Karachi, August 26, 2022 (PPI-OT): Pakistan Refineries: What to expect
As super profits of refiners begin to cool off, the recent re-emergence of the long-awaited refinery policy has spurred life into the sector’s prospects once more.
Keeping in view the aforementioned objectives, various incentives such as attractive pricing along with a pathway for future deregulation is in the works.
More than any increases in gross margins either through cracking spreads/ duty protections, it is the decontrol of fuel prices that is expected to be the positive trigger going forward.
In terms of pricing, ATRL turns out to be the major beneficiary of increase in effective duty protection on MS/HSD due to the company’s retail fuel yields outperforming other refiners in the listed space, with average yields during the outgoing quarter standing at 38%/38% for MS/HSD, respectively.
For the incentives regarding up gradation, CNERGY turns out to be the major beneficiary with the company meeting minimum capacity requirement set for up gradation (100k/bpd requirement vs 150k/bpd company capacity) and 10-year tax holiday incentive.
Refining Policy has much to offer:
As super profits of refiners begin to cool off, the recent re-emergence of the long-awaited refinery policy has spurred life into the sector’s prospects once more. Petroleum division recently asked for the country’s top five refiners to provide a fresh analysis and the necessary adjustments for the previously introduced policy draft in 2021. The said policy is expected to liberate the sector as government plans to incentivize up gradation of local refineries along with future investments of new ones.
Keeping in view the aforementioned objectives, various incentives such as attractive pricing along with a pathway for future deregulation is in the works. Other features of the policy would be 5/10 year tax holidays and the introduction of duty protections on MS and HSD (10% each) vs 0% on crude oil, in order to incentivize refiner profits.
For perspective, currently there is 5% duty on import of crude oil while for MS and HSD there is 5% and 13% (inclusive of 7.5% of deemed duty) effective duty, respectively. The extra profits through said ’duty protection’ are to be accumulated in the re- serve account to be specifically used as funds for up gradation costs, for 5-years from construction beginning.
Deregulation may be the key:
More than any increases in gross margins either through cracking spreads/ duty protections, it is the decontrol of fuel prices that is expected to be the positive trigger going forward. We believe this may bring about operational efficiencies for both the OMCs and Refiners alike, where previously there was no incentive to promote efficiencies due to fixed margins.
This is expected to push Refiners/OMCs to become conscious of better product sourcing and set pricing in line with their refining performances. Also, deregulation may not only be the end of future burdens such as price differential claims (PDC), but havocs such as fuel shortages and strikes may no longer exist due to an overall margin liberated regime.
Going forward, the said measures are expected to provide the much needed relief to the overall petroleum sector and will probably draw investor confidence due to limited influence of government, eventually bringing about the much-needed capital to the sector to drive its modernization/ expansion going forward. To note, the local refining industry currently needs around $US4-5bn to expand and upgrade their plants.
Investment Perspective:
The aforementioned policy has the potential to transform the local refinery landscape, where local refiners have particularly been provided a lifeline. In terms of pricing, ATRL turns out to be the major beneficiary of increase in effective duty protection on MS/HSD due to the company’s retail fuel yields outperforming other refiners in the listed space, with average yields during the outgoing quarter standing at 38%/38%.
In terms of pricing, ATRL turns out to be the major beneficiary of increase in effective duty protection on MS/HSD due to the company’s retail fuel yields outperforming other refiners in the listed space, with average yields during the outgoing quarter standing at 38%/38% for MS/HSD, respectively.
Although, PRL is the most further along in its up gradation journey as the company is expected to complete its engineering design study and has already appointed a financial advisor to finance the said projects, estimated to cost $US1.2bn, as per news flows.