Pakistan refineries protest reduced products duties

By an OGJ correspondent
KARACHI, Aug. 24 -- The Economic Coordination Committee (ECC) of Pakistan has rejected a claim by the country's refineries that they face loss under the reduced "deemed duty" (ad valorem surcharge) that they now are allowed to charge. ECC asked the Ministry of Petroleum and Natural Resources to submit each refinery's financial results separately to determine the impact of the reduced-duty formula on the refineries.

Pakistan's five refineries have a total refining capacity of 267,000 b/d. A sixth is under construction and expected to begin products production for export, in spring 2009. Four of the refineries meet the country's domestic market demand for petroleum products.

A report on refineries' profit considered by ECC in one of its previous meetings contradicted the refiners' claims of facing huge losses, despite an enormous increase in the cost of imported crude oil feedstocks. ECC indicated that each refinery's profit had increased 15-18 times during the last 6 years. This kind of profit is only possible when a section of the economy enjoys protection such as the deemed duty, the committee said.

Following the ECC directive, the ministry will ask the refineries to submit their financial results for the first quarter of the current fiscal year. These financial results will be presented to ECC for its consideration.

New refinery
The outcome also will affect the new refinery under construction. Indus Refinery Ltd. (IRL) is scheduled to start commercial production of petroleum products in March 2009 from a 100,000 b/d refinery under construction near Karachi. IRL's foreign investors hold 86.7% of the shareholding, while local sponsors hold 13.3%.

IRL CEO Sohail Shamsi said the company's investment was based on the existing formula and would be wasted if the refinery could not make a profit. He said Pakistan's refineries were operating on low fixed margins, contrary to the belief that they made windfall gains.

In 2007 gasoline demand in Pakistan was declining, so the refinery plans to export its products. It would produce 1 million tonnes/year of kerosene, 1.5 million tonnes of low-sulfur diesel, and 500 tonnes/day of liquefied petroleum gas. It also will produce propane, butane, high quality unleaded gasoline, and aviation fuels.

Oil consumption in Pakistan recorded a growth of 8.3% in the first half of FY08 as total volumes settled at 9.07 million tonnes during this period against 8.38 million tonnes registered in the same period in FY2007.

However, imported crude feedstock costs have risen greatly due to high oil prices in the international market, which affects refinery loss scenarios. Pakistan's Bureau of Statistics reported that the country's oil import bill, which swelled by 87.41% to $1.287 billion in July 2008 over $686 million in the same period last year.

The year's total oil import bill was $11.3 billion in 2007-08, up 55.14% over the 2006-07 total of $7.34 billion.

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