Pakistan approves new refining policy to boost Euro-5 fuels output

The Pakistan government approved a new refining policy under which existing refineries will be provided incentives for the duty-free import of machinery that can help boost production of Euro-5 grade fuels, a move that is expected to help cut product imports, government sources and analysts told S&P Global Commodity Insights.

The country's cabinet committee of energy approved the policy and has received a final nod from the outgoing federal cabinet. This move would help refineries upgrade and modernize to produce environment-friendly fuels, a government document showed.

"The incentivization of refineries through duty-free machinery imports is poised to modernize and optimize facilities, fostering the adoption of advanced and cleaner refining technologies," Sumit Ritolia, refinery economics analyst at S&P Global Commodity Insights, said.

"By prioritizing the upgrading of existing refineries to manufacture Euro-V grade fuels, the government underscores its dedication to aligning with global environmental benchmarks and bolstering energy infrastructure," he added.

Pakistan's oil refining capacity stands at 450,000 b/d, which translates to about 20 million mt/year. However, actual capacity utilization is only around 10 million mt, according to the government document. This is mainly due to the decline in fuel oil demand in the country following the change in energy demand patterns for the power sector.

"It may be noted that in essence the production slate for refinery is fixed. They cannot produce just petrol and diesel. All products are produced simultaneously", the document stated.

According to the document refineries would get an exemption from customs duties and levies, surcharges, withholding tax, general sales tax on the import of the new equipment installed, as well as material to be used for refinery upgrades.

In addition, refineries can retain some of the duties instead of passing on to the government and use them for refinery upgrades, the document showed.

Under the new approved policy, refineries will aim to increase production of Euro-5 grade petrol by 99% to 21,251 mt/d and Euro-5 grade diesel by 47% to 31,288 mt/d. However, the refineries would cut fuel oil output to 3,414 mt/d from 15,417 mt currently, the document showed.

Reduced imports

Market participants added that Pakistan's overall gasoline imports could fall in the future should refinery upgrades result in an increase in domestic production.

Petroleum products contribute 31% of Pakistan's primary energy mix, with overall consumption at around 23 million mt/year. Out of this, locally produced refined products are around 11 million mt, while the remaining volume is imported, the government document showed.

The refinery upgrade plan would include setting up hydro de-sulfurization units for reduction of sulfur from diesel as well as isomerization plants for upgrading petrol quality.

The government has been urging local refineries to upgrade their plants in order to minimize production of furnace oil. However, it will require capital investment of around $4 billion-$4.5 billion.

This would require refineries to arrange funding from their own resources as well as borrowing from vendors on commercial terms. But to obtain funding, refineries will first have to improve their balance sheets, the document stated.

Pakistan's crude oil imports in dollar terms in the year ended June 30, 2023 fell 11.6% to $4.989 billion, compared with $5.598 billion in the corresponding year-ago period. Petroleum products imports declined 36.8% to $7.628 billion compared with $12.069 billion the previous year, data from Pakistan Bureau of Statistics showed.

"The new refining policy's main impact lies in potentially abating the requirement for fuel imports. Through refinery modernization and the production of Euro-5 grade fuels, dependence on foreign fuel imports will decrease," Ritolia said. "This augments trade balance and foreign reserves, while fostering energy security and a self-sustaining energy sector."

"Overall, Pakistan's refining policy shift towards producing Euro-5 grade fuels domestically has the potential to transform its fuel import and refining industry," Ritolia added. "However, successful implementation will depend on effective policy execution, industry collaboration, and continuous monitoring of outcomes."