Review of Pakistan's Brownfield Refinery Policy

The Government has amended the Pakistan Oil Refining Policy 2023 for the second time in August 2026, introducing a revised framework for brownfield refinery upgrades. The latest amendment largely retains the core incentive structure of the February 2024 policy, including 10% tariff protection on Motor Gasoline (MS) and Diesel for seven years and an incremental 2.5% deemed duty on HSD and 10% on MS for funding refinery upgrades. However, the latest amendment significantly changes the implementation mechanism by shifting control from OGRA to the Petroleum Division, replacing the joint escrow structure with dedicated Refinery Upgradation Accounts and resetting the seven-year incentive period for all refineries.

The amendment is positive for the refining sector from a long-term earnings and investment perspective, as refineries can now potentially receive a fresh seven-year incentive period from the signing of the new Upgrade Agreement. At the same time, the policy introduces stricter deadlines, stronger financial guarantees and tighter project-monitoring requirements. Refineries that fail to sign the Upgrade Agreement face a steep reduction in HSD deemed duty, falling from 5% to 2.5% by October 1, 2026 and being completely withdrawn by November 15, 2026.

For listed refiners, we view the policy as particularly positive for ATRL, PRL, NRL and Cnergy given their planned brownfield investments and substantial improvement in product slate following upgradation. The key near-term catalyst will be execution of the Upgrade Agreement and subsequent realization of incremental tariff protection into the Refinery Upgradation Account.

Tariff Protection Remains the Core Incentive

The latest policy continues to provide a minimum 10% customs/regulatory duty on imported MS and Diesel for seven years. In addition, refineries are entitled to 10% deemed duty/tariff protection on MS and Diesel for seven years from the signing of the Upgrade Agreement and opening of the Refinery Upgradation Account. Of this incentive, 10% on MS and 2.5% on HSD represents the incremental incentive earmarked for the upgrade project, while the existing 7.5% HSD deemed duty continues for sustainability after the seven-year period for up to 20 years or until deregulation, whichever occurs earlier.

Investment implication: The policy continues to provide a meaningful earnings cushion for refiners while also creating a dedicated funding source for upgrade projects. Therefore, government policy supports the economics of brownfield upgrades rather than relying entirely on refinery balance sheets.

Major Positive: Fresh Seven-Year Incentive Period

One of the most important changes is the reset of the incentive period. Under the amended policy, all refineries, whether or not they have executed an Upgrade Agreement, surrender incentives availed under the 2023 Policy and become eligible for incentives afresh for seven years from signing the Upgrade Agreement. This materially improves the long-term visibility of the incentive framework and strengthens the economics of refinery upgradation projects.

Stronger Penalty for Delaying the Upgrade Agreement

The new policy significantly increases the cost of failing to commit to the upgrade. Under the February 2024 policy, HSD deemed duty was reduced from 7.5% to 5% for refineries that failed to sign the Upgrade Agreement within the prescribed 60-day period. The August 2026 policy introduces a much more aggressive step-down: HSD deemed duty remains at 5% until the refinery signs the Upgrade Agreement. It falls to 2.5% if the refinery does not sign by October 1, 2026. It is completely withdrawn from November 15, 2026, for refineries that have not signed the Upgrade Agreement. The policy therefore creates a very strong economic incentive for refineries to formally commit to their upgrade projects. This reduces the probability of prolonged delays in signing the Upgrade Agreements, although it increases execution pressure on refiners.

Courtesy: AL Habib Capital Markets Pvt Ltd.