MoP agrees to raise deemed duty for oil refineries: upper cap set at $80 per barrel

The Petroleum Ministry on Tuesday agreed to increase deemed duty from 7.5 percent to 10 percent for oil refineries with an upper cap at $80 per barrel crude oil price in the global market. According to new proposed formula, oil refineries will not be able to get 10 percent deemed duty if crude oil price exceeds $80 per barrel in international market.
Sources told Business Recorder that a decision was taken in a meeting held in the ministry to review the deemed duty formula. Now the ministry will seek formal approval from the Economic Co-ordination Committee (ECC) of the Cabinet in its next meeting.
With the new proposed deemed duty formula, the Petroleum Ministry had withdrawn the idea of replacing deemed duty with processing fee. The government had offered processing fee of $3.5 per barrel crude oil to National Refinery Limited (NRL) and Pakistan Refinery Limited (PRL) and $5 per barrel processing fee to Attock Oil Refinery and Bosicor Pakistan Limited (BPL).
These four oil refineries in a joint letter addressed to the Petroleum Ministry had refused the said processing fee and demanded raise in deemed duty from 7.5 percent to 10 percent. These refineries claim that they are facing loss in line with the reduction in global oil prices.
Earlier the oil refineries were being given 10 percent deemed duty that was reduced to 7.5 percent on July 31, 2008 when global oil prices stood at $147 per barrel. Oil refineries were receiving more than $10 per barrel through deemed duty at that time, sources claimed.
Sources said that it was also decided in a meeting that the government would provide loans to oil refineries to expand their operations according to their capital value. The oil refineries will have to pay these loans after a five-year period. Oil refineries are not currently meeting the international standards even after receiving 7.5 percent deemed duty.
The official said that oil refineries had failed to reduce sulphur content in diesel and lead in petrol to meet the set standards. No oil refinery has set up de-sulphuration plant to upgrade the petroleum products. The government will provide loans to oil refineries to set up de-sulphuration plants to upgrade the products, sources said.
At present, there is no mechanism to monitor oil refineries on government side and after implementation of new proposed deemed duty formula, the government will monitor the operations of oil refineries. The new proposed formula will also enable the government machinery to maintain the record of the oil refineries through regular monitoring, sources added.
Differences have cropped up between oil refineries and the government over processing of different petroleum products. The government was of the view that processing fee would be given on regulated products including premier motor gasoline, HOBC, light diesel oil, kerosene oil, JP-1, JP-4 and JP-8.
The government determines the prices of these products on a monthly basis. But refineries support the implementation of processing fee on deregulated products and bi-products including furnace oil, naphtha and Liquefied Petroleum Gas (LPG). The Petroleum Ministry had also consulted the oil refineries on the issue of distribution of products to the Oil Marketing Companies (OMCs).
The refineries want to have the right to determine how much they supply to OMCs; however the government has opposed this. The government is of the view that Pakistan State Oil is major market shareholder that captures 70 percent market share; hence the bulk of the supply must go to PSO as per its market share.

Copyright Business Recorder, 2009