95 RON Petrol Was Taxed Out of the Market
National Refinery Limited spent a year developing and producing higher-octane petrol. But according to its FY2026 annual report, a steep petroleum levy eventually “effectively eliminated” sales of its 95 RON Mogas.
The company had introduced the premium grade to meet demand for cleaner, higher-octane fuel while improving refining margins beyond ordinary Mogas.
NRL’s Directors’ Report says the government subsequently imposed an “exorbitantly high” petroleum levy on the product.
The result, according to the refinery, was not weak consumer demand but a price structure that made the premium grade commercially unviable.
The development comes as Pakistan continues to rely heavily on petroleum levies for fiscal revenue. The government collected more than Rs1.56 trillion in petroleum levy during FY26.
Record Gasoline Output Failed to Translate Into a Premium-Fuel Success
NRL nevertheless recorded its highest-ever motor gasoline production, at around 282,840 metric tons.
However, the increase did not translate into the premium-fuel growth story the refinery had initially expected. Instead, cheaper grades filled the gap created by the policy environment surrounding 95 RON petrol.
The episode highlights a broader challenge for Pakistan’s refining sector: companies are being encouraged to produce cleaner, higher-value fuels while simultaneously facing taxes and levies that can undermine their commercial viability.
Hormuz Crisis Transformed the Refining Year
NRL’s FY26 performance was heavily influenced by geopolitical disruption.
Until February, refining margins remained weak and smuggled fuel continued to put pressure on domestic demand. The situation changed dramatically when the US-Iran conflict disrupted shipping through the Strait of Hormuz, a critical global oil transit route.
The disruption created significant challenges for NRL. One of the company’s crude cargoes remained stranded for almost a month, while crude prices reached as high as $167 per barrel in a single day.
Freight and war-risk premiums reportedly increased around tenfold. Lighter Aramco grades became unavailable, leaving heavier crude from Yanbu as one of the key available feedstocks.
Heavier Crude Created a Diesel Yield Problem
The shift toward heavier crude had consequences for product yields.
Diesel cracks were among the few positive elements in the refining market, yet heavier crude reduced the refinery’s ability to maximise diesel output.
NRL responded by purchasing locally produced crude that had been destined for export, securing ADNOC spot cargoes and rerouting shipments through the Red Sea.
These measures helped keep the refinery operating despite the disruption.
Throughput increased to around 70 percent from 56 percent a year earlier. HSD sales climbed 26 percent, while gasoline sales increased 34 percent.
War Boosted Margins but Left a Costly Inventory Bill
The geopolitical shock did not translate into a straightforward improvement in annual profitability.
After the ceasefire, petroleum prices declined sharply. NRL was left holding high-cost inventory, resulting in an estimated year-end net realisable value loss of around Rs7 billion.
The sequence illustrates the volatility of refining during a geopolitical crisis: margins can rise sharply during supply disruptions, but falling prices can quickly turn those gains into inventory losses.
Profit Rebounds but Dividend Remains Absent
NRL reported a net profit after tax of Rs6.16 billion for FY26, compared with a loss of Rs14.87 billion a year earlier.
Earnings per share also turned positive, rising to Rs77.09 from a loss per share of Rs185.91.
Despite the turnaround, the Board did not recommend a dividend, with capital requirements for refinery upgrades taking priority.
The profit recovery therefore comes with significant caveats, particularly when the company’s policy-related costs and other charges are taken into account.
Rs1.82bn Payment to PSO Adds to Policy Pressure
In April 2026, the government required refineries to transfer part of their HSD-era gains.
NRL’s share amounted to Rs1.82 billion, which was paid to Pakistan State Oil and deducted from revenue.
The refinery also faced repeated changes to diesel pricing mechanisms. Pricing moved through several structures, including weekly adjustments, crude-linked pricing and eventually daily revisions after the financial year ended.
The shifting framework has added uncertainty to refinery earnings and investment planning.
Brownfield Policy Creates Another Financial Burden
NRL also booked around Rs8.2 billion through June 2026 in connection with deemed duty under the Brownfield Refining Policy.
The company says it completed the relevant signing formalities in March 2024 and had already invested in Euro-V HSD production as far back as 2017.
NRL is contesting the charge, but the accounts still reflect the financial impact.
The dispute comes at a time when refineries are under pressure to commit billions of dollars to modernisation and cleaner fuel production.
Tax Changes Further Reduced Cash Flow
The refinery also faced the impact of changes to Pakistan’s tax regime.
Crude customs duty linked to deregulated products, amounting to around Rs6.7 billion through June 2025, was written off. NRL estimates the cumulative impact of related charges at approximately Rs13.5 billion.
The Finance Act 2024 also classified motor spirit, HSD, kerosene and LDO as exempt supplies. NRL says this eliminated around 70 percent of its input sales tax claims.
Super tax, turnover tax, alternate corporate tax and changes to the treatment of export income further increased the tax burden.
Chairman Shuaib A. Malik said in his review that profit would have been “significantly higher” without these charges.
Furnace Oil Market Collapses
The refinery’s furnace oil business faced an even more dramatic decline.
Local furnace oil sales plunged around 95 percent following the petroleum levy introduced through the Finance Act 2025, falling from 93,792 tons to just 5,065 tons.
NRL responded by exporting 280,726 tons of furnace oil, compared with 180,726 tons previously.
However, export realisations remained below crude costs as well as the previous local market price, limiting the financial benefit of shifting volumes overseas.
Smuggling and Imports Continue to Weigh on Demand
NRL also identified fuel smuggling and excessive imports as persistent threats to domestic demand.
These pressures forced the refinery to manage throughput carefully even after market conditions improved.
The weakening rupee added another layer of pressure by increasing the cost of crude payments and creating foreign exchange losses.
Utility expenses, freight costs and letters-of-credit charges also continued to consume working capital.
EVs Add to the Long-Term Refining Challenge
Beyond immediate market and policy pressures, NRL sees structural changes emerging in the petroleum market.
The growing adoption of electric vehicles could gradually reduce demand for conventional fuels. At the same time, global markets are moving away from furnace oil, creating another challenge for refineries with older configurations.
NRL’s credit profile also carries some uncertainty. PACRA maintained the company’s AA/A1 ratings but assigned a “developing” outlook and kept the refinery under watch.
NRL Plans Further Investment and Upgrades
The company is looking at several operational initiatives to strengthen its position.
NRL has highlighted plans involving lighter crude processing, higher HSD and Mogas production, wax sales, the turnaround of its Lube-I unit and repairs to its BTX facility.
A Wood study is also being undertaken to assess potential refinery upgrades.
These measures represent the operational response to a rapidly changing refining environment. But the company’s report suggests that investment decisions will remain closely tied to government taxation, pricing rules and the economics of upgraded products.
The Bigger Policy Question
NRL’s FY26 results tell a complicated story.
The refinery returned to profitability, increased throughput and kept its supply chain functioning during a period of severe geopolitical disruption. Yet at the same time, policy charges, taxation changes, the collapse of furnace oil demand and fuel smuggling continued to weigh on its underlying economics.
The 95 RON episode is perhaps the clearest example.
Pakistan needs cleaner, higher-quality fuels and wants its refineries to invest billions of dollars in modernisation. But if the fiscal framework makes premium products commercially unattractive, the incentive to invest becomes weaker.
NRL’s own theme for the year was “Beyond the Barrel.” Its annual report suggests that moving beyond the barrel will require more than new technology and capital.
It will also require a policy framework that allows cleaner and higher-value refinery products to survive in the market.