THE country is expected to register a sharp spike in oil imports following the loss of its oil refining industry, making the country an attractive market for oil traders.
Lone oil refiner Petron Corp. ceased its 180,000-barrel-per-day (bpd) refinery operations in Bataan on February 10. The loss of Petron’s presence sparked an exchange between House Ways and Means committee chairman Joey Salceda and the Action for Economic Reforms (AER) on whether or not local refineries merit government support by way of tax relief in the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Bill. The measure, ratified by both chambers and awaiting the President’s signature, has a provision exempting local refineries from paying taxes and duties on local crude oil imports.
Salceda championed this relief, but the AER asserted that giving local refiners such tax breaks will not solve the problem, because the fiscal regime is not the issue—it is the government’s inventory requirements, placing local refiners at a disadvantage compared to those who just import the oil.
According to the Oil Industry Management Bureau (OIMB) of the Department of Energy (DOE), Petron’s refinery production consists of around 70 percent of its total supply and 30 percent accounts for the directly imported finished petroleum products.
“With the recent scheduled maintenance shutdown, there will be an increase of around 70 percent in the direct importation of finished petroleum products to cover said unproduced supply,” said DOE-OIMB Director Rino Abad in a recent interview.
Based on available DOE figures, the country’s total oil imports reached 16.05 million liters at end-September last year. Of which, 11.93 million liters is petroleum and 4.13 is crude oil.
The increase in oil imports could go on for a few months until Petron resumes its refinery business.
Petron informed the DOE that the shutdown would last for four months. During the shutdown, maintenance activities on key process units would be conducted.
‘No threat’
PILIPINAS Shell Petroleum Corp., meanwhile, permanently ceased its 110,000-bpd refinery operations in Tabangao, Batangas, in August last year. The site has been converted into an import-receiving terminal.
However, closure of the refineries does not pose a threat to non-oil refiners because finished products are abundant almost all over the world. “The total import combined is less than half of 1 percent of available global supply of oil. It will hardly dent the available supply nor will this affect pricing,” said Eastern Petroleum Chairman Fernando Martinez in a text message.
Phoenix Petroleum Senior Vice President for External Affairs Business Development and Security Raymond Zorilla said that even if all oil companies import their requirements, “it won’t have any impact on us.”
In fact, Abad said there is excess supply in the international oil market. “Supply is not an issue. And with the absence of a refinery, the country becomes much more attractive in the eyes of oil traders.”
The DOE insists that there will be no supply disruption when importation is done properly. “The first security layer calls for the strict compliance with the minimum inventory requirement (MIR),” said Abad.
MIR compliance
BASED on DOE Circular 2003-01-001 issued in 2003, petroleum refiners are required to maintain product inventory “equivalent to 30 days’ supply consisting of crude oil and refined petroleum products.”
For the finished product importers, the MIR is good for 15 days of equivalent supply; while for liquefied petroleum gas (LPG), the inventory shall at least be seven days.
“Petron can still supply [oil]that will last for more than 30 days as of early February. This supply is already in their tanks. We were also informed that Shell’s inventory is also good for over 30 days. Therefore, supply is not an issue because they will replenish this as they shift to importation,” explained Abad.
At the mercy of foreign suppliers
RESEARCH firm Fitch Solutions noted that the country’s economy would be tied to fluctuations in global energy prices as it becomes fully dependent on imports for its fuel needs.
It said that the country’s implied import dependence is expected to increase to 67 percent by 2025 from 48 percent over the past decade. “A downsized domestic refining output, next to rising need for imports, is expected to prove a drag on the trade balance over the coming years, creating pressures for the Philippines’s external financing position when domestic demand for energy is rising,” added Fitch.
Consumer group Laban Konsyumer Inc. (LKI) agreed. “It will make us dependent on foreign supply and prices. We will be put at the mercy of foreign oil suppliers,” said LKI president Vic Dimagiba.
Nonetheless, oil prices are expected to rise after a slump in demand was experienced globally. “We have noticed that prices are increasing. Supply is not an issue. [What is being constantly weighed in the] international supply-demand balance [is the effect on] price. International suppliers are very keen to increase the price since [they are now trying to recoup what they lost],” explained the DOE official.
Local pump prices increased four times this month and rounds of oil-price hikes are expected in coming weeks.
‘Not a vital industry’
Meanwhile, the AER is making a last-minute appeal to Duterte to do a line veto on CREATE in order to take out the sector the group insists is “not a vital industry.”
In a statement last week, it refuted the claim of Salceda that the crude oil refining industry makes up 5 percent to 6 percent of the country’s gross value added (GVA) in manufacturing.
In a statement published in the BusinessMirror on February 22 (“Salceda defends CREATE perks for local oil refineries”), Salceda had “noted that the crude oil refining industry contributes around 5 percent to 6 percent of the country’s total gross value added in the manufacturing sector.” The lawmaker was justifying the provisions inserted in the bicameral conference committee of the CREATE Bill, which exempted local refineries from paying taxes and duties on local crude oil imports.
These tax breaks, the AER noted, were inserted in an attempt to prevent the permanent shutdown of the Petron refinery in Bataan, the last remaining oil refinery in the country, which has been suffering from weak refining margins.
As Salceda put it, the tax breaks will level the playing field for direct importers of finished petroleum products and local crude oil refiners. He claimed what is at stake from a permanent shutdown of Petron’s refinery is this: loss of 5 percent to 6 percent of GVA in manufacturing.
However, the AER stressed that GVA of oil refining in the manufacturing sector “is actually only 2.7 percent as of 2020 and has been on a steady decline for several years now.” Oil refining “only contributes around 0.6 percent to our gross domestic product,” the AER added.
The AER thinks “the tax breaks inserted in CREATE will not keep the refinery open in the long run, as the shutdown of our oil refineries is not due to the tax regime, but due to our lack of economies of scale to be competitive in oil refining.”
It recalled Finance Secretary Carlos Dominguez III saying previously that Philippine refineries cannot “compete with larger end-to-end refineries with petrochemical complexes.”
Indeed, the AER said, the Philippines “does not have the comparative advantage nor the economies of scale to be competitive in oil refining.” Petron’s maximum productivity, it noted, is at 180,000 bpd; in contrast to Singapore’s refineries producing 500,000 to 700,000 bpd; South Korea’s 700,000 to 800,000 bpd; and India’s 1.3 million bpd.
The real constraint to local oil refineries is not the tax regime, the AER said, but “the inventory requirement of the Department of Energy.” It elaborated thus: The input value-added tax (VAT) of an oil refinery is lower than that of an importer of refined petroleum products. Meanwhile, oil refineries are more vulnerable to price squeezes because the DoE’s inventory requirement is 60 days’ worth of product, while an importer of refined petroleum needs to maintain an inventory of only 14 days. (In reality, the inventory for local oil refiners is around 40 to 45 days). Furthermore, as oil is a commodity, it is subject to price volatility.”
The AER also disputed Salceda’s position that a permanent closure of Petron’s refinery could expose the country to a national security threat as it becomes dependent on imports.
Any day now, it is said, the President will sign CREATE, which economic managers have long sought for. Whether the tax perks issue for refiners becomes subject of a line veto is anybody’s guess. Meantime, the oil traders are having a field day.
