FY26 budget delivers little for oil, gas and refineries

Business Recorder

13-06-2025

The Federal Budget for FY26 has brought a mix of continuity and subtle policy shifts for Pakistan's oil and gas sector. While the government's focus remains on fiscal consolidation and meeting IMF targets, the budget introduces some changes that carry implications for the Oil Marketing Companies (OMCs), the Exploration & Production (E&P) sector, and the refining industry.
For the OMCs, the budget continues to rely heavily on the Petroleum Development Levy (PDL) as a key non-tax revenue source, setting an ambitious collection target of Rs1.468 trillion, up 26 percent from last year. This reinforces the government's dependence on petroleum products to bridge fiscal gaps, with implications for fuel pricing and affordability. In addition, the government has introduced a carbon tax of Rs 2.5 per litre on petrol, diesel, and furnace oil. While this aligns with global trends toward climate-conscious fiscal measures, the cost will likely be passed on to consumers. However, the estimated Rs40 billion in expected collections from this tax is not anticipated to materially impact OMC margins, making the measure relatively neutral for the sector. Another noteworthy measure is the imposition of PDL on furnace oil, which was previously exempt. While furnace oil is a declining part of the national energy mix, its taxation signals the government's intent to extract revenue from all available streams. In the short term, this could slightly impact industrial demand, but for OMCs, the pass-through mechanism likely cushions any significant adverse effects.
In contrast, the E&P sector has seen no major direct changes in this year's budget. There were no revisions to royalties, levies, or corporate tax rates specific to exploration or upstream activity, signalling a continuation of the status quo — neither incentivized nor penalized. That said, the broader macroeconomic framework could still influence the sector. The government aims to reduce the fiscal deficit to 3.9 percent of GDP, its lowest in over two decades, and maintain a primary surplus of 2.4 percent of GDP. If achieved, this could reduce fiscal stress and help address the circular debt problem, a persistent challenge in the gas and power supply chain that often impacts payments to upstream players. One potentially indirect concern for the E&P sector is the reduction in power sector subsidies to Rs1 trillion, down 13 percent year-on-year. This could exert pressure on power producers and, by extension, affect the payment cycle to gas suppliers — a scenario that E&P companies will monitor closely.
Despite expectations, Budget FY26 delivered little to energize the refining sector. Analysts were anticipating clarity on the Refinery Policy 2023, particularly in relation to incentives for upgrading to Euro-V standards, deemed duty reforms, and a revised pricing mechanism. However, the budget remained silent on all fronts. There were no new incentives, tax exemptions, or subsidies introduced for refinery upgradation or capacity expansion. This policy inaction continues to weigh on investor sentiment, especially as refining margins remain under pressure and projects requiring substantial capital investment await regulatory clarity. Some minor relief came through customs duty rationalization on select raw materials and intermediates used by the sector, but these measures are insufficient to offset the broader uncertainty. The refining sector remains caught in a holding pattern, operating under legacy frameworks while regional peers push ahead with modernization. Without decisive
policy support, the sector risks falling further behind both in terms of efficiency and environmental
compliance.
While Budget FY26 does not revolutionize the outlook for Pakistan's energy sector, it maintains a careful balance. The OMC sector faces revenue-linked levies that reflect the government's fiscal needs but stops short of heavy-handed intervention. The E&P sector enjoys continuity but without strategic stimulus. The refining sector, however, stands out as a missed opportunity — a space where expectations of reform were not met, leaving stakeholders in limbo. As Pakistan continues its fiscal consolidation journey under IMF oversight, the energy sector — particularly its pricing, investment, and taxation dynamics — will remain a crucial pillar of revenue and economic management. The real test will lie in execution: managing fiscal targets without compromising the long-term health and modernization of the energy value chain.