Prime Minister ignores 'unprecedented' incentives given to Parco

Prime Minister Shahid Khaqan Abbasi has reportedly ignored objections of Law Minister, Commerce Minister and Secretary Privatisation on "unprecedented" incentives allocated to Parco to establish a refinery at Khalifa point Hub (Balochistan), well-informed sources told Business Recorder. According to the Petroleum Division, ECC in its decision of October 10, 2007 had approved certain incentives for establishment of a Coastal Oil Refinery at Khalifa Point [Hub] by IPIC of Abu Dhabi. The ECC also approved draft Implementation Agreement (IA) between GoP and the Emirate of Abu Dhabi for establishment of the Refinery with 250,000-300,000 barrels per day (bpd) capacity.
The IA was subsequently executed on 13-11-2007. However, work on KCR project could not begin at that time. During last decade (2007-2017) the demand of petroleum products in the country has grown from 18 Million Tons Per Annum (MTPA) to about 26 MTPA in 2017, an increase of about 4% per annum. As per latest industry forecast projected 5% GDP growth rate and incremental impact of CPEC the demand is expected to rise to 50 MTPA (47 MTPA net of Furnace Oil) in 2030.
Based on industry demand projections and the expected production from existing refineries, the country would be in need of adding at least three deep conversion refineries with each having a capacity of 11-13 MTPA (approx. 250,000-300,000 bpd) within next 7-10 years.
A deep conversion refinery involves better efficiency and economics as it converts heavy crude oil and furnace oil into more profitable products such as motor gasoline, diesel and jet fuels. Thus, the proposed project will provide fuel security; reduce dependence on imported products and flexibility in production of refined products.
However, setting up of an oil refinery is highly complex and capital intensive besides the project has long lead time (5-7years). While the financial strength required for setting up of a state of the art oil refinery is mainly available internationally potential investors seek meaningful incentives/ commitments prior to making any investment decision.
In this regard, PARCO which is a joint venture of GoP (60%) and the Emirate of Abu Dhabi (40%) through Abu Dhabi Petroleum Investment Company (ADPI) has recently revived the KCR project at Hub under the name of PARCO Coastal Refinery (PCR) having 250,000 bpd capacity at an estimated cost of US$ 5 billion. Accordingly, PARCO has stated that ADPI has sought incentives, as a pre-requisite, in order to move to the next phase of the project ie Final Investment Decision (FIO).
The Petroleum Division further revealed that in addition to PARCO, there are other potential investors who have, from time to time, expressed a keen interest in setting up of oil refinery in northern part of the country. An inland refinery project also entails additional risk and cost in terms of construction and operation of crude pipelines from ports to the refinery location. However, incentives granted by ECC in 2007 are only available to the new refinery projects alongside the coastal belt of Balochistan and those granted under the IA were just applicable to KCR project.
Therefore, Ministry of Energy (Petroleum Division) proposed that a uniform incentives package be offered to all potential investors to facilitate the investment process and to leave the choice of location of the refinery project to the investors as per due diligence carried out by them.
In this regard, PARCO has also stated that whereas the cumulative impact of the incentives sought over the project's life of 20 years is estimated at US$ 1.6 billion, the monetary benefits of US$ 5 billion investment in shape of forex savings, attributable profits to GOP and contribution on account of sales tax and petroleum levy are estimated to the tune of US$ 84 billion (impact of incentives was just 2% of the total monetary benefits to the country).
The Petroleum Division proposed that ECC may consider/approve following Incentive Package, for PARCO Coastal Refinery Project (PCR) and for all new state of the art (not second hand/relocated) Deep Conversion Oil Refinery projects including expansion of existing refineries of minimum 100,000 bpd refining capacity to be set up anywhere in the country: (i) 20 years income tax holiday; (ii) new refinery project may be exempted from application of the Companies Profits (Workers' Participation) Act 1968 and Workers' Welfare Fund Ordinance 1971; (iii) exemption from all duties, taxes, surcharges and levies on import, by the Refinery Project, its contractors or any other persons, of all machinery, vehicles, plant and equipment, other materials and spares and consumables for setting up, operation, maintenance and repair of the refinery; (iv) exemption from withholding tax and all other duties, taxes, surcharges, levies and imports relating to foreign contractors/subcontractors and their personnel in connection with engineering, procurement, construction, commissioning, operation, maintenance and repair of the refinery; (v) exemption from leviable sales tax and excise duty on supply of locally manufactured building and construction material, equipment and services for setting up of refinery; (vi) new refinery projects would be given a pricing mechanism which shall be no less favorable than the prevailing mechanism; (vii) facilitation in project infrastructure such as Single Point Mooring (SPM), Jetties, subsea/ land pipelines etc; and viii) waiver of applicable Development Surcharge on the value of exports under the EPZA Rules 1981 in case Refinery Project is set up in Export Processing Zone (EPZ).
During ensuing discussion, the Minister for Law & Justice stated that the company is being offered all types of incentives for establishment of refinery, whereas no incentive has been proposed for workers. They being an important organ of the refinery should also be given incentives for motivation, he added.
Minister for Commerce, Malik Pervaiz reportedly stated that he has never seen such type of exemptions for a new refinery project including exemption from the application of the Companies profits (Workers' Participation) Act 1968 and Workers' Welfare Fund Ordinance 1971.
Additional Secretary, Petroleum Division responded that the proposed incentive package comprises incentives already approved by ECC in 2007 for Khalifa Coastal Refinery (KCR). Secretary, Privatization Division argued that the exemptions proposed for new refinery in the summary are on the higher side as compared to those which were earlier approved by the ECC for Khalifa Coastal Refinery at Hub in 2007.
The representative of Finance Division opined that besides views of the FBR, the views of the Board of Investment (BOI) being a stakeholder in the matter are also essential. The Prime Minister, who is also the Chairman of the ECC observed that consumption of various petroleum products is on the rise in the country and existing refineries are old and have no capacity to meet the country's requirement. Therefore there is a dire need to establish new oil refineries.
However, due to lack of incentives, prospective investors are not interested in establishing refineries in the country. ADPI has shown an interest in establishing Parco Coastal Refinery (PCR) at Hub and is demanding incentives that were also offered to Khalifa Coastal Refinery in 2007. The total impact of these incentives would be just 2 % of the total monetary benefits during the project's life.
"Prime Minister observed that Saudi Arabia as well as India are offering free of cost land to the investors for establishment of new refineries in their countries," the sources added. He also stated that the PCR project will fetch one of the largest foreign investments in the country therefore, "we should not waste this opportunity." He further stated that the proposed incentives package will also facilitate establishment of state of the art refineries in other parts of the country.
After a detailed discussion, the ECC approved the incentives proposed by the Petroleum Division despite questions raised by some of the ECC members. The ECC further decided that in case of oil refinery projects upcountry the imported crude oil, transportation pipelines and storage will be integrated as part of the refinery project to enable them to avail all incentives.
The ECC also decided to include the following in the approved incentive package: "The temporary imports by contractors/sub-contractors of all machinery, vehicles, plant and equipment, other materials and spares in connection with engineering, procurement, construction, commissioning, operation, maintenance and repair of the Refinery shall be exempted from all duties, taxes, surcharges and levies on import".