Pakistan State Oil (PSO) had a storage capacity of more than 400,000 tonnes, but they were not interested or capable to meet power sector’s demand due to their choked credit lines.

The State-owned Pakistan Refinery Limited (PRL) wants to invest $1 billion to upgrade technology for production of Euro-II standard diesel. “The board of directors of the company, after thorough deliberations, has decided to implement the refinery upgrade project with an approximate investment of one billion dollars,” PRL said in a filing with the Pakistan Stock Exchange.

The company has been exploring the option of conversion of the refinery into a deep conversion refinery along with achieving compliance with the government’s requirement to produce Euro-II standard diesel. The refinery has a capacity of processing 47,000 barrels per day of crude oil into a variety of distilled petroleum products such as Furnace Oil, High Speed Diesel, Kerosene oil, Jet fuel and Motor gasoline, according to its website.

Pakistan has eight operating oil refineries in the country. The combined production of local refineries remained 13.5 million tons/year in the current fiscal year of 2017/18 versus the consumption of 26 million tons/year in the country, showing that local refineries meet around half of the local demand.

PRL has already got a comprehensive feasibility study completed through renowned international consultants that entailed evaluation of different technological variants, technical and financial viability to carry out the refinery upgrade project.

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