Pakistan Refinery Sector
A Detailed Investor Essay on Refining Process, Product Slate, Margins, Policy Incentives, Sales Tax Issue, Euro-V Compliance and Upgrade Economics
Note: This essay on Pakistan’s refinery sector is prepared solely for informational and educational understanding and should not be treated as a buy/sell recommendation, investment advice, or a formal research report.Readers are advised to independently verify all information, a ssumptions, and figures before making any investment decision and should not rely solely on this document.
Contents
1.Executive summary
2.Where refineries fit in Pakistan's energy chain
3.Crude oil, natural gas, LNG, LPG and condensate
4.What a refinery actually does
5.Step-by-step refining process
6.Refinery technologies and why Pakistan is under-converted
7.Pakistan refinery-wise context
8.Why refineries cannot produce only petrol and diesel
9.Product slate: energy and non-energy products
10.Naphtha, petrochemicals and Pakistan's missing value chain
11.Lubricants and why NRL is different
12.Gross refining margins and product spreads
13.Why furnace oil/RFO is the structural problem
14.Pricing, import parity, PSO reference and regulation
15.Deemed duty, customs duty, escrow and IFEM
16.Crude oil import duty issue
17.Sales tax input-output adjustment issue
18.Euro-V compliance and penalties
19.Dividend cap, special reserve and the new escrow discipline
20.Other earnings drivers investors should not miss
21.Upgrade policy, capex and future product slate
22.Investor checklist and conclusion
23.Source notes
1.Executive summary
Pakistan's refinery sector is strategically important but commercially complex. A refinery is not a simple plant that buys crude oil and sells petrol at a guaranteed margin. Refinery earnings are driven by the spread between the cost of crude oil and the value of the products produced from that crude. This spread is called gross refining margin, or GRM. However, GRM is not one single spread. It is the weighted outcome of several product spreads: petrol, diesel, jet fuel, naphtha, furnace oil, LPG, asphalt, lubricants and other by-products.
The most important investment problem in Pakistan is that most refineries are old hydroskimming refineries. They can separate crude into different products and improve some product quality, but they have limited ability to deeply convert heavy residue and furnace oil into high-value petrol and diesel. Because all products are produced simultaneously from crude, a refinery cannot simply decide to produce only MS and HSD. If it processes crude, it will also produce furnace oil, naphtha, LPG, kerosene/jet, asphalt and other streams. Therefore, when furnace oil demand falls, refineries often have to reduce total throughput, even if petrol and diesel demand exists.
For investors, the sector must be understood through five big lenses. First, the technological lens: whether the refinery is hydroskimming, mild-conversion or deep-conversion. Second, the margin lens: diesel and petrol spreads are usually positive, while furnace oil spreads are often negative. Third, the policy lens: deemed duty, IFEM, Euro-V compliance, escrow accounts, sales tax and crude duty reimbursement can materially affect earnings and cash flows. Fourth, the operational lens: utilization, crude slate, inventory gains/losses, exchange rate, finance cost and maintenance shutdowns can distort quarterly profits. Fifth, the strategic lens: upgrades can transform the sector by reducing furnace oil and increasing Euro-V petrol and diesel.
2.Where refineries fit in Pakistan's energy chain
Pakistan's energy chain should be divided into two separate but related flows. The first flow is the liquid petroleum chain: crude oil or condensate is produced locally or imported, transported to refineries, processed into petroleum products, and then sold through oil marketing companies. The second flow is the gas chain: natural gas is produced from gas fields, processed in gas plants, and sent into the transmission/distribution network or directly to customers such as fertilizer, power and industry.
Chain Input Processing facility Main outputs PSX/company relevance
Liquid petroleum chain Crude oil and condensate Oil refinery MS/petrol, HSD/diesel, jet fuel, kerosene, FO, LPG, naphtha,
asphalt, lubes Refineries: PRL, NRL, ARL/ATRL, Cnergyico;
PARCO as unlisted
Gas chain Natural gas Gas processing plant Pipeline gas, LPG/NGL,
condensate, sulphur E&P companies: OGDC, PPL,
MARI, POL
This distinction is essential. When an E&P company such as OGDC or PPL produces gas, that gas normally does not go to an oil refinery. It goes to a gas processing plant, where water, impurities, CO2, H2S, condensate and recoverable LPG/NGL streams may be removed. When the same E&P company produces crude oil or condensate, the liquid stream can be delivered to an oil refinery or liquid-product handling system.
Refineries are therefore mainly liquid hydrocarbon processors. Gas companies may produce LPG from wet gas, and refineries may also produce LPG from crude processing, but these are not the same as LNG. LPG is mainly propane and butane. LNG is mostly methane that has been cooled to a liquid for shipping and then regasified for use in gas pipelines.
3.Crude oil, natural gas, LNG, LPG and condensate
Before analyzing refineries, an investor must understand the raw materials and related products. The terms crude oil, condensate, natural gas, LPG and LNG are often used together, but they are not interchangeable.
Term Main composition Physical form Where it comes from Where it goes
Crude oil A broad mixture of
hydrocarbons, from light molecules to heavy residue Liquid Oil reservoirs and associated production Oil refinery
Natural gas Mostly methane, with possible ethane, propane, butane and
impurities Gas Gas reservoirs or associated gas from oil
fields Gas processing plant, then pipeline network
Condensate Very light liquid hydrocarbons, often pentane-plus/naphtha-
range Liquid at surface conditions Gas-condensate reservoirs or wet gas streams Refinery, petrochemical/blending use or
liquid handling
LPG Mainly propane and butane Liquefied under
pressure Refineries and gas
processing plants Cylinders, cooking, industry,
autogas in some markets
LNG Mostly methane Liquefied by cooling to very low
temperature Natural gas liquefaction plants/imported LNG
cargoes Regasification terminal and gas pipeline network
Condensate deserves special attention. It is not ordinary natural gas and it is not exactly the same as crude oil. It is a very light liquid associated with natural gas. A condensate-rich field may produce gas plus condensate. The gas goes into gas processing and then pipelines, while the condensate can be used as refinery feedstock. Because condensate is light, it usually gives more naphtha and light products and less diesel/residue than heavier crude. That can be useful or harmful depending on refinery configuration and product demand.
For investors, the important rule is: gas needs gas processing; crude oil and condensate need liquid handling and can be refined. This is why a refinery's feedstock slate can include imported crude, local crude and some condensate, while normal methane-rich gas does not enter the crude distillation column.
4.What a refinery actually does
A refinery performs three core functions: separation, treatment and conversion. Separation means the refinery separates crude oil into different fractions according to boiling range. Treatment means it removes sulphur, nitrogen, metals and other impurities, or improves quality to meet product specifications. Conversion means it breaks heavy low-value molecules into lighter high-value molecules. The older the refinery, the more it relies on separation and simple treatment. The more advanced the refinery, the more it can convert bottom-of-the-barrel material into valuable fuels.
Function Simple meaning Example units Investor importance
Separation Separate crude into fractions by
boiling point Crude Distillation Unit (CDU),
Vacuum Distillation Unit (VDU) Determines the natural starting
product slate
Treatment Clean and improve streams Naphtha hydrotreater, DHDS, amine
treating, sulphur recovery Required for Euro-V and product
quality
Conversion Break heavy streams into lighter
products FCC, RFCC, hydrocracker, coker,
resid hydrocracker Reduces FO and improves MS/HSD
yield
The official brownfield refinery policy also emphasizes this core reality: the product slate is effectively fixed by the crude and refinery configuration, and all products are produced simultaneously. Therefore, a Pakistani refinery cannot merely choose to produce petrol and diesel while avoiding furnace oil. To change the slate, it must invest in conversion technology.
5.Step-by-step refining process
5.1Crude receipt, storage and testing
The process begins with crude oil or condensate receipt. Crude may come from local E&P companies or through imports under supply arrangements. Coastal refineries are naturally linked with imported crude logistics, while upcountry refineries such as Attock Refinery have stronger linkage with local crude from northern areas. Before processing, the refinery checks crude quality: API gravity, sulphur, water and salt content, metals, sediment, crude assay, yield pattern and compatibility with existing units.
5.2Desalting
Crude contains water, salts and sediments. If these are not removed, they can cause corrosion, fouling, catalyst poisoning and equipment damage. Therefore, crude first passes through a desalter, where water and salts are removed. This step is not usually highlighted in investor presentations, but it is operationally important because poor crude quality can create maintenance issues and reduce efficiency.
5.3Heating and atmospheric distillation
After desalting, crude is heated in a furnace. The purpose is not to burn the crude but to heat it so that lighter molecules vaporize. The hot crude then enters the atmospheric distillation column. The column is hot at the bottom and cooler at the top. Lighter products rise and condense higher in the column; heavier products remain lower.
Distillation cut Typical position/range What it becomes Investor note
Light gases / propane /
butane Top of column Refinery fuel gas, LPG Small versus MS/HSD, but useful by-
product
Light naphtha Upper column Isomerate / petrol blending Octane improvement through isomerization
Heavy naphtha Upper-middle column Reformate / petrol blending /
BTX feed Reformer also produces hydrogen
Kerosene Middle column Jet fuel / kerosene Important for aviation and defence
Diesel cut Lower-middle column HSD after hydrotreating/DHDS Major positive margin product
Heavy gas oil Lower column FCC/hydrocracker feed if
available Key conversion feed
Residue Bottom FO, asphalt, VDU/coker/resid
feed Pakistan's biggest structural issue
5.4Light ends and LPG
The lightest gases include methane, ethane, propane and butane. Methane and ethane are usually used as refinery fuel gas. Propane and butane can be recovered as LPG. Butane may also be used for petrol blending where specifications allow. Refineries do produce LPG, but in Pakistan it is normally much smaller than MS, HSD and FO. Therefore, LPG is rarely the main investment driver for refineries.
5.5Naphtha processing
Naphtha is one of the most important intermediate streams. Light naphtha usually has low octane and may go to an isomerization unit. Isomerization rearranges molecules into higher-octane components, making light naphtha more valuable for petrol blending. Heavy naphtha usually goes through a naphtha hydrotreater and then a reformer or platformer. The reformer produces high-octane reformate for petrol blending and also produces hydrogen, which is useful for hydrotreating and desulphurization units.
5.6Kerosene and jet fuel
The kerosene range cut can become kerosene or jet fuel. Jet fuel must meet strict specifications, including cleanliness, stability, smoke point, freezing point and sulphur-related requirements. Pakistan's refineries have historically played an important role in supplying jet fuel for aviation and defence needs.
5.7Diesel and DHDS
The diesel cut is one of the most important streams in Pakistan. Raw diesel usually contains sulphur and requires diesel hydro-desulphurization (DHDS) or hydrotreating to meet cleaner fuel specifications. DHDS uses hydrogen, catalyst, temperature and pressure to remove sulphur. This is central to Euro-V compliance and to the refinery upgrade program.
5.8Heavy gas oil, vacuum distillation and residue
After diesel, the refinery receives heavier material such as heavy gas oil and atmospheric residue. Atmospheric residue may go to a Vacuum Distillation Unit (VDU), which separates heavy material under lower pressure so that it can be processed without excessive thermal cracking. VDU produces vacuum gas oils and vacuum residue. In advanced refineries, these streams can go to FCC, hydrocrackers, cokers or resid hydrocrackers. In older Pakistani refineries, much of this heavy material ends up as furnace oil or asphalt because deep conversion capacity is limited.
6.Refinery technologies and why Pakistan is under-converted
The difference between refinery technologies is the difference between merely separating a barrel and upgrading a barrel. This distinction is the key to understanding why Pakistan's refineries struggle when furnace oil demand falls.
Technology type What it can do Typical units Main limitation
Topping refinery Mainly separates crude CDU only or limited facilities Produces large low-value residue;
little quality improvement
Hydroskimming
refinery Separates crude and improves
some product quality CDU, reformer, hydrotreating,
isomerization Still produces too much
FO/residue
Mild-conversion
refinery Adds some conversion beyond
hydroskimming Some cracking/conversion
support Better than hydroskimming but
not full deep conversion
Deep-conversion
refinery Converts heavy streams/residue
into lighter products Hydrocracker, FCC/RFCC, coker,
resid hydrocracker Very high capex and execution risk
Pakistan's issue is that most existing refineries are hydroskimming, while PARCO is mild-conversion. Hydroskimming refineries can improve naphtha quality and desulphurize diesel, but they cannot materially destroy the bottom of the barrel. The result is a product slate that remains too exposed to furnace oil.
Unit What it does Relevance for Pakistan
CCR / catalytic reformer /
platformer Improves heavy naphtha into high-octane
reformate Supports petrol quality and hydrogen supply
Isomerization Improves light naphtha octane Converts naphtha into higher-value petrol blendstock
DHDS Removes sulphur from diesel Required for cleaner diesel/Euro-V trajectory
FCC / RFCC Cracks heavy gas oil/residue into petrol, LPG
and lighter products Helps reduce low-value heavy streams
Hydrocracker Uses hydrogen to convert heavy streams into
diesel, jet and naphtha Very important for increasing HSD/jet and lowering FO
Coker Thermally cracks residue into lighter liquids
and pet coke Strong bottom-of-barrel solution
Resid hydrocracker Deeply upgrades residue using hydrogen High capex but directly addresses FO problem
7.Pakistan refinery-wise context
Pakistan's refinery sector is not uniform. Each refinery has different crude sourcing, technology, product slate, balance sheet, upgrade potential and non-energy product exposure.
Refinery Simplified profile Investor interpretation
PARCO Largest and most modern operating refinery;
mild-conversion; important for national supply Better configuration than hydroskimming peers,
but still needs deeper conversion to reduce FO
Attock Refinery (ARL/ATRL) Upcountry refinery linked with local crude; has quality-improvement units such as isomerization
and DHDS Local crude linkage is useful, but FO/product slate and upgrade execution remain key
Pakistan Refinery (PRL) Karachi-based hydroskimming refinery; has CDU,
hydrotreating, platformer and isomerization units Investment case depends heavily on upgrade
project and reduction of FO
National Refinery (NRL) Fuel refinery plus two lube refineries; also has
specialty products/BTX angle Lube base oil and specialty products create a
different margin profile versus fuel-only refineries
Cnergyico Largest nameplate capacity but utilization and working capital are central issues Capacity alone is not enough; investors must track utilization, crude slate, finance cost and upgrade
path
The sector should not be ranked only by capacity. A refinery with large capacity but low utilization and high FO burden may be weaker than a smaller refinery with better product slate, crude access, lower finance cost and specialty products. For investors, the real comparison is yield quality, conversion depth, policy eligibility, upgrade financing and cash-flow resilience.
8.Why refineries cannot produce only petrol and diesel
A common misunderstanding is that refineries can increase petrol or diesel output whenever they want. In reality, crude oil has a natural product distribution. When a refinery processes crude, it produces a basket of products. Petrol and diesel are only part of that basket. The refinery also produces naphtha, kerosene, jet fuel, LPG, furnace oil, asphalt and other streams.
This matters because Pakistan's demand problem is not simply insufficient petrol/diesel production. The problem is that old refineries produce too much furnace oil along with those fuels. When furnace oil demand declines, storage fills up and offtake becomes difficult. Since the refinery cannot stop only FO while continuing MS/HSD at full rate, it often has to reduce total throughput. Lower throughput reduces fixed-cost absorption and weakens profitability.
9.Product slate: energy and non-energy products
Refinery products can be divided into energy products and non-energy/by-products. Energy products dominate revenue and GRM. Non-energy products can still be important because they improve the value extracted from the barrel and may provide margin support where they are unregulated or specialty in nature.
Category Products Main uses Investor importance
Energy products MS/petrol, HSD/diesel, jet fuel,
kerosene, FO, LDO, LPG Transport, agriculture, aviation,
power, domestic/industrial fuel Main GRM driver
Non-energy products Naphtha, asphalt/bitumen, lube base oil, wax, sulphur, solvents, BTX, extract oils Petrochemicals, roads, lubricants, chemicals, tyres, textiles Secondary for most refineries, but important for
NRL and barrel value
MS and HSD are the high-priority retail fuels. Jet fuel is strategically important. Furnace oil is the weak product because demand has declined sharply in the power sector. LPG is useful but usually not the main refinery output. Naphtha can be used for petrol blending or petrochemicals. Asphalt and bitumen are linked to construction and road activity. Lube base oils are especially important for NRL.
10.Naphtha, petrochemicals and Pakistan's missing value chain
Naphtha is a light liquid hydrocarbon fraction produced during crude distillation. It sits between LPG/light gases and kerosene/diesel in the refinery chain. It is not automatically a final product. It is an intermediate stream that can either be upgraded into petrol blending components or used as feedstock for petrochemicals.
Naphtha route Process Output Value implication
Fuel route Isomerization and reforming Isomerate and reformate for petrol
blending Improves petrol yield/quality
and margins
Petrochemical route Steam cracking / aromatics extraction Ethylene, propylene, butadiene, BTX Creates plastics, synthetic fibre, rubber, dyes, solvents
and chemicals
Export/feedstock route Sale as naphtha Naphtha sold to external buyers Lower value than integrated petrochemical conversion if
spreads are weak
In an integrated petrochemical complex, naphtha can be converted into ethylene and propylene. These building blocks then become polyethylene, polypropylene, PVC, synthetic fibres, rubber, packaging materials, auto parts, electronics components, textile inputs, dyes, pigments and many other industrial products. This is why crude oil is not only an energy story; it is also a petrochemical and industrial materials story.
Pakistan currently captures only part of this value chain. Existing refineries produce naphtha, but the country does not yet have a large world-scale naphtha cracker integrated with refineries. Some naphtha is upgraded into petrol through isomerization/reforming, some may be exported or sold, and NRL has a limited BTX/aromatics link. The long-term opportunity is to move from fuel-only refining toward deep conversion plus petrochemical integration.
Petrochemical building block Produced from Downstream use
Ethylene Naphtha or ethane cracking Polyethylene, PVC, ethylene glycol, polyester, packaging,
detergents
Propylene Naphtha cracking or FCC/RFCC Polypropylene, auto parts, fibres, packaging, acrylics
Butadiene Naphtha cracker C4 stream Synthetic rubber, tyres, gloves, hoses
Benzene Reformate/BTX extraction Styrene, nylon intermediates, detergents, solvents
Toluene Reformate/BTX extraction Solvents, coatings, chemicals
Xylene/PX Aromatics chain PTA, PET, polyester fibre, bottles, textile
11.Lubricants and why NRL is different
Lubricants are among the most important non-fuel refinery products. The important distinction is between lube base oil and finished lubricants. A lube refinery produces base oil. Additives are then mixed with base oil to produce finished lubricants such as engine oil, gear oil, hydraulic oil and industrial oils.
Term Meaning
Lube base oil Refined oil produced by a lube refinery; the base material for lubricants
Additives Chemical packages added to improve viscosity, cleanliness, anti-wear properties and performance
Finished lubricant Final product used in vehicles and machines, such as engine oil, gear oil and industrial oil
Lube base oil is not produced from light naphtha. It comes from heavier, suitable crude fractions. A lube refinery typically uses atmospheric distillation, vacuum distillation, propane deasphalting, solvent extraction, dewaxing and
hydrofinishing. Vacuum distillation separates heavy lube distillates. Propane deasphalting removes asphaltic material. Furfural extraction removes undesirable aromatic/unstable components. MEK dewaxing removes wax and improves pour point. Hydrofinishing improves color and stability.
NRL is different from other listed refineries because it has two lube refineries in addition to its fuel refinery. This makes its margin profile different. Fuel refining margins depend mainly on MS/HSD/FO spreads, crude cost, deemed duty and utilization. Lube margins depend more on base oil prices, grade mix, local transport and industrial demand, imports, exports, feedstock quality, solvent and hydrogen cost, and by-product recovery. That is why NRL can sometimes receive support from the lube business even when the fuel segment is under pressure.
Lube-related output How it is produced Use
Lube base oil Vacuum distillation + extraction + dewaxing +
hydrofinishing Engine oils and industrial lubricants
Slack wax Separated during dewaxing Candles, packaging, polishes, rubber,
board/coating applications
Process/extract oils From extraction/aromatic streams Tyres, rubber goods, industrial formulations
Asphalt/bitumen Heavy residue/deasphalting and air blowing Roads, roofing, waterproofing
12.Gross refining margins and product spreads
GRM is the main operating spread in refining. However, it is not the spread of one product. A refinery processes a barrel of crude and sells multiple products. Therefore, GRM is a weighted-average margin from the entire product basket.
This is why product mix matters so much. Diesel, petrol and jet fuel are usually positive-margin products. Furnace oil is frequently weak or negative. Naphtha can be strong if petrochemical demand is strong or if it can be upgraded into petrol; otherwise it can be weak. Asphalt can help when infrastructure demand is strong. Lube base oil can support margins for NRL. A refinery with a high HSD/MS yield and low FO yield will normally deserve a better valuation than one with high FO exposure.
Product/spread Typical margin behavior Investor interpretation
HSD/diesel Usually positive and often the largest
contributor Higher HSD yield is generally favorable
MS/petrol Usually positive but volatile Supports margins, especially when gasoline cracks
improve
Jet fuel Often positive and strategically important Aviation/defence demand matters
Naphtha Can be positive or weak Better if converted to petrol or petrochemicals
Furnace oil/RFO Often weak or negative High FO yield is a structural drag
LPG Useful but smaller in refinery slate Not usually a main earnings driver
Lubes/asphalt/BTX Can provide specialty margins Important especially for NRL and asphalt producers
13.Why furnace oil/RFO is the structural problem
Furnace oil is the bottom-of-the-barrel problem for Pakistan. Old hydroskimming refineries produce substantial FO because they lack enough conversion capacity. Historically, FO had demand in power generation. But as Pakistan's power sector shifted away from furnace oil toward gas, coal, renewables and other sources, FO demand declined. When demand declines, refineries face storage, pricing and offtake problems.
Internationally, high-sulphur fuel oil also became structurally weaker after IMO 2020 because shipping fuel sulphur limits reduced demand for high-sulphur fuel oil unless vessels use scrubbers. Locally, additional levies and weak power-sector offtake can make FO even harder to sell. In some periods, refineries may be forced to export FO at poor prices or reduce crude throughput.
This is why FO is not just a product problem; it is a utilization problem. If a refinery cannot evacuate FO, it may reduce crude processing. Lower crude processing means less MS/HSD/jet production as well. Therefore, the FO problem reduces the value of the entire refinery system.
14.Pricing, import parity, PSO reference and regulation
Pakistan's domestic pricing of MS and HSD is linked to import parity. This means local ex-refinery prices are influenced by what it would cost to import the same product. The pricing build-up uses international benchmark prices, freight, premiums/discounts, import incidentals, customs/deemed duty, IFEM and other components. In simplified terms, refineries cannot freely charge any price they want for MS and HSD. Their prices are connected to PSO's average actual import prices and the official pricing formula.
This has two implications. First, refinery margins are exposed to international product cracks. If Arab Gulf diesel and petrol cracks rise, local refinery margins may improve. If international FO prices are weak, FO hurts the product slate. Second, refineries cannot automatically pass through every incremental cost. If a new cost appears - such as unrecoverable sales tax, crude duty timing issues, finance cost or inventory losses - the refinery may not be able to fully recover it in the product price.
Pricing component Simple meaning
Average FOB price International benchmark product price, commonly linked to Arab Gulf markets
Marine freight Cost of shipping product
Premium/discount Market quality/supply-demand adjustment
C&F price Cost and freight landed reference
Import incidentals Handling and other import-related costs
Custom/deemed duty Actual duty on imports or deemed protection for local refineries
Ex-refinery price Price at which refinery sells product before downstream margins/taxes
IFEM Equalization/settlement pool for freight and policy adjustments
15.Deemed duty, customs duty, escrow and IFEM
Deemed duty is one of the most important policy mechanisms in Pakistan's refinery sector. It must be separated from actual customs duty.
Item Who receives it? Nature
Actual customs/regulatory duty on
imported MS/HSD Government/FBR Government revenue paid by importer
Deemed duty in local refinery ex-refinery
price Refinery initially, but final treatment
depends on policy Tariff protection/pricing incentive
Escrow deposit Joint OGRA/refinery account Upgrade-linked restricted funds
IFEM deposit/settlement IFEM pool Petroleum pricing/equalization and settlement
mechanism
Historically, the major continuing deemed duty was on HSD. After the old guaranteed return formula ended, tariff protection was used. The known ongoing protection became 7.5?emed duty on HSD. Petrol did not have the same continuing old 7.5?emed-duty structure.
Under the amended Brownfield Refinery Policy, imported MS and HSD are to carry minimum 10% customs/regulatory duty for seven years. Local refineries are allowed 10% tariff protection/deemed duty on MS and HSD for seven years after signing the upgrade agreement and opening the joint escrow account. However, the cash treatment differs by product.
Product Policy treatment
HSD - existing 7.5% Continues for refinery sustainability and margin support
HSD - incremental 2.5?posited into escrow for upgrade projects
MS/petrol - 10?posited into escrow for upgrade projects
Non-eligible refinery incentive Deposited into IFEM rather than retained
Duty above 10% reflected in ex-refinery
price Excess goes to IFEM
This means the new incentive is not a simple profit windfall. The refinery may collect the amount through ex-refinery pricing, but the upgrade-linked portion is locked in escrow and can be used only for approved upgrade projects. For investors, the old HSD 7.5% supports earnings, while the incremental incentive supports project financing rather than free dividends.
16.Crude oil import duty issue
The crude oil duty issue comes from a basic mismatch: crude oil is refinery raw material, while MS/HSD are refinery outputs. If the government imposes duty on imported crude, the refinery pays higher input cost upfront. If the refinery cannot recover this fully through product pricing, margins are squeezed.
The policy therefore says that any customs duty on crude oil should be reimbursed to refineries through IFEM. The logic is simple: the government may want to protect local refineries by imposing duty on imported finished MS/HSD, but it should not punish refineries by taxing their raw material. This becomes especially complicated under the new policy because incremental deemed duty is supposed to go into escrow, not be used casually to offset other costs. Therefore, if crude duty is charged, a separate IFEM reimbursement mechanism becomes necessary.
17.Sales tax input-output adjustment issue
The sales tax issue is one of the most important current policy overhangs for Pakistan's refinery sector. It began when petroleum products such as petrol, HSD, kerosene and LDO were declared sales-tax exempt under the Finance Act 2024. To understand why refineries objected, an investor must understand the difference between taxable/zero-rated supplies and exempt supplies.
Tax treatment Output sales tax Input sales tax adjustment Business impact
Taxable supply Charged at applicable rate Generally adjustable against output tax Input tax does not usually
become final cost
Zero-rated supply Output tax at 0% Input tax is generally
claimable/refundable/adjustable Exporter-like treatment; input
tax can be recovered
Exempt supply No output tax charged Input tax is generally not adjustable Input tax becomes cost to the
business
When petroleum products were treated in a way that allowed input tax adjustment, refineries could recover input sales tax paid on crude-related purchases, services, consumables, maintenance, spare parts and project equipment through the tax chain. Once the output became exempt, the refinery had no output sales tax against which input tax could be adjusted. Therefore, the input tax became an unrecoverable cost.
This affects both existing operations and upgrades. For existing operations, unrecoverable input tax raises operating cost. For upgrades, it can increase project capex materially because machinery, equipment, services and construction-related inputs may carry taxes that cannot be recovered. The sector argued that this could make the multibillion-dollar upgrade program unviable or significantly more expensive. It is especially serious because the upgrade policy is already built around a carefully calculated return mechanism using deemed duty and escrow. If unrecoverable tax increases the cost base, the economics change.
The government later moved toward relief on import of capital goods for refinery upgradation and overhaul. That helps project machinery, but it does not automatically solve the broader routine input tax issue on services, consumables, operations and local project costs. Therefore, investors should treat sales tax resolution as one of the most important sector triggers. Until it is fully resolved, refinery upgrade timelines and financing remain uncertain.
18.Euro-V compliance and penalties
Pakistan moved imported petrol and diesel toward Euro-V standards from 2020. This created a quality benchmark problem for local refineries. If imported product is Euro-V but local refineries produce lower-grade product, the lower-grade product should not receive the same pricing benefit without quality adjustment. Therefore, non-compliance can create financial penalties, not just environmental concerns.
There are two layers of penalty. First, there can be a pricing penalty or quality discount if local product is lower than the import benchmark. Second, under the Brownfield Policy, deemed duty eligibility depends on signing and executing upgrade agreements. Refineries that sign upgrade agreements receive a waiver to continue producing non-Euro-V products until the agreed completion date, subject to policy limits. After the waiver period, a refinery producing non-Euro-V MS/HSD will not be entitled to deemed duty on those products.
Situation Policy/economic consequence
Imported fuels are Euro-V Local lower-spec product faces benchmark and quality pressure
Refinery signs upgrade agreement Receives waiver during approved upgrade period
Refinery does not sign upgrade agreement HSD deemed duty can be reduced from 7.5% to 5%; differential and MS duty treatment
can move to IFEM
Refinery misses Euro-V after waiver Loss of deemed duty entitlement on MS/HSD
Non-compliant product receives lower
quality pricing Direct impact on ex-refinery revenue and GRM
The policy target is clear: after upgrades, all refineries should produce Euro-V MS and HSD while sharply reducing FO. Therefore, Euro-V compliance is a valuation issue. A refinery that cannot comply risks lower pricing, reduced deemed duty, surrender of incentives and weaker long-term competitiveness
.
19.Dividend cap, special reserve and the new escrow discipline
Historically, refinery dividends were constrained under the old policy framework. Under the earlier tariff-protection and refinery upgradation framework, profits after tax above 50% of paid-up capital as at July 1, 2002 were required to be transferred to a Special Reserve Account. This reserve was intended for refinery upgradation, modernization, expansion or loss absorption depending on the applicable framework and later interpretations. It was not freely available for shareholder distribution.
Under the new 2023 Brownfield Refinery Policy, the old Special Reserve transfer requirement is no longer required. However, this does not mean all policy-supported cash is freely distributable. The new control mechanism is escrow.
The incremental deemed duty on HSD and the full MS deemed duty under the upgrade incentive must be deposited into a joint OGRA/refinery escrow account and used only for approved upgrade projects. Therefore, the discipline has shifted from a profit-reserve/dividend cap to an incentive-specific escrow restriction.
Old system New system
Profit above threshold transferred to Special Reserve Incremental deemed duty transferred to escrow
Reserve restricted dividend distribution Escrow restricts use of upgrade incentive
Linked to older tariff-protection framework Linked to Brownfield Policy upgrade agreements
Investor issue: lower distributable profit Investor issue: cash collected but not freely distributable
20.Other earnings drivers investors should not miss
20.1Utilization
Low utilization means fixed costs are spread over fewer barrels. Because Pakistan's effective utilization is constrained by FO demand, utilization is a critical driver of profitability. A refinery operating at low throughput may show weak margins even when some product cracks are healthy.
20.2Crude slate
Crude quality matters. Light crude usually produces more white oil, but may also produce more naphtha depending on its composition. Heavy crude can produce more residue and requires deep conversion. Sweet crude has lower sulphur and is easier to process. Sour crude needs more desulphurization and hydrogen capacity. A refinery's ability to process multiple crude grades improves flexibility.
20.3Inventory gains and losses
Refineries carry crude and finished-product inventory. If oil prices rise after purchase, inventory gains may appear. If prices fall, inventory losses or NRV adjustments can damage quarterly earnings. Therefore, reported EPS can be distorted by inventory revaluation and should not be treated as pure operating performance.
20.4Exchange rate
Crude is dollar-linked. PKR depreciation can create exchange losses, working capital pressure and inventory revaluation effects. Product pricing may adjust with a lag, but timing gaps can still hurt earnings.
20.5Finance cost
Refineries are working-capital-heavy businesses. They import or buy large volumes of crude, carry inventories, sell to OMCs and manage receivables/payables. High interest rates can materially reduce net profit even if GRM is positive.
20.6Smuggling and illegal imports
Smuggled petroleum products can reduce formal demand and hurt refinery offtake. This affects volumes, utilization and working capital. Investors should track anti-smuggling measures and formal POL sales data.
20.7Maintenance shutdowns
Refineries require periodic shutdowns for maintenance and turnaround. Shutdowns reduce throughput and can distort quarterly performance. Large refinery shutdowns can also affect national supply and sector averages.
20.8Strategic storage and logistics
Strategic storage improves energy security but increases working capital. If refineries are required to hold more crude stocks, balance-sheet needs rise. Logistics also matter: crude transport is generally more efficient than importing all finished products separately, which is one reason domestic refining has strategic value.
20.9Demand cycle
MS demand depends on mobility and vehicle use. HSD demand depends on agriculture, trucking, construction, logistics and industry. Jet fuel depends on aviation and defence. Asphalt depends on infrastructure spending. FO depends heavily on power-sector fuel economics. Therefore, an investor must analyze each product market separately.
21.Upgrade policy, capex and future product slate
The Brownfield Refinery Policy is designed to address Pakistan's structural refinery problem. The objectives are to produce cleaner Euro-V compliant fuels, increase MS and HSD production, reduce FO, improve product slate, save foreign exchange, use local crude/condensate, and modernize existing assets.
The projects under consideration across the sector include CCR complexes, hydrocrackers, DHDS units, isomerization/reforming improvements and other conversion/treatment systems. The central idea is to shift the production mix toward retail fuels and away from furnace oil. A successful upgrade should create higher white-oil yield, lower FO burden, better utilization, higher-quality products and more resilient GRMs.
Current problem Upgrade solution Investor impact
High FO output Hydrocracker, coker, resid conversion Better product slate and lower negative
spread exposure
Non-Euro-V products DHDS, hydrotreating, sulphur recovery, hydrogen
units Avoid pricing/deemed-duty penalties
Weak petrol quality/yield Isomerization, CCR/reformer Higher-value petrol blendstock
Low utilization due to FO Conversion of heavy streams Higher sustainable throughput
Limited petrochemical integration Naphtha/aromatics/petrochemical complex Higher non-fuel value capture
However, upgrades are expensive and execution-heavy. They require policy certainty, financing, technology selection, EPC execution, import of equipment, construction, shutdown planning and stable regulatory treatment. The sales tax issue is especially important because it can increase project cost and undermine bankability. Therefore, upgrade announcements should be evaluated by signed agreements, financing closure, escrow mechanics, tax treatment, EPC timelines and actual implementation milestones.
22.Investor checklist and conclusion
An investor should not analyze a refinery only by looking at quarterly EPS or nameplate capacity. Refinery EPS can be distorted by inventory gains/losses, FX, shutdowns and policy changes. The better approach is to build a structured checklist.
Question Why it matters
What is the refinery's product slate? More MS/HSD/jet is better; more FO is weaker
What is the utilization rate? Low utilization hurts fixed-cost absorption
What crude/condensate does it process? Crude slate determines yield, sulphur burden and margins
What conversion units does it have? Deep conversion lowers FO and increases white oil
Is it Euro-V compliant? Non-compliance can trigger pricing and deemed-duty penalties
Has it signed and financed the upgrade? Determines long-term competitiveness
How does deemed duty flow? Old HSD duty supports earnings; new MS/HSD incentive is escrowed
What is the sales tax position? Exempt output can make input tax unrecoverable and raise costs
What are inventory and FX effects? Can distort quarterly profitability
Does it have non-energy products? Lubes, asphalt, BTX and naphtha can improve barrel value
What is the balance sheet/finance cost? High leverage and working capital can consume GRM
What are demand and smuggling trends? Affect offtake, utilization and formal sales
The refinery sector is therefore a mix of commodity spreads, industrial technology and government policy. Petrol and diesel cracks can improve margins in the short run, but the structural value unlock is conversion technology. Deemed duty can support current economics and upgrade funding, but it is not a permanent solution if the refinery continues to produce too much furnace oil. Sales tax treatment can make or break project economics. Euro-V compliance is both an environmental and financial requirement. Non-energy products provide useful optionality, especially for NRL, but they do not fully replace the importance of MS/HSD/FO economics.
23.Source notes
User-provided refinery-sector notes uploaded in this conversation, including simplified explanations of GRM, product slate, LPG/LNG, crude vs gas, deemed duty, IFEM, input-output sales tax adjustment, Euro-V penalties, lubricants, non-energy products and investor checklist.
Petroleum Division, Government of Pakistan: Pakistan Oil Refining Policy for Upgradation of Existing/Brownfield Refineries, 2023, as amended in February 2024: https://petroleum.gov.pk/SiteImage/Downloads/AmendedBrownfieldPolicy23.pdf
Petroleum Division, Government of Pakistan: Pakistan Oil Refining Policy 2023 for New/Greenfield Refineries: https://petroleum.gov.pk/SiteImage/Downloads/Pakistan Oil Refining Policy 2023 For New Greenfield Refineries 160523.pdf
PACRA: Refineries Sector Study, December 2025: https://www.pacra.com/view/storage/app/Refineries -
PACRA Research - Dec`25_1765549615.pdf
Business Recorder: Refineries upgrade at risk due to sales tax exemption, July 2024: https://www.brecorder.com/news/40313983
Business Recorder: Brownfield refinery upgradation policy proposals to address hurdles, May 2026: https://www.brecorder.com/news/40420655
FBR: Budget 2026-27 Salient Features: https://fbr.gov.pk/Budget2026-27/SalientFeatures/Salient-Feature.pdf
Dawn: Oil industry rejects budgetary measures / sales tax exemption on petroleum products, June 2024: https://www.dawn.com/news/1841838
PID / Petroleum Division: Euro-V petrol and diesel import policy guidelines, July 2020: https://pid.gov.pk/site/press_detail/14329
Reuters: Pakistan refiners warn USD 6bn upgrades at risk due to fuel price deregulation plan, April 2024: https://www.reuters.com/markets/asia/pakistan-refiners-warn-6-bln-upgrades-risk-due-fuel-price-deregulation-plan-2024-04-23/
U.S. Energy Information Administration: Refining crude oil - the refining process: https://www.eia.gov/energyexplained/oil-and-petroleum-products/refining-crude-oil-the-refining-process.php
NRL official pages on lube refinery, lube base oils and BTX plant: https://www.nrlpak.com/
Disclaimer: This article is for general informational and educational purposes only and is not financial or investment advice.
The analysis is based on publicly available information and secondary research and does not constitute primary research.
Unintentional errors, omissions, or discrepancies may exist, and readers should independently verify the data with official sources.
Please conduct your own due diligence or consult a qualified, licensed financial advisor before making investment decisions.
.png "Intermarket Correlation Analysis: KSE-100 and Major Asian Equity Indices")
