In Pakistan in particular, the conventional standards of reasoning frequently fall short of describing the changes in today’s environment.
Given the country’s current economic woes and terrorism dangers, the apparent increase in investor confidence is perplexing.
The fact that the current government’s tenure is coming to an end this week only makes the matter more complicated.
Over the past few weeks, the bullish investor attitudes have been reflected in the expanding capital market. The benchmark stock market index for Pakistan Stock Exchange (PSX) increased vertically.
5 weeks ago, it had reached a level of 41,000. It increased by 20% last week and went above the 49,000 threshold.
“The fact that the said contract was instantly marked and analyzed globally is a testament to the potential it holds for Pakistan and its partners. A project of this scale in the energy sector has consequences that sometimes extend beyond economics,” commented an analyst hinting at the changing contours of energy politics post the Saudi Iran détente.
Commenting on the Saudi refinery project Mohammad Sohail, CEO of Topline Securities, said: “We have been hearing of this refinery for the last few years. Now the process seems to be gaining momentum with local participation. This, however, is a long-term project, and the actual investment will depend on how aggressively both governments stick to their commitments.”
Approximately three years after the project’s initial conception in 2019, Pakistan and the Kingdom of Saudi Arabia signed a $10 billion joint venture agreement to build an integrated greenfield oil refinery at Gwadar with a processing capacity of 300,000 barrels per day (20 million tons per year).
Oil and Gas Development Company Limited (OGDCL), Pakistan Petroleum Limited (PPL), Pakistan State Oil (PSO), and Government Holding Private Limited (GHPL), four state-owned majors, will collaborate with Saudi energy giant Aramco on a refinery project that will process more oil than Pakistan’s current total combined capacity.
With a 20 million ton capacity, Pakistan’s current annual demand for refined oil is estimated to be over 33 million tons. However, the actual production is only 11 million tons, which is only around half of what is needed.
In addition to other limitations, the country’s low refining capacity is further hampered by the lack of refinery upgrades. Only two refineries have been built in Pakistan over the past few decades.
Although complete information about the aforementioned multi-billion dollar acquisition is still a mystery, analysts believe that what little information has been revealed thus far shows significant promise.
“The benefits will flow not just for the parties directly involved, but its dividends may extend to oil suppliers including Russia and Iran and likely providers of engineering and construction services in China,” said an analyst.
There were rumors that Pakistan was already negotiating engineering, procurement, and construction (ECP) contracts with the Chinese.
The evidence that is emerging indicates that Pakistan’s state-owned companies will provide 70% of the project’s funding, with Aramco providing the initial 30% equity.
A generous incentive package was reportedly made available to Saudi Aramco by Pakistan, including a flat 7.5 percent deemed duty on petrol and diesel for 25 years, a 20-year tax holiday, and a complete exclusion from all taxes (custom duty, surcharges, withholding tax, general sales tax, etc.) on the import of equipment or materials as well as any approvals or clearances from regulatory bodies, such as the Engineering Development Board.
“A petrochemical complex at Gwadar, hardly 90 kilometers from the Iran border, will be great. It will provide a chance for closer trade ties with the oil-rich neighbor. It can also help capitalize on the access to cheaper Russian crude,” Dr Manzoor Ahmed, a reputed trade expert, commented over the phone from Lahore.
He made a case for not limiting incentives to Saudi refineries. “To optimize returns, it would help if the incentive cover extends countrywide for refineries. It would nudge current refineries to upgrade and attract new investment.”
The adoption of the Oil Refining Policy 2023 and the creation of the Special Investment Facilitation Council, a civil-military forum with a seat reserved for the army chief in its apex committee, provided comfort to foreign investors, which at this point was essential for the realization of the deal, according to reliable sources in Islamabad.
“Anyone interested in Pakistan is aware of the relative power of the military establishment. Given a chance, they would prefer to settle affairs with the person at the top of the pile. My own experience of dealing with political leadership has not been good. I still think business is not a martial activity and must be in the civilian domain,” a former executive of a project compromised by a policy reversal said privately.
He objected to SIFC because he believed it threatened the fundamental principle of civilian dominance in a democratic system.
To share information about the Saudi refinery deal, the top layer of the current energy establishment was contacted, but their response did not arrive until after the report had been filed. Many company executives defended themselves by claiming that their knowledge is limited to news reports.
“My politician friends are in election mode now. It’s futile to bother them with anything business at this point. Without deeper insight, it’s lame to comment,” noted a tycoon explaining his reluctance to offer his opinion.
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