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ISLAMABAD: Petroleum Division has cleared refineries from any wrongdoing in deemed duty, saying that they have spent Rs199 billion against collection on up-gradation during 2002-2020, well informed sources told Business Recorder.

Sharing the details, sources said: “Cabinet Committee on Transport & Logistics (CCOTL) while considering a summary submitted by Ministry of Maritime Affairs on reduction in port charges for export cargo, directed Petroleum Division on September 1, 2021 to place the matter of deemed duty collected and utilized by refineries before CCoE and recommended to carry out an audit of the deemed duty.

Petroleum Division has submitted that the matter of deemed duty has already been discussed in the CCoE’s meeting held on September 13, 2021 while considering the Petroleum Division’s summary on the Pakistan Oil Refining Policy 2021 and CCoE approved the policy to the extent of establishment of new refineries whereas Petroleum Division was directed to present workable option for sustainability and up-gradation of existing refineries.

CCoE also required further clarity on the utilization of revenue stream arising out of tariff protection (deemed duty) on offsetting of losses instead of up-gradation in the past.

As a matter of fact the protection regime in the refining sector has been in place since 1960s which has taken many forms concomitant to the emerging challenges of different times.

CCoE to take up refining policy on Monday

The tariff protection formula (deemed duty) introduced in 2002 for the existing refineries was aimed at ensuring their operational sustainability.

In order to ensure supply of quality products to the consumers, Government has been constantly improving the desired specifications of refinery products to remain aligned with global refinery market, as well as, international quality benchmarks. Improvement in product standards has led to the up-gradation of existing plants to remain commercially viable against the headwinds of import of oil products from international market.

Following is a brief chronology of improvement of product specifications by local refineries in Pakistan: (i) in 2000, enhancement of motor gasoline Research Octane Number (RON) from 80 to 87 RON; (ii) 2002, elimination of lead from Motor Gasoline; and (iii) 2016, enhancement of Motor Gasoline RON from 87 to 92 (Euro-Il).

According to Petroleum Division the next target is Euro-V Motor Gasoline which will be achieved in 2026.

Petroleum Division stated that prior to 2012 sales of diesel @ 1 per cent Sulphur content (10,000 ppm) was replaced with 0.5 per cent Sulphur content (5,000 ppm). In 2016, diesel was shifted to [email protected] 0, 05 per cent Sulphur content (500 ppm) which will be 0.001 per cent in 2026 when Euro-V HSD will be introduced.

Resultantly, existing five refineries have constantly been upgrading their installed configuration’s in compliance with new specifications and to compete with international suppliers in line with the tariff protection formula given in Budget speech on Finance Bill 2002 whereby refineries were required to operate and compete in the market on their own (without precondition for up-gradation), as quoted below:

“As part of the restructuring and de-regulation of the oil sector the Ministry of Petroleum has decided to abolish the minimum 10% rate of return guarantee for the National Refinery Limited, Pakistan Refinery Limited and Attock Refinery Limited and allow them to compete in the market through tariff protection formula.

For this purpose import duty at 10% ad valorem on import of HSD and 5% ad valorem plus 1% surcharge on import of kerosene oil, light diesel oil and JP-4 is being proposed. However, excise duty on these products is being abolished and petroleum development levy is being reduced to minimize the impact of this measure on the retail prices.

While conveying the formula to the refineries, the refineries were issued guidelines by the Petroleum Division on June 25, 2002 that 50% of the net profit after tax will be diverted to a special reserve account to offset against any future loss or make investment for expansion or up-gradation of refinery.

Incentives for refineries not approved by CCoE

According to Petroleum Division, the intent of 2002 tariff protection policy was to provide a reasonable margin to refineries so that refineries could primarily operate their normal business while encouraging them to manage losses and up-grade refineries with the provision of a special reserve account. Accordingly, refineries have run the operation of refineries on their own and also up-graded the same during 2002-2020. The focus of the proposed Refining Policy 2021 is also to up-grade and enhance the production/ quality of the local fuel so as to minimize dependency on import.

Petroleum Division argues that in addition refineries not only made investments and up-graded the refineries in the past with the provision of special reserve account but also have arranged funds out of their own resources and borrowings. A brief position on the collection andutilization of deemed duty since inception onwards is as follows: (i) Pak Arab Refinery (PARCO) spent Rs66 billion against collection of Rs76 billion; (ii) Attock Refinery Ltd Rs26 billion against collection of Rs47 billion; (iii) National Refinery Ltd Rs37 billion as compared to collection of Rs40 billion; (iv) Pakistan Refinery Ltd, Rs 17 billion against collection of Rs 36 billion; and (v) Byco Petroleum Pakistan Ltd Rs53 billion against collection of Rs38 billion.

The details of financial audit, conducted by refineries since inception through reputed independent audit firm have also been shared. Auditor General of Pakistan Office also reviewed the details of the deduction/ utilization of deemed duty for the period 2002-2018. In addition, ENAR Petrotech Services Ltd also carried out technical audit in 2016 on the direction of Petroleum Division in order to assess whether refineries have up-gradated their plants by installing Naptha Isomerization and Diesel Hydro-Desulphurization unit.

Petroleum Division has argued that it is clear that refineries have up-graded their plants by using deemed duty as well as their own resources, and undertook its financial technical audit.

Copyright Business Recorder, 2021

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