Saudi Aramco shares terms of investing in Pakistan's greenfield refinery

• Aramco says it will only invest in Pakistan if conditions are met.
• PM Shehbaz Sharif to be briefed about development this week.
• Mega project will cost around $9.5 billion to $12 billion.

ISLAMABAD: Saudi Aramco has shared its terms with the Pakistani government of investing in a greenfield refinery that will have the capacity to refine 300,000 barrels of crude oil per day, officials of the Energy Ministry told The News.

In its terms, Aramco is willing to invest if it is provided with a 7.5% deemed duty on Mogas and diesel for the life of the project and a tax holiday for 20 years including tax exemption on the import of plant and equipment to ensure profit up to 15%.

The oil giant has also told the government in clear terms that it will only invest in Pakistan if its terms and conditions are met.

Prime Minister Shehbaz Sharif will be updated about the development for the final decision about the mega project in a meeting either to be held today or in other meetings in the current week about Aramco’s offer.

Being an incharge minister of the Petroleum Division, the premier will also be told that the part of the refining policy pertaining to upgradation of existing refineries has been finalised and is ready to be submitted for Economic Coordination Committee’s approval.

As per the finalised draft for the local refineries upgradation available with The News, the existing refineries will be extended tariff protection equal to the existing customs duty (10%) on imported Mogas and diesel. The funds that are to be through tariff protections will be utilised after the financial close for six years for the purpose of the refinery’s upgradation, which may absorb about 25% to 30% of the project cost.

The Oil and Gas Regulatory Authority (OGRA) will monitor the fund utilisation process as per their work plan and milestone subject to verification by one of the top four audit firms.

Local refineries produce refined products of around 11 MTPA (inclusive of 30% local crude processing). Deficit crude oil and petroleum products worth about $10 billion are annually imported. The indigenous and imported crude is refined by five local refineries.

Refineries are a strategic asset catering to fuel requirements of transport, energy, defence, etc, playing an effective role in an emergency situation such as pandemic and war conditions. The local refineries are required to be upgraded for producing Euro-V specification fuels and minimising the production of residual fuel (furnace oil), requiring a huge capital investment of around $4 billion to $4.5 billion and the government's fiscal support.

However, to a question, an official, who remained part of talks with Saudi Aramco, said the cost of the mega project would be in the range of $9.5 billion to $12 billion, depending upon the salient features of the project that were to be finalised once the premier took the decision on Aramco’s terms and conditions.

Authorities say if Aramco conditions are accommodated, there will be a serious impact on the country’s revenue on finished POL and crude oil. The oil giant has also asked for a waiver of the customs duty already imposed at 5% on the import of crude oil for the refinery.

The Saudi Aramco, the official said, had refused to accommodate Pakistan State Oil’s offer of 10% deemed duty for 10 years with a 10 years tax holiday for the new mega refinery.

“The Saudi Aramco in its charter of demands also asked for third-party investments in critical infrastructure to reduce CAPEX (capital expenditure) and stressed the participation of Chinese investment with their capability to de-risk the investment,” said an official. 

He added that in case PM Shehbaz accepts the incentive package asked by the Saudi firm, it would be made part of the refining policy for new refineries.

The official said if the incentive package for the new refinery asked by the Saudi oil giant was implemented, the pre-tax (internal rate of return) would stand at 15%, but the post-tax IRR would be at 14.9% and while meeting Aramco’s hurdle rate of 12-15%, the reduction tankage requirement for crude and liquid products would further increase the IRR.

Mentioning the impact of accepting Saudi Aramco conditions, the official said Pakistan might avail net foreign exchange of $9 billion in 25 years. Aramco would make the entire crude supply for utilisation in the proposed refinery. The first mega refinery of 300,000 barrels per day would be established in Pakistan and this would open the door for further investment from other parts of the world, especially from China.

“The establishment of the greenfield refinery will shield Pakistan from any volatility in the supply chain of petroleum products across the country, in the future,” he said, adding that the incentives desired by Aramco would also be applicable to all other potential investors to set up a greenfield refinery. 

Therefore, consensus on the said terms of Saudi Aramco is yet to be developed, which will subsequently be added to the draft Oil Refining Policy for greenfield and new refineries.