In a bold move to achieve 100% local diesel production, the Cabinet Committee on Energy (CCoE) is poised to sanction incentives to existing refineries for the establishment of upgradation plants. Prime Minister Shehbaz Sharif is slated to preside over the CCoE’s meeting on Monday to grant final approval for this transformative initiative.

Sources familiar with the matter have revealed to The Express Tribune that the incumbent government’s incentives include a 10% deemed duty on petrol and an additional 2.5% deemed duty on high-speed diesel. This incentivisation aims to catalyse production growth of these crucial petroleum products within Pakistan.

Spanning a comprehensive six-year policy horizon, the approach aims at yielding an outcome of achieving 100% diesel production in alignment with the nation’s current demand. Presently, refineries enjoy a 7.5% deemed duty on diesel, which is set to be elevated to 10%, marking a 2.5% increase.

To ensure effective utilisation of resources, sources estimate that refineries will be capable of allocating 25%, or $1 billion, of the projected total collection towards upgradation plants. This ensures that the incremental revenue generated finds purpose in industry-enhancing endeavours.

The mechanism for this involves the establishment of an Escrow account jointly managed by the Oil and Gas Regulatory Authority (OGRA) and the refineries. It is within this framework that deemed duty collection is deposited. “Refineries are permitted to allocate a maximum of 25% of the accumulated revenue towards their upgradation projects,” said sources.

This approach marks a revised stance from the preceding government’s stipulation, which sanctioned refineries to allocate up to 30% of incremental revenue for upgradation initiatives. Insiders with industry expertise have projected the total upgradation project expenditure to range between $4 to $5 billion. A considerable $1 billion has been earmarked for utilisation from the incremental revenue to fuel refineries’ upgradation projects.

The policy’s impact is poised to be reflected in local refineries’ contributions to domestic demand. At present, these refineries fulfil 30% of the country’s petrol demand. With the proposed policy in place, this coverage is anticipated to double within the next six years, reaching a substantial 60% of the total petrol demand, said sources.

Similarly, for diesel supply, refineries meet 50% of the country’s diesel demand. The upcoming six years are projected to witness a doubling of this capacity, resulting in the domestic production catering to 100% diesel demand.

Pakistan would thereby be capable of entirely satisfying its domestic diesel demand without resorting to imports. Industry experts concede that while the demand for diesel may rise by 10% to 20% over the coming six years, the nation’s self-reliance is poised to negate the need for imports.

Sources say the policy’s proposed incentives are projected to yield returns within one to two years, manifesting in the form of a bolstered foreign exchange inflow into the nation’s economy. Officials estimate that through bolstered local production of petrol and diesel, the country would annually save approximately $600 million in foreign exchange. This anticipated impact translates into a substantial benefit of $1.2 billion to the economy within just two years.

Beyond these initiatives, the government is also poised to introduce a 10% custom duty on petrol and diesel under the refinery policy. This contribution will be set over a six-month period, acting as an integral component of the larger deemed duty collection, which will be deposited into the Escrow account.

To avail these incentives, refineries are mandated to commit to their upgradation projects within three months of the policy’s official notification. The establishment of binding agreements with OGRA stands as a pre-requisite for refineries seeking to qualify for these benefits. A further undertaking to the Petroleum Division is required, necessitating refineries to align with the proposed project timeline, specify the upgradation project’s scale, and secure OGRA’s consent for implementation.

Published in The Express Tribune, August 5th, 2023.

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