The Pakistan Ministry of Energy has reportedly drafted a new Petroleum policy for the downstream oil sectors – OMCs and Refineries – which has to be reviewed and approved by the ECC. Overall, the policy aims to achieve the following objectives and has many positive measures, which can sustainably lift the profitability of these sectors, in our view.

To increase FDI in the sector – specifically in oil refining and infrastructure

To ensure greater availability of high-quality petroleum products – which are compliant with global environmental standards

To deregulate the sector in a gradual manner

To ensure a reliable petroleum reserve at all times

Refining: Incentives mostly for new refineries

Broadly, the policy incentives are focused on new refineries, without a big push to incentivize existing refineries to upgrade and expand. Such projects are extremely capital intensive; just a project for adding a conversion unit (from furnace oil to motor gasoline) will cost more than US$500mn. For comparison, the 150,000bpd new refinery promised by the Saudi government will cost c.US$5.0bn. Removing the deemed duty on HSD (instead of amplifying it as a return for new investment) effectively disregards the significant cost outlay and potential debt burden that existing refineries will have to bear to upgrade facilities, in our view. The 50% OMC margin on ex-refinery basis may not compensate for the removal fully, in our view.

The proposed removal of cap on payouts could be a major value-unlocking event for refineries, which are effectively not able to pay out profits from their fuel refinery operations (dividends cannot be greater than 50% of the paid up capital in 2001-02). This will be particularly positive for Attock Refinery (ATRL) while National Refinery (NRL) majorly earns from its Lube operations (distributable). The measure may also incentivize PSO – which has c.56% stake in Pakistan Refinery (PRL) – to invest in upgradation of PRL (through capital calls from PRL or direct lending to it) which can lead to more distributable profits from PRL. However, in light of the significant capex outlays that the government will mandate these refineries to undertake, for them to remain relevant and profitable in the long run, the removal of cap may not immediately lead to big payouts, in our view. (Intermarket Securities Limited)