- Brownfield Refinery Policy marked a milestone aiming to support upgrades and deeper conversion
Interview with Mohammad Wasi Khan, Independent Consultant Oil, Energy & Infrastructure and former chairman of the Board and Chief Executive Officer, Cnergyico Pk Limited (formerly Byco Petroleum Pakistan Limited)
Profile:
Mohammad Wasi Khan is an independent consultant in the oil and energy sector, advising clients across Pakistan and the broader region on downstream oil strategy, refinery upgrades, trading dynamics, and energy transition opportunities.
With over four decades of industry experience, he has held senior leadership positions across refining, oil marketing, trading, and infrastructure development. He previously served as Chairman of the Board and CEO of Cnergyico Pk Limited (formerly Byco Petroleum Pakistan Limited). Prior to that, he spent 25 years at National Refinery Limited (NRL), where he served as Deputy Managing Director. Mr. Khan has led several major expansions, infrastructure projects, and operational improvements. A number of growth-oriented initiatives and strategic developments stand to his credit, reflecting his longstanding commitment to advancing Pakistan’s downstream oil sector.
PAGE: What are the biggest structural or policy hurdles currently facing Pakistan’s refining sector, and how can they be addressed to attract long-term investment?
Mohammad Wasi Khan: Pakistan’s refining sector has long been burdened by deep-rooted structural constraints, many stemming from legacy overregulation and restrictive fiscal policies. These include decades-old pricing control on refined products, complex taxation structures, and a rigid import parity pricing (IPP) formula that lacked the flexibility to reflect ground realities and compensate for unequal economic eco systems of Middle Eastern countries, whose prices we use here as basis, and Pakistan. While product prices remain under government control through fixed import parity formulas, refineries shoulder full exposure to volatile international crude prices and currency depreciation.
This mismatch has resulted in significant inventory and exchange losses without any risk mitigation support, especially since refineries are not allowed to hedge either foreign exchange, crude or product pricing risks. It is only recently, over the last three to four years, that the government has started addressing the exchange loss aspect. These inefficiencies have translated into underinvestment, technology stagnation, and a widening gap between domestic fuel specs and global standards.
Over the years, the government has also exercised subtle but high-impact influence over key commercial decisions via policy levers limiting the sector’s ability to respond to market dynamics. A particularly disruptive example was the sudden policy shift that replaced furnace oil (FO) with LNG for power generation. Local refineries, which previously supplied over 3 million tons of FO annually, were left with mounting inventories and underutilized capacity, forcing them to export FO at significant financial disadvantage, disrupting their yield balance, revenue streams and profitability. That said, the sector has shown resilience. Despite all these constraints, local refineries have taken it upon themselves to invest in capacity expansions, revamps, and modernization efforts — including the installation of Isomerization and Hydrotreating units to improve fuel quality. A notable transformation can be seen in gasoline production, where we once produced only 80 RON leaded fuel, we now have unleaded gasoline exceeding 92 RON, while the volume of previously exported low-value Naphtha has been substantially reduced. Likewise, the average sulfur content in diesel across the country has significantly declined over the period. In fact, the crude processing capacity of refineries running in private sector has nearly doubled in the last two decades. All refineries have also made significant investments in environmental and safety compliance, consistently meeting National Environmental Quality Standards (NEQS).
Recognizing these long-standing challenges, the Ministry of Energy initiated an extensive multi-year consultation process in 2019, eventually resulting in the Greenfield and Brownfield Refining Policies. These offer much needed fiscal incentives to make new (Greenfield) projects economically viable and to support investment in the upgradation of existing (Brownfield) facilities. That said, the real game-changer still pending is the sector’s deregulation. Future investment will depend upon creating a commercially autonomous environment where refineries can independently manage their businesses with the most important aspect being freedom in product pricing. This all, however will work within a rules-based, transparent, but less intrusive regulatory framework.
PAGE: How do you assess the implementation and impact of the Brownfield Refinery Policy so far — especially in terms of enabling capacity upgrades and improving product quality?
Mohammad Wasi Khan: The Brownfield Refinery Policy (2023) was, without doubt, a commendable achievement. It came after exhaustive engagement among stakeholders and marked a significant policy milestone. The policy sent a strong signal to investors that the government was serious about improving the refining sector’s competitiveness by aiming to support product upgrades, yield improvements, and deeper conversion projects. However, its implementation has run into a major roadblock, that is the unresolved issue of ineligibility of input sales tax on capital goods, materials, and services intended for refinery upgrades. Despite the policy’s clear fiscal intent to ensure tax neutrality; as reflected in the provision for duty relief on crude oil through IFEM, no legally binding exemption or adjustment mechanism for sales tax has yet been institutionalized for upgrade-related expenditures.
As a result, the sales tax becomes an unrecoverable expense, rendering project imports and local services cost-prohibitive.
Consequently, even though all upgrade projects have received approvals in principle, there is no visible urgency or major activity on the ground. Refineries simply cannot absorb these additional cost burdens without seriously eroding returns, which directly undermines the policy’s investment protection objective. Meanwhile, ongoing operations are also under pressure.
Refineries are facing severe working capital constraints due to continuing restrictions on input sales tax refund claims. While a temporary refund mechanism was introduced, it falls short of resolving the core structural issue. Expectations were high that the 2025–26 federal budget would address this comprehensively — but, regrettably, that promise remains unmet. This has understandably caused considerable frustration across the board. Unless these sales tax anomalies are corrected, the policy’s intended outcomes will remain out of reach. Since reclassifying the product status from “exempt” to “zero-rated” has not been considered, an alternative could be to either offer an additional fiscal incentive — such as incremental deemed duty — or to incorporate a tax-neutrality provision into the policy (similar to the existing crude duty offset) to maintain upgrade project viability. Another pressing concern is the widespread smuggling of petrol and diesel across the western borders. This has severely disrupted legitimate product sales. Since policy incentives are closely tied to a refinery’s actual upliftment, the economic viability of upgrade projects is being doubly compromised.
PAGE: Given the rising demand for cleaner fuels and regional competition, how do local refineries stand in terms of competitiveness and compliance with emerging standards?
Mohammad Wasi Khan: Pakistan’s local refineries have made sincere and commendable progress in recent years, especially considering the limited financial resources and policy challenges they operate under. Most have added diesel desulphurization and isomerization units, upgraded environmental controls, and today, all five local refineries are fully compliant with the National Environmental Quality Standards (NEQS) for emissions and effluents. That said, they still remain structurally disadvantaged when compared with regional players, particularly in India and the Gulf, where refineries have moved ahead with deep conversion technologies and integrated petrochemical operations that allow greater value addition and margin flexibility.
To stay competitive, especially in light of the global shift toward Euro-V and cleaner fuels, Pakistan’s refineries must now take the next step beyond the current Brownfield Policy framework. This means adopting deeper conversion units to eliminate furnace oil output and maximize high-value fuels.
Eventually, Pakistani refineries must also transition toward integrated complexes that co-produce petrochemicals or specialty products, as their regional counterparts have already done. But this shift requires both time and strong policy support. In the meantime, it’s essential that the pricing regime, particularly the import parity pricing mechanism, be rationalized to reflect genuine market parity with the Arabian Gulf. The current model does not account for the economy of scales, logistics, and structural disadvantages local refineries face.
A more supportive pricing environment, including selective tariff protection and incentives that reward cleaner, higher-spec fuels, petrochemicals and specialty products, would go a long way in making upgrades commercially viable and accelerating technology adoption. With the right signals and targeted support, local refineries can absolutely rise to the challenge. They’ve already demonstrated resilience — now they need a level playing field to become truly competitive.
PAGE: What’s your overall assessment of Pakistan’s oil sector today — particularly the downstream segment — and what key reforms are needed to ensure long-term sustainability and resilience?
Mohammad Wasi Khan: Pakistan’s downstream oil sector, comprising of refining, pipelines, OMCs, and retail, stands at a strategic crossroads. The sector already has the foundational infrastructure, technical expertise, and market size needed to evolve into a more robust and resilient system. But to unlock its full potential, a few critical realignments are necessary. First and foremost is the need for deregulation with safeguards.
Commercial freedom should be granted to refineries and OMCs to manage their pricing and margins, within a well-governed, transparent regulatory framework. Regulator should focus on environmental compliance, safety, and consumer protection, similar to the models followed in the US or EU, where freedom to operate is balanced by accountability.
The second major challenge is the Inland Freight Equalization Margin (IFEM). This was originally intended to ensure uniform pricing nationwide, it has now become a distortionary tool. It discourages efficient logistics planning, penalizes regional investments, and enables malpractice in fuel distribution. Removing IFEM, while providing targeted support for genuinely underserved regions, would introduce cost efficiency, reduce end-user prices, and encourage fair competition.
In addition, Pakistan urgently needs smarter logistics for domestic fuel supply, which still relies heavily on road transport, even for the primary movement. Expanding the national pipeline network to link major supply sources with key consumption hubs is essential for delivering cost-effective and efficient fuel distribution across the country. Third, Pakistan needs to clearly distinguish between strategic and commercial petroleum stocks. At present, we hold only about 18-20 days of inventory, and even that is entirely commercial.
In contrast, India maintains such reserves covering over 75 days. Building dedicated strategic storage, possibly through public-private partnerships, would greatly strengthen energy security and buffer against supply shocks. Finally, in order to ensure a robust and secure energy supply across the country — and to maintain an uninterrupted national supply chain at all times — this function must remain under the oversight of the government and OGRA, even in a fully deregulated downstream sector.
A critical part of this is to ensure that local refineries are kept running at the highest possible capacity utilization. This helps secure a reliable domestic supply base and reduces over-reliance on imports. To achieve this, imports of refined products should only be allowed for volumes that exceed domestic refinery output and available stocks. Leaving this space to short-term trading or speculative gains would risk long-term supply security. This safeguard is necessary not just for industrial stability, but also to protect broader national interests.
I firmly believe Pakistan can build a strong and reliable downstream oil sector if it moves forward with the right reforms.