Pakistan’s oil refining sector occupies a strategic but often under-appreciated space in the national economy. The country has five main refinery operators — PARCO, Attock Refinery Limited, National Refinery Limited, Pakistan Refinery Limited and Cnergyico — with an installed capacity of roughly 450,000 barrels per day, or around 20 million tonnes per annum.
Yet this capacity is not being fully utilised. One reason is the changing demand pattern, particularly the decline in furnace oil consumption after the power sector shifted away from FO-based generation. Since refineries cannot selectively produce only petrol and diesel, lower furnace oil demand forces them to reduce throughput and operate below optimal levels.
Recognising this structural weakness, the government introduced the Brownfield Refinery Upgradation Policy in 2023. Its objective was sound: encourage existing refineries to modernise, produce cleaner Euro-V fuels, increase petrol and diesel output, reduce furnace oil production and improve energy security through import substitution. The policy offered tariff protection and deemed duty-based incentives, to be partly parked in escrow accounts for utilisation against approved upgrade projects. In principle, this was an attempt to convert an ageing refining base into a more efficient and environmentally compliant sector.
However, the policy has not taken off as expected. The major disruption came through the Finance Act 2024, when refined petroleum products were declared sales-tax exempt. Earlier, petroleum products were treated in a manner that allowed refineries to adjust input sales tax against output sales tax. Once the output side became exempt, refineries continued to face sales tax on many inputs, services, capital equipment and project-related imports, but could no longer recover or adjust that tax in the same manner. The distinction between zero-rated/taxable treatment and exempt treatment may appear technical, but for a capital-intensive sector it is decisive. It changes project economics, increases operating costs and weakens the financial case for multibillion-dollar upgrades.
This sudden fiscal change created a policy contradiction. On one hand, the state was asking refineries to invest heavily in upgradation. On the other hand, it altered the tax treatment in a way that raised the cost of those very projects. The result is that the brownfield incentives remain largely stuck in transition, while refineries continue to operate under uncertainty. No investor can take a final investment decision of this scale if the fiscal assumptions underlying the policy are vulnerable to abrupt reversal through annual budgetary measures.
The challenge deepened further with the subsequent imposition of petroleum levy and Climate Support Levy — sometimes described as a carbon levy — on furnace oil. From the government’s perspective, these measures support the federal resource envelope at a time when revenue needs are acute and the tax base remains narrow. Pakistan’s fiscal position leaves limited room for easy choices. Petroleum-related levies are easier to collect, more visible in pricing formulas and administratively simpler than expanding taxation into under-documented areas of the economy.
Yet the cost to the refining sector is real. Furnace oil is already a weak product in the domestic market. Additional levies make it more expensive for local users and can push demand further down. For refineries, lower FO off-take means storage constraints, reduced throughput, weaker margins and possible forced exports at unfavourable prices. This undermines the very objective of maximising domestic production of petrol and diesel. If refineries cannot run at economic levels because one part of their product slate becomes commercially unviable, the country ends up importing more finished petroleum products at a higher foreign-exchange cost.
The wider economy also pays the price. A constrained refining sector increases reliance on imported finished fuels, exposes the balance of payments to international price volatility and weakens domestic industrial capacity. Higher fuel-related charges also feed into the cost of doing business, particularly for transport, cement, textiles, agriculture, construction and other energy-intensive sectors. Ultimately, these costs do not remain confined to corporate balance sheets. They travel through supply chains and appear in consumer prices.
This is not an argument against revenue mobilisation. The government has genuine fiscal needs. But energy-sector taxation must be aligned with industrial policy, investment policy and energy security. A refinery policy cannot succeed if budgetary changes negate its incentives. Likewise, petroleum levies should be calibrated in a way that protects essential revenue without destroying the economics of domestic refining.
Pakistan needs a stable compact with its refining sector: predictable tax treatment, time-bound upgrade commitments, transparent monitoring of escrow incentives and a clear path to cleaner fuels and lower furnace oil production. The choice is not between government revenue and refinery profitability. The real choice is between short-term fiscal comfort and long-term energy resilience. A country facing foreign-exchange constraints cannot afford to weaken an industry that has the potential to save foreign exchange, improve product quality and support industrial competitiveness.
Copyright Business Recorder, 2026
The writer is a civil servant with deep interest in the energy and climate change issues
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