Byline: Sarfaraz A. Khan
Petroleum consumption in Pakistan has been booming. The demand for crude oil and refined petroleum products, such as motor gasoline and high-speed diesel, has been growing at a rapid pace. The country's crude oil refining industry plays a crucial role in satisfying the local energy needs. On top of this, the industry saves Pakistan billions in foreign exchange reserves every year, provides employment opportunities to tens of thousands, and makes significant contributions to the national exchequer in the form of duties and taxes while strengthening Pakistan's energy security.
However, the refining industry has received little support from the government in the last decade and is often at the receiving end of undue criticism, including from former policy planners. This shakes the confidence of the sector's participants, who have already invested billions in the country, and could impede the energy industry's growth.
For instance, some critics of the energy industry have claimed that the sector needs government subsidies and payouts for its profits and the state shouldn't strive for investments in oil refineries. This one sentence has two glaring misconceptions which should be corrected:
Pakistan's energy sector in general and oil refining in particular neither receive nor depend on direct subsidies or heavy payouts from the government for its survival. All local industries, however, receive some form of government support. The fertilizer industry, for instance, benefits from gas subsidies, while the automotive industry receives tariffs on vehicle imports, and the banking industry benefits from heavy government borrowings and low deposit markup rates. Oil refineries, however, receive minimal support in the form of 7.5% of duty on high-speed diesel, but since a refinery produces a number of other fuels as well, the net impact is just 2.25% on the whole barrel. This modest tariff protection for a heavily capital intensive industry which imports its raw materials is simply inadequate.
The energy sector's business model is fairly straightforward and usually profitable, although margins are underpinned by movements in oil prices. The oil and gas production sector earns profits by extracting and selling hydrocarbons.
The oil refining business turns profits by processing and turning crude oil into various refined products which are sold to oil marketing companies and other buyers. The energy sector also feeds petrochemical...