Karachi: Attock Refinery Limited (ATRL) has postponed its major refinery upgrade project. The upgrade aims to boost high-value fuel production, including petrol and diesel. The delay stems from an unresolved tax adjustment issue critical to the project’s financial viability.
ATRL officials explained that tax changes in the FY25 budget now prevent input sales tax adjustments on products like petrol and diesel. Previously, these products were zero-rated, allowing ATRL to make such claims. The budget reclassified them as exempt, creating a financial hurdle.
Topline Securities analyst Sunny Kumar commented after a recent briefing, saying, “Management highlighted a delay in the upgradation agreement due to a sales tax issue.” He added that, once completed, the project would increase premium gasoline output by 25% and meet Euro-V standards.
Industry-Wide Response and Government Deadline
The refinery sector has raised the tax issue with the Special Investment Facility Council (SIFC), which set a November 12, 2024, deadline to resolve it. “Management is confident the sales tax issue will be addressed soon, allowing the project agreement to proceed,” noted Kumar.
The upgrade’s projected cost may be lower than initially estimated, as interest rates have decreased from 18% to 15% since the feasibility study. ATRL plans to fund the project with a 30% equity and 70% debt mix. As of September 2024, ATRL reported Rs80 billion in cash reserves, and management indicated there are no restrictions on dividends.
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Changes in Gross Refining Margins (GRMs)
ATRL reported gross refining margins (GRMs) of $9 per barrel for the first quarter of FY25, down from $14 in FY24 and a high of $18 in FY23. Historically, these margins have fluctuated from highs to lows, even entering negative territory.
The Economic Coordination Committee of the Cabinet (ECC) approved an allocation of 50,000 barrels per day of Southern Crude for ATRL, with costs added to the Inland Freight Equalization Margin (IFEM).
Furnace Oil Exports and Heavy Crude Processing
In FY24, ATRL exported 80,000 tonnes of furnace oil and set a target to export 100,000 tonnes in FY25. These exports are expected to generate foreign exchange, offsetting some of the refinery’s upgrade costs. ATRL is the only refinery in Pakistan capable of processing heavy crude oil, with furnace oil comprising 15-17% of its output.
Deregulation of Petroleum Prices
ATRL supports the deregulation of petroleum prices if local refinery volumes are prioritized over imports. In a deregulated market, the IFEM would be eliminated, benefiting ATRL due to its strategic location. Pakistan Refinery Limited (PRL) noted last month that the government’s decision to bar tax offsetting on crude oil has increased refinery costs. This restriction, introduced under the Finance Act 2024, has posed challenges for funding and financing refinery upgrades.
ATRL and other industry players are pushing the government, especially the FBR, to restore taxes on petroleum sales. PRL and other refineries have also asked the SIFC for help. The SIFC directed the Petroleum Division to resolve the issue by November 12, 2024.
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