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ISLAMABAD: The Cabinet Committee on Energy (CCoE) is all set to approve the long-debated revised policy (Brownfield Refinery Policy) to upgrade local refineries to boost refining capacity, on February 1, 2024 as four contentious issues have been sorted out mutually, well-informed sources in Petroleum Division told Business Recorder.

Sharing the details, sources said, Brownfield Policy was announced on August 17, 2023. Refineries had to ink agreements with OGRA within three months. The first deadline for signing the upgradation agreements with OGRA was November 16, 2023. However, it was extended for another two months, ie, January 16, 2024, which expired two weeks ago.

The sources said Pakistan Refinery Limited (PRL) has the signed upgrade agreement with OGRA. The remaining four refineries raised serious objections on the policy. Refineries requested for continuation of 7.5 percent deemed duty incentive on HSD and tax exemptions on payments from Escrow Account.

PRL says plans to double refining capacity within 5 years

According to sources, refineries had made it clear that they will not sign upgrade agreement until their four major concerns were sorted out with mutual consultations.

One key contentious point in the Brownfield Policy was that deemed duty of 7.5 per cent on HSD will be done away with after six years.

Refineries clarified to the government that deemed duty is for sustainability of refineries and if this incentive is withdrawn refineries would not be able to compete with imported POL products due to economies of scale of huge foreign refineries which also enjoy tax incentives. Refineries asked the government to continue 7.5 per cent deemed duty for those refineries which will opt for upgradation for 20 years.

Local refineries argued that since the government has approved 7.5 per cent deemed duty for Greenfield refineries for 25 years on both HSD and Motor Gasoline, this incentive must also be available for 20 years or till deregulation whichever is early.

Of this, refineries will get 25 per cent of the cost of capping. Refineries were of the view that this amount should not be taxed, ie, income tax as in case of taxation, refineries would receive only 12 or 13 per cent instead of 25 per cent. This issue was debated for a long time.

The existing refinery policy also suggests a mechanism according to which Escrow Account will be opened in the National Bank of Pakistan, to be jointly managed by the Oil and Gas Regulatory Authority (OGRA) and the refineries. Refineries would have to deposit 2.5 percent of the deemed duty on diesel and 10 percent on motor gasoline in the Escrow Account. The amount would be used only for upgrading projects.

Refineries will also get 25 per cent of total collected amount of Escrow Account and there will be no tax (income tax) on this amount. However, FBR argued that it cannot give any tax relief due to agreement with the IMF. Finally, it was agreed that FBR would impose tax but refineries will be taxed at the rate of 27.5 per cent of the project cost instead of 25 per cent to compensate for income tax.

Earlier, this amount had to be recovered in six years but now it will be received in seven years.

There were also differences on the clause of force majeure. On this issue, OGRA argued that the government will determine the force majeure event, which was rejected by the refineries as the government was expected to side with OGRA. This issue was resolved as it was decided that in the event of force majeure both sides ie refinery and OGRA would resolve the associated issues. However, if issue(s) persists it will be sorted out by the Arbitrator.

Another key issue was appointment of arbitrator. Original clause of the approved refineries policy says that Secretary Petroleum will appoint the Arbitrator. Refineries argued that it is one-sided and urged the government to review it as there are two parties, ie, OGRA and refineries. It was decided first of all to try to appoint an Arbitrator after mutual consultation. However, in case of differences, three persons each will be recommended by the OGRA and refineries and one person from the two sides will be selected by Secretary Petroleum Division, who will finalize the selection of the arbitrator.

The sources said, government is likely to give one month to refineries to sign the agreement with OGRA. However, if any refinery, does not sign agreement with OGRA, its deemed duty of HSD will be slashed to 5% from 7.5% after six months and if the refinery fails to sign the pact in seven years, it will be declared ineligible for the deemed duty.

Copyright Business Recorder, 2024

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