The government’s drive to deregulate petroleum prices has brought the country’s refinery sector to a policy crossroads, with industry experts arguing that the government must now choose between allowing market forces to determine refinery economics or continuing with an increasingly complex system of deemed duties, incentives, escrow accounts and administrative controls.
The debate has gained urgency as the government moves to finalise long-delayed Brownfield Refinery Policy agreements while simultaneously considering greater deregulation of petroleum-product prices. Industry and government sources told The News that the two approaches are becoming increasingly difficult to reconcile, and that uncertainty over the policy framework could put billions of dollars in planned refinery investments at risk.
Under a deregulated model, experts believe the government could gradually withdraw from determining refinery returns through tariff protection and instead establish clear fuel-quality, environmental, competition and supply-security requirements. Existing refineries could be provided with a defined six-to-seven-year transition period to complete their upgrades and meet prescribed standards. Refineries that fail to upgrade within the stipulated period could ultimately face regulatory action, including the loss of their licences, experts suggested.
The proposed approach would fundamentally change the government’s role. Rather than protecting refinery margins through deemed duties and subsequently determining how portions of those revenues are deposited and utilised via escrow arrangements, regulators would focus on ensuring that refiners invest, meet fuel specifications and compete effectively.
“The government should establish a transparent transition towards deregulation instead of simultaneously deregulating one part of the market and increasing controls over another,” a source said.
The issue has become particularly pressing because the government is currently seeking to impose a 2.5 percentage-point reduction in deemed duty on High-Speed Diesel — from 7.5 percent to 5 percent — with the financial impact on refineries estimated at around Rs29-30 billion. Refineries have rejected the retrospective application of the reduction, arguing that they were ready to sign the implementation agreements but the government failed to hold the signing ceremony on October 22, 2024.
According to senior officials, the first draft of the upgrade agreements shared with refineries requires them to bear the Rs29-30 billion impact of the deemed-duty reduction, in addition to maintaining a 20-day crude-oil stock prior to signing the upgrade projects. Industry officials argue that the penalty undermines the very investment certainty that the Brownfield Refinery Policy was supposed to provide.
They point to documentary evidence showing that refineries were prepared to sign the upgrade and escrow agreements as early as March 2024. The government, however, delayed the process because it wanted Parco to become a party to the agreements. The situation was further complicated by sales-tax exemption measures introduced in the June 2024 budget.
According to industry officials, those measures affected the commercial viability of the proposed $5 billion refinery-upgrade programme and resulted in refineries and oil marketing companies facing an estimated Rs34 billion annual loss because sales-tax inputs could not be adjusted.
The government subsequently shifted the signing deadline to October 22, 2024, but the signing ceremony was not held. Refiners, therefore, argue that imposing the deemed-duty reduction retrospectively amounts to penalising them for a delay caused largely by government-level policy and administrative decisions.
Attock Refinery Limited CEO Adil Khattak said his company was currently paying around Rs7.5 million per day as a penalty, despite having been ready to sign the agreement. He urged the government to immediately hold the signing ceremony so that the upgrade project can begin.
The issue is now being considered alongside another proposed layer of administration. The Petroleum Division has asked state-owned Inter State Gas Systems (ISGS) to sign and monitor the refinery-upgrade agreements on its behalf, replacing an earlier proposal under which the Directorate General of Oil was to act as the signing authority. The proposal has raised questions within the industry over ISGS’s suitability for the task. The company was established primarily for gas transmission and international pipeline projects, including TAPI and the Iran-Pakistan pipeline, and has no established track record in administering refinery-upgrade programmes.
“Instead of simplifying the regime, we are creating another layer of administration,” an industry executive said.
The government is also working on the mechanism for operating the incentive-package escrow accounts. The petroleum secretary is scheduled to meet the law and finance secretaries to further fine-tune the agreements, while the accounts controller is expected to determine how the incentive-package account will be operated.
Federal Minister for Petroleum and Natural Resources Ali Pervaiz Malik is scheduled to visit Karachi on Wednesday and meet senior management of Parco, Cnergyico PK Limited, NRL and PRL for briefings on their upgrade projects and outstanding issues. The meetings are expected to provide an opportunity for the government to address the long-running disputes over the upgrade agreements, deemed-duty reduction and implementation mechanism.
However, industry officials say the larger issue is no longer simply the size of the incentive package but whether Pakistan can provide a stable commercial framework for long-term refinery investment.
