According to a summary of the Petroleum Division on the new refining policy, a tariff protection incentive given to local refineries could increase the price of motor gasoline (MS) and high-speed diesel (HSD) by Rs3 per liter. The summary has been prepared for the Cabinet Committee on Energy, scheduled for next week. The incentive tariff protection equivalent to an incremental custom duty on MS and HSD at the rate of 10% and 25% respectively, would raise the consumer price of both products by Rs3 per liter. However, the impact on prices could be reduced by optimally using the white oil pipeline.
The summary noted that the government introduced Petroleum Policy 1997 in October 1997, which was amended in 2002. The policy replaced the minimum 10% guaranteed rate of return for refineries with a tariff protection formula. In 2008, the tariff protection was reduced to 7.5% on HSD only. The summary stated that the tariff protection couldn’t attract investment in the sector in the form of new refineries or the upgrading of existing ones and requires improvement.
The summary said that a new policy for attractive incentives for the establishment of new refineries is under process for finalization and would be placed before the Economic Coordination Committee of the Cabinet. In the case of existing refineries, necessary changes have been incorporated into the policy after deliberations with the refineries and government bodies. It also noted that five refineries refine indigenous and imported crude, and have been upgraded periodically to meet fuel specifications.
The government has urged local refineries to upgrade their facilities to produce Euro-V specification fuels while reducing the production of furnace oil. This upgrade would require a significant capital investment of $4 to $4.5 billion. The refineries are responsible for securing their own funding, which may involve borrowing from local lenders at commercial rates.
To qualify for funding, the refineries must improve their balance sheets. The summary notes that the local refining sector is at risk of collapse and shutdown if the government does not provide financial support to improve the refineries’ financial position. In this event, approximately 70,000 barrels per day of domestic crude oil production would need to be exported, and multiple petroleum products would need to be imported, further complicating port congestion.
This situation could discourage investment in the oil and gas sector, create vulnerability in the supply chain of strategic fuels, and place an additional burden on the balance of payments.
