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Refineries allowed incentive to upgrade diesel to European standards

Refineries allowed incentive to upgrade diesel to European standards

ISLAMABAD: The government has agreed in principle with petroleum refineries to allow an incentive in the diesel price to upgrade their product to European standards.

This would mean a relatively higher price for high speed diesel (HSD) of better grade produced locally. The step would allow an increase in deemed duty on HSD from 7.5 per cent to 9pc on low sulphur product produced by local refineries which have completed their dehydration plants.

The understanding has been reached between Minister for Petroleum and Natural Resources Shahid Khaqan Abbasi and local refineries under the umbrella of Oil Companies Advisory Committee.

“It was agreed that these arguments have merit,” said a senior government official quoting minutes of a recent meeting which decided to take up the matter with the Economic Coordination Committee (ECC) of the cabinet at the earliest for approval.

The meeting was called on the demand of refineries which had been protesting over a recent ECC decision that suspended incentives package for refineries for their failure to upgrade their products by an extended deadline last year.

The petroleum ministry was informed that in the light of government directive of 2013 to upgrade refineries for diesel production, the Pak Arab Refinery Co Ltd (Parco) took the lead among the refineries and set up the first Diesel Hydro Desulpurisation (DHDS) plant at a cost of $120 million producing 500ppm Sulphur HSD. This was followed by Attock Refinery Limited which undertook refinery expansion and upgradation with $251m in 2013.

The engineering, procurement and construction contractor of ARL started implementing the project on a fast-track basis for completion in July 2015 – five months earlier than the Dec 31 deadline. But the project could not be completed by the deadline because of unilateral withdrawal of SRO575 that resulted in delays at ports where consignments got stuck due to litigation and certification issues at the Engineering Development Board.

This was followed by inland transportation blockades due to security situation arising out of political sit-ins and floods. All these issues were being tackled in consultation with the petroleum ministry which noted that certain hurdles were out of the refinery’s control and hence the DHDS plant would be commissioned in the second quarter of 2016.

While only Parco completed the DHDS project well within the first deadline given by the government, further deadline of imposition of penalties on refineries not producing Euro-II HSD has now been extended till June 30, 2017, but the price incentive of 1.5pc deemed duty on HSD has not been extended, which is discriminatory.

The refineries were of the view that the ECC had approved the 1.5pc increase in deemed duty for the conforming refineries to provide a recovery mechanism for the heavy capital expenditure. ARL was of the view that without 1.5pc increase in deemed duty, they will not be able to even recover their operating costs of the DHDS because the product otherwise did not have any value addition to profitability.

In that case, ARL cannot afford to commission and operate their unit having already lost $23m due to project price escalation and additional duties and related taxes on imports as well as another loss of opportunity cost to the tune of $6.2m for nine months — August 2015 to May 2016 — on the sale of HSD. Parco was also of the view that while it had completed the DHDS plant much earlier, it had not received 9pc deemed duty promised by the government. “In all fairness, the incentive must accrue to Parco as well.”

Under the incentive package approved in March 2013, the PPP government had allowed major refineries — Attock Refinery, Pak­istan Refinery, National Refinery and Byco Refinery — to charge 9pc deemed duty, instead of 7.5pc, on diesel to produce Euro-II fuel. This meant the sulphur content had to be reduced to 0.05pc from 0.5pc and 0.1pc of varying degrees prevailing at the time.

For this, the refineries were required to set up DHDS plants by December 2015 and isomerisation plants for petroleum products of international standards and reduce import reliance. The PPP government at the time had also deferred the penalties until December 2015 on production of low-grade diesel which was earlier put in place in February 2013.

Under the said decision, the refineries were also required to set up an Escrow account to park available cash balance amount of their special reserve fund to be jointly operated by the finance ministry and the refineries for modernisation and upgradation of refineries. Total expenditure for upgradation was estimated at Rs200 billion.

The ECC was told early last month that none of the refineries was able to meet committed deadlines even though they had already missed three deadlines. They also failed to open an Escrow account until February 2015 and even then could not deposit surplus funds in it, saying they already had spent about Rs35bn against their original investment commitment of Rs150bn.

The ECC last month then extended the deadline for completion of isomerisation and DHDS plants until June 30, 2017, instead of Dec 31, 2015, deadline set in early 2013, but withdrew 1.5pc incentive.

Published in Dawn, June 20th, 2016

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