Wanting more is not always bad, but it is ironic that such an important sector has not been able to undertake any major refinery upgradation and expansion all these years despite one crisis after the other (read petroleum). More recently, the sector has been waiting for the latest refinery policy that has been in the consultation and approval stage for quite some time.
While a detailed draft policy must follow, many believe that the latest budget has spelled out the key nuggets from the much-awaited refinery policy. The first impression of the budget FY22 has been pro-growth – some also terming it borderline ambitious. What the budget is offering the refinery sector is also akin to increased incentives for revamping and investment. That’s largely the outsider view – the view of independent analysts and experts.
The budget offers a 10-year tax exemption for new deep conversion refineries of at least 100kbpd as well as for upgradation, modernization or expansion project of deep conversion refinery of at least 100kbpd of existing refineries. This tax holiday is a key incentive for not only attracting new investment in the sector but also for existing refineries to undertake the much-needed upgradation for the overhaul of the archaic refining process and infrastructure in the country.
The governemnt also announced custom duty of 10 percent on two key petroleum products: petrol and diesel, collection of which is expected to help refinery sector undertake heavy capex as well as improve cash flows and gross refining margins. Furthermore, minimum turnover tax reduction from 0.75 percent to 0.5 percent will further help ease GRMs, profitability and the investment climate in general. Refineries have again been facing lower offtake of furnace oil by the OMCs due to lower demand by the power sector affecting their overall production, which gives another reason for the refineries to upgrade to reduce reliance furnace oil.
The government’s proposal of removing zero-rating from crude oil means that there will be sales tax charged on crude oil. How will this be positive for the refinery sector? A sales tax on the import of crude oil would push the oil marketing companies further down the value chain to timely lift crude oil from local refineries.
The refinery sector’s view of the proposals by the federal government however are not enough or adequate. While on their own the incentives offered are positive for the sector, they deviate from what the refineries have reportedly mentioned to have been discussed between them. For example, the sector isn’t happy about the addition of minimum upgradation threshold of 100kbpd as mostly none of the refineries have a capacity of over 100kbpd with expansion plans underway.
Also, while GST on crude oil is going to be adjustable and will not have any financial repercussions, analysts believe that this application of GST on crude oil could result in accumulation of refunds for the local refineries given how refunds have always faced delays in almost all sectors historically.
Refineries could not upgrade their refining process and infrastructure all these years despite availing incentives through deemed duty. A decade later since they were first directed to upgrade, the situation is no different. Its high time that they show some progress in the overhaul of the refinery sector or just fizzle out.