Aramco Shares its Conditions For Investing in $12 Billion Plant in Pakistan

Saudi Aramco has conveyed its willingness to invest in a $12 billion greenfield refinery on the condition that the Government of Pakistan accepts its terms and conditions.

Aramco says the plant will have the capacity to refine 300,000 barrels of crude oil per day but nothing will work unless its terms for streamlining refinery operations are met, reported a national daily.

According to a national daily, the company wants a 7.5 percent deemed duty on Mogas and diesel for the life of the project and a 20-year tax holiday, including tax exemption on the import of plant and equipment to ensure a profit of up to 15 percent.

Pertinently, a component of the refining policy for upgrading existing local refineries has been finalized and is ready for cabinet approval. According to the finalized sketch for the upgrade, existing refineries will be granted tariff protection equal to the existing customs duty (10 percent) on imported Mogas and diesel. Tariff protection funds will be used for six years after the financial close for the purpose of upgrading the refinery, which could account for 25-30 percent of the project cost.

Understandably, identical offerings to foreign players like Aramco would heavily dent profit-taking from the sector. As indicated in earlier reports on the refinery project, the cost of the Saudi Aramco unit would be around $12 billion, depending on the salient features of the project that would be finalized once the related terms and conditions are checked. Authorities claim that if the Aramco conditions are met, the country’s revenue from finished POL and crude oil will suffer significantly.

Ignoring that possibility altogether, Saudi Arabia has further requested a waiver of the 5 percent customs duty already levied on crude oil imports for the refinery.

Saudi Aramco has also requested third-party investments in critical infrastructure to reduce CAPEX (capital expenditure), emphasizing the importance of Chinese investment and its ability to de-risk the investment.

If the Saudi Aramco incentive package for the new refinery is implemented, the internal rate of return (IRR) would be 15 percent, but the post-tax IRR would be 14.9 percent while meeting Aramco’s cut-off rate of 12-15 percent.

On the surface, Pakistan could earn $9 billion in net foreign exchange over the next 25 years, and that is insultingly low. To note, Aramco would produce the entire crude supply for use in the proposed refinery. The first mega refinery of 300,000 barrels per day would be built in Pakistan, paving the way for additional investment from other parts of the world, particularly China, but at a very hurtful cost.