Amended refinery policy offers seven years of tariff protection and financial incentives as Pakistan seeks to modernise ageing refineries and improve fuel quality.
KARACHI: Pakistan’s amended refinery policy is set to provide refiners with greater long-term earnings visibility by offering tariff protection and other financial incentives linked to the modernisation of the country’s ageing refining fleet.
According to a research report by Arif Habib Limited, the amended Brownfield Refining Policy, 2023, along with subsequent amendments introduced in February 2024 and August 2026, provides a range of incentives aimed at encouraging existing refineries to upgrade their facilities and improve fuel quality.
Pakistan’s refining sector comprises five major players — PARCO, Attock Refinery Limited (ATRL), National Refinery Limited (NRL), Pakistan Refinery Limited (PRL) and Cnergyico — with combined refining capacity of around 20.5 million tonnes per annum (MTPA), equivalent to approximately 449.4 thousand barrels per day.
Except for PARCO, which operates a mild-conversion refinery, most of the country’s refineries are ageing hydroskimming facilities. Their existing configurations result in relatively high furnace oil production and lower-quality Euro-II and Euro-III fuels.
This has constrained product flexibility and increased Pakistan’s dependence on imports of higher-quality Euro-V petrol and high-speed diesel (HSD).
Seven-year tariff protection
A key feature of the amended policy is 10% tariff protection for seven years.
Under the arrangement, a minimum customs or regulatory duty of 10% will be maintained on imported motor spirit (MS) and HSD for seven years.
Any duty imposed above the 10% threshold will be channelled into the Inland Freight Equalisation Margin (IFEM) pool.
The policy also provides for reimbursement through IFEM of customs duty paid on imported crude oil.
In addition, sales tax disallowed on refinery operations will continue to be reimbursed through IFEM, while equipment imported for refinery upgrade projects will be exempt from sales tax.
These measures are designed to improve the financial viability of refinery modernisation projects while providing greater visibility over future earnings.
Refineries required to sign upgrade agreements
Existing refineries will be required to enter into a legally binding Upgrade Agreement (UA) with the Petroleum Division within 45 days of notification of the amended policy.
The agreement will establish specific targets and timelines for refinery modernisation.
According to Arif Habib Limited, the UA will cover targets for producing Euro-V motor spirit and HSD, reducing furnace oil production and meeting project milestones.
It will also specify timelines for front-end engineering design (FEED), final investment decision (FID), financial close, and engineering, procurement and construction (EPC), along with the required refinery configuration and post-upgrade product slate.
New crude storage requirements
The amended policy also introduces crude storage requirements that refiners must meet after completing their upgrade projects.
Refineries dependent on imported crude will be required to maintain 20 days of crude storage capacity and inventory.
For refineries using locally produced crude, the requirement will be 15 days of storage capacity and eight days of inventory, together with confirmation of a 20-day local crude supply.
The requirements are intended to strengthen supply resilience and ensure refineries have adequate crude availability following their modernisation.
Upgrade incentives ring-fenced
The incentives provided under the policy will be ring-fenced through an Upgradation Account, with funds restricted to capital expenditure related to refinery upgrade projects.
The Petroleum Division will oversee the Upgradation Account, claims process and audits.
The policy also requires biannual audits, providing an additional monitoring mechanism for the use of upgrade-related incentives.
This framework is intended to ensure that financial benefits provided to refiners are directed towards approved modernisation projects rather than being used for unrelated expenditure.
Policy could improve refinery earnings visibility
The Arif Habib Limited research report noted that the amended framework broadly aligns with recent developments concerning Pakistan’s refinery sector and could improve the long-term earnings visibility of existing refiners.
The seven-year tariff protection, alongside reimbursement mechanisms and tax incentives, could provide refiners with greater certainty as they undertake major capital-intensive upgrade projects.
For the industry, the policy represents an attempt to address structural weaknesses in Pakistan’s refining capacity while encouraging investment in modernisation, higher-quality fuel production and reduced dependence on imported Euro-V petroleum products.