ISLAMABAD: Pakistan’s oil industry has emphasized the urgent need for the implementation of the Brownfield Policy, stressing that resolving the sales tax issue is crucial for the survival of the nation’s oil refining sector.
Adil Khattak, Chairman of the Oil Companies Advisory Council (OCAC) and CEO of Attock Refinery Ltd, expressed concern over the prolonged delays in the formulation, approval, and implementation of the Refineries Upgradation Policy. He pointed out that the estimated loss in foreign exchange alone amounts to a staggering $5 billion, not including the significant opportunity costs to the refineries.
Strategic Importance of Refineries in Pakistan
Refineries in Pakistan meet over 50% of the country’s petroleum product demand and are vital for energy security, prosperity, and economic development. These refineries are critical for the backbone of industrial growth and are intrinsically tied to the country’s defense and energy security needs. Relying solely on imported fuels would increase the risks to the energy supply chain and could have catastrophic consequences for the nation.
Local refineries have repeatedly proven their strategic importance by providing uninterrupted supplies of refined petroleum products to the Armed Forces during times of conflict or national emergencies. Ensuring the sustainability of these refineries and the viability of their operations is not only essential for safeguarding national interests but also for maintaining an uninterrupted supply of energy during unforeseen crises in the region.
Recent history has shown that even minor disruptions to the petroleum products supply chain can quickly escalate into a national crisis, affecting every sector of the economy.
Pakistan Oil Refining Policy for Upgradation of Existing Refineries (2023)
Recognizing the strategic role of the refining sector in Pakistan’s energy security, the government began consultations on the Refineries Upgradation Policy in December 2019.
The first draft was completed in March 2021 and presented to the Cabinet Committee on Energy (CCOE) in August 2021. After further deliberations and revisions, the policy was approved by the PDM government in August 2023. In February 2024, the policy was amended following extensive consultation with the government, refineries, and independent financial and legal advisory firms.
The main objective of the policy is to create a framework enabling existing refineries to undertake major upgradation projects. These projects aim not only to meet Euro-V environmental standards but also to significantly increase the production of petrol and diesel by 99% and 47%, respectively, while reducing furnace oil production by 78%. The decline in furnace oil demand in recent years has led to storage constraints, often forcing refineries to reduce their capacity utilization.
The planned upgrades would bring an investment of $5-6 billion, resulting in cleaner, environmentally friendly fuels, as well as significant foreign exchange savings for the country.
Sales Tax Issues and Their Implications
Unfortunately, the implementation of the policy remains stalled due to several obstacles, the latest of which is the exemption of petroleum products from sales tax in the Finance Act of 2024. This change has prevented refineries from reclaiming most of the sales tax paid at the input stage, rendering both their upgradation projects and current operations financially unviable. Despite numerous meetings with the Petroleum Division, OGRA, and the FBR over the past six months, the issue remains unresolved. Even directives from the Prime Minister’s Office and the Special Investment Facilitation Council (SIFC) have gone unheeded.
This exemption is severely undermining the financial viability of upgrade projects, infrastructure development, and daily operations. If the exemption continues, profitability will erode, placing considerable financial strain on the industry. This will jeopardize the progress of crucial, capital-intensive projects that are necessary to ensure the uninterrupted supply of petroleum products across the country, thus nullifying the objectives of the Brownfield Refining Upgradation Policy, which was approved by the government with the active support of SIFC.
“I personally don’t agree with some in the industry who believe the ‘strong import mafia’ would rather shut down the refineries than allow them to upgrade .The delay can be attributed to factors such as lack of capacity and coordination in relevant departments, as well as frequent changes in political leadership and bureaucracy,” Khattak added.
In contrast, India has successfully pursued its 2025 Vision for the energy sector, which not only resulted in the development of the largest and most modern refining complexes but also enabled India to export petroleum products to countries with the strictest environmental standards. Additionally, India has leveraged cheap Russian crude oil to its advantage.
Consequences of Oil Refinery Closures in Pakistan.
Without the implementation of the Brownfield Refining Policy (2023), refineries in Pakistan may face unsustainable operations, potentially leading to their closure. This would have serious consequences, including:
Financial Cost: The country would incur an additional $750 million to $1 billion annually in importing finished petroleum products, draining precious foreign exchange reserves.
Energy Security Risks: Reliance on imports would compromise the country’s energy security, especially for defense and strategic sectors like airports and military bases.
Supply Chain Vulnerabilities: Dependence on imports leaves the country vulnerable to disruptions in the global supply chain (e.g., blockades or international incidents), leading to severe shortages and potential public disorder.
Loss of Revenues: The closure of refineries would eliminate contributions from local refineries in duties, taxes, and levies.
Impact on Domestic Oil Fields: The closure could also affect local crude oil fields and their associated gas supplies to the national grid.
Logistical Burden: Increased imports would strain Pakistan’s port infrastructure and logistics, adding more pressure to an already overstretched system.
Higher Costs: Increased freight costs (Rs 3-5 per liter) would be passed on to consumers.
Unemployment: Around 50,000 to 60,000 jobs in the refining and allied industries would be at risk, conflicting with the government’s objectives of increasing employment opportunities.
High Investment for New Refineries: Establishing new refineries with equivalent refining capacity would cost $10-15 billion and take 8-10 years from conception to commissioning.
The potential closure of refineries and the resulting economic and security risks highlight the critical importance of resolving the sales tax issue and implementing the Brownfield Policy. This is essential not only for the survival of the oil refining industry in Pakistan but also to maintain foreign investor confidence.
Mr. Khattak concluded, “Given the serious consequences of inaction, the implementation of the Brownfield Policy is urgently needed to ensure the survival of Pakistan’s oil refining industry and protect the country’s economic and energy security.”