Pakistan’s refinery upgrade is a bet the world is already unwinding

After two decades of deliberation, Pakistan has finally approved a policy to upgrade its refineries. The timing invites skepticism. The world is electrifying. The Middle East has a refining glut. Critics call the policy a decade too late. The government calls it strategic insurance against an increasingly unreliable supply chain for petroleum products. Both cannot be fully right.

The idea has a long history. Talk of two new refineries began in the early 2000s. A 2020 study scaled that ambition down to one new refinery. In 2026, the government has settled for something smaller still: upgrading the five refineries that already exist. No new study was commissioned. No international consultant was engaged. The decision was made in-house by the government and the refiners themselves.

The economics do not obviously support it. The plan requires $5-6 billion in capital investment, almost entirely for imported plant and machinery, against savings from importing less crude and more finished products. On normalised gross refining margins, the numbers are not clear. They only start to work once a levy of Rs85,000/ton on furnace oil is factored in, a levy that exists for reasons that have nothing to do with refinery economics.

That levy is itself a case study in policymaking without foresight. Pakistan’s refineries run on old hydro-skimming technology, which yields a high share of furnace oil and diesel and comparatively little petrol. To satisfy an IMF Resilience and Sustainability Facility condition, the finance ministry imposed a heavy levy on furnace oil without working through the consequences. Domestic demand collapsed. Export markets, already shrinking as the world moves away from dirty fuel, offered only steep discounts. Refineries now truck the fuel inland before exporting it at a loss, a logistically absurd outcome. The irony is sharper still: furnace oil in Pakistan goes largely into power generation, a relatively clean part of the energy mix, yet it is taxed as though it were a transport fuel. A wiser government would have renegotiated the levy with the IMF before building a refinery policy on top of it.

The financing structure raises a second concern. Refiners will collect a deemed duty into an escrow account, funding roughly a quarter of the project cost. In practice, consumers will pay an extra ten percent on every litre of petrol and diesel to build refiners’ equity. The pool will take about three years to fill, pushing the real investment decision to 2030. That is a long runway for the world to change. If two- and three-wheeler electrification matches the pace of Pakistan’s recent solarisation, some refiners may simply walk away once the money is in hand.

Dollar financing is a third obstacle. Pakistani banks lack the balance sheets and the appetite for projects of this scale. Foreign lenders will weigh the country’s economic risk alongside the underlying viability of the projects themselves. Should refiners turn to local funding instead, the State Bank may prove reluctant to open the letters of credit needed to import equipment.

Even on its own terms, the upgrade delivers less than advertised. Deep conversion technology could cut furnace oil output from roughly a third of the barrel to about a tenth, with petrol and diesel making up the difference. But Pakistan already produces around 70 percent of its diesel domestically, so the import savings there are marginal. Petrol imports would fall, but margins on petrol are thin. And crude still has to be imported either way, which quietly undermines the strategic case for reducing reliance on external supply. A stronger argument exists for building strategic petroleum reserves, of which Pakistan currently has none, though the tankage required is expensive and poorly timed given current prices.

The most defensible rationale for upgrading is compliance with Euro 5 fuel standards. Whether that alone justifies a multibillion-dollar commitment is another question, and a fair case can be made for spending the money instead on accelerating the shift to electric two- and three-wheelers and developing domestic battery manufacturing capacity.

For now, the policy exists mostly on paper. Pakistan’s largest refinery, which is majority state-owned, has yet to sign, with its board, which includes foreign representation, still holding reservations. The other four have concerns of their own. All have ninety days to decide, and the penalty for refusing, a cut to the 7.5 percent deemed duty on diesel, is steep enough that most will likely sign. But signing now and upgrading in 2030 are different commitments. By the time the real decision arrives, the calculus may look very different.

Copyright Business Recorder, 2026