ISLAMABAD  - Pakistan has approved raising the tax break offered to refiners on high speed diesel to 9pc from 7.5pc, to help them recover the cost of upgrading their plants to produce Euro 2-compliant gasoil, a govt official said.

The Economic Coordination Committee, Pakistan’s highest decision making body, on Friday evening decided to raise the tax break, an official of the Ministry of Petroleum and Natural Resources who attended the meeting confirmed on condition of anonymity.

The tax break, commonly known as “deemed duty” will take effect from January 1, 2016, on the condition that refiners have fulfilled their commitment to set up hydro-desulfurizers at their plants, Asim Hussain, adviser to the Prime Minister on energy matters, said March 5.

The tax break will stay in place until refiners have recovered the cost of the upgrades.

Under Pakistani law, the “deemed duty” cannot be raised without raising the import tax on gasoil, so the ministry has also proposed increasing the customs duty on imported gasoil to 9pc. Pakistan relies on imports to meet 70pc of its gasoil demand of 7.2m mt/year (147,200 b/d).

The tax break will help refiners save around Rs 1 per liter (1 cent/liter), said Aftab Hussain, CEO of Pakistan Refinery Limited. So, a refiner selling 1 billion liters/year could save Rupees 1 billion or $100 million, he added.

Separately, the Economic Coordination Committee has accepted the petroleum ministry’s demand to extend the deadline for refiners to start producing Euro 2-compliant diesel to Dec 31, 2015, from June 2014.

This is the second time the deadline has been pushed back from its original start in 2012.

In order to meet the tighter specifications, refiners are required to upgrade their plants by adding a hydro desulfurization unit, allowing them to cut the sulfur content in gasoil to 0.05pc from the current 1pc.

All refiners, except Pak Arab Refinery Co., had said they could not meet the June 2014 deadline due to the ongoing financial crisis. Pakistan’s refiners have been in financial stress due to the issue of circular debt, a chronic problem that has plagued Pakistan’s energy sector for the last several years.

Total installation cost of a HDS unit is around $600-700 million, according to Farhan Mehmood, head of research at Karachi-based brokerage.

Pakistan has a total refining capacity of 13 million mt/year across five refineries.