ISLAMABAD: Four of five local refineries on Thursday finally entered into formal agreements with the government to upgrade their refining technologies for cleaner product quality and increased production, with an estimated investment of about $5 billion in five years.

The upgradation agreements were signed under the Brownfield Petroleum Refining Policy 2026, which was approved in the last week of July after a deadlock spanning over seven years.

The formal agreements were signed by the managements of four refineries — Attock Refinery, National Refinery, Pakistan Refinery and Cnergyico Petroleum. They were also signed by the Inter State Gas Company (ISGC), a subsidiary of the petroleum division and a designated entity to execute the agreements and monitor the implementation process.

Informed sources said the fifth local refinery, the Pak Arab Refinery (Parco) — a joint venture of Pakistan and Abu Dhabi — was not yet ready for the new upgrade, as it believed its technology to be modern.

However, if and when it signs the upgradation agreements as well, the investment volume is expected to reach $6bn.

The chairman of the Energy Committee of the Overseas Investors Chamber of Commerce and Industry (OICCI) and the CEO of Attock Refinery, Adil Khattak, welcomed the signing of the upgradation agreements.

He termed it a historic milestone for the country’s refining industry to begin tangible work on “arguably the largest coordinated industrial investment programme ever undertaken in Pakistan”.

“These projects will fundamentally modernise Pakistan’s refining infrastructure, enable production of cleaner Euro-V fuels, substantially reduce furnace oil production, replace significant quantities of imported petroleum products and strengthen the country’s energy security,” Khattak said.

He recalled that the journey began with the first draft of the Refining Policy in December 2019, followed by its approval in August 2023 and subsequent amendments before finally reaching implementation today — almost seven years later.

“The delay has come at a considerable cost. Industry estimates indicate that refinery upgradation could save Pakistan around $1.5bn annually in foreign exchange,” he said.

The Attack Refinery CEO noted that recent geopolitical developments had reinforced something that the refining industry had emphasised for years. This meant domestic refining capacity was not merely a commercial consideration but a strategic national asset, he said.

Khattak added that the journey ahead would be even more challenging as the five refineries translated their commitments into financing, engineering, procurement, construction and commissioning of the complex projects within the stipulated five-year period.

The new policy was approved by the Cabinet Committee on Energy, led by Prime Minister Shehbaz Sharif, on July 28.

Alongside tax incentives and stability clauses to protect investment, it provides for foreign exchange accounts for imports of machinery against the export of furnace oil, and enhances onshore and offshore storage for greater energy security.

How will it work?

Under the policy, which now supersedes all previous refining policies, the existing refineries have to improve product quality, quantity and product mix through upgradation.

As such, the total production of motor spirit (petrol) and high-speed diesel (HSD) will significantly improve, while that of furnace oil is reduced.

As such, total petrol production would increase by 72pc to 18,400 tonnes per day (TPD) from 10,700 TPD. HSD output would rise by 39pc to 29,520 TPD from the current 21,240 TPD, while furnace oil production would drop by 63pc to 5,714 TPD from 15,417 TPD.

All existing refineries would upgrade, modernise and expand their refineries to produce environmentally friendly fuels as per Euro-V specifications.

Euro V standards permit only 10 parts per million (ppm) of sulphur in gasoline and diesel. Euro IV allows 50 ppm while Euro III allows 150 ppm in gasoline and 350 ppm in diesel.

Refineries are also to maximise production of motor gasoline, diesel or other value-added products, if any, by minimising furnace oil and other fuels. In return, they would be entitled to policy incentives.

Under the fiscal regime, there is to be a minimum customs duty or regulatory duty of 10 per cent for a period of seven years on motor gasoline and diesel imported into the country.

Any customs duty imposed over 10pc and reflected in the ex-refinery price will be deposited in the Inland Freight Equalisation Margin (IFEM) pool. In case any refinery is not eligible to avail the incentives provided in this policy, it will be bound to deposit the same in IFEM.

Customs duty on crude oil will be reimbursed to refineries through IFEM. The refineries will be allowed 10pc tariff protection or deemed duty applicable on motor gasoline and diesel’s ex-refinery price for seven years from the date of signing of the agreement, and opening of the joint Escrow Account with the Oil and Gas Regulatory Authority (Ogra) within 90 days of notification of the amendments in the policy.

However, 2.5pc of the deemed duty on diesel and a 10pc incremental incentive on motor gasoline is to be deposited by refineries in the Escrow Account maintained by Ogra and the respective refinery jointly in the National Bank of Pakistan, specifically to be utilised for upgradation projects.

Until the opening of the said account, the incremental incentive shall be deposited in the IFEM. The prevailing 7.5pc deemed duty on HSD for sustainability shall continue after the seven-year incentive period for 20 years or till deregulation, whichever is earlier.

Due to the exempt status of petroleum products, any disallowed sales tax related to refinery operations, confirmed by the Federal Board of Revenue (FBR), shall continue to be reimbursed through IFEM for FY26 until the validity of upgrade agreements to be executed under the amended policy. Equipment to be installed or material to be used in the upgradation project will be exempted from sales tax.

After upgradation, the refineries would be required to ensure crude stocks of at least 14 days’ equivalent of their capacity at all times. Refineries relying on the import of crude oil will ensure an additional five days cover at sea at all times.

Refineries will be allowed to sell their products to any oil-marketing company (OMC) licensed by Ogra, as well as to export surplus petroleum products with respect to domestic demand subject to the authority’s approval.

There will be binding agreements between the refineries and OMCs for sale and purchase of major products (motor gasoline and HSD) based on product review meetings to ensure a smooth oil supply chain.

The petroleum division is to notify Euro-V fuel specifications for compliance after the upgrading of the refineries within one month of the agreement signing.

In 2020, the state-owned Pakistan State Oil (PSO) became the first OMC to upgrade the fuel standard to Euro-V. The petroleum ministry had noted then that Euro-V standard fuels reduce harmful vehicle emissions by massively cutting down Sulphur and Benzene content.