Depressed refining margins to hit Petron, Shell — Moody’s

MANILA, Philippines — Local refiners Petron Corp. and Pilipinas Shell Petroleum Corp. may continue to suffer this year as depressed refining margins are seen to persist in Asia, according to Moody’s Investors Service.

In its latest report, Moody’s senior vice president Vikas Halan said Asian refining margins would remain low.

Consumption of petroleum products and petrochemicals was low in 2019 compared to recent years because of the trade dispute between the US and China and the consequent economic growth slowdown in Asia.

Refining margins and petrochemical spreads in the region will remain depressed this year, constraining earnings growth for the region’s downstream-focused companies.

“We do not expect the commodity consumption growth to pick up significantly in 2020, given our subdued expectation of economic growth in the region – especially in India and China,” Halan said.

Moody’s said Singapore’s refining margins averaged $3.70 per barrel last year, a stark decline from the $6 per barrel average for 2017 and 2018.

Specifically, the country’s refining margins turned negative in December last year.

“The decline in refining margins stemmed from a steep fall in fuel oil prices, driven by the International Maritime Organization’s new IMO 2020 regulation that restricts the usage of high-sulfur fuel oil in marine transportation,” Halan said.

As of the end of September last year, Petron – the country’s largest oil refiner and marketer – booked a net income of P3.6 billion, down 70 percent due to low refining margins amid worsening oil smuggling in the country.

PSPC -- the local unit of Royal Dutch Shell—earned P4.4 billion in the same period, lower by 39 percent.

Moody’s pointed to slower economic growth for the lack of increase in gas oil spreads to mitigate the decline, which was actually anticipated by the market.

It said some smaller refiners could use the low-priced fuel oil as feedstock, “possibly further increasing the supply of gasoil and keeping margins low.”

“By contrast, the high-complexity refiners have little fuel oil in their product mixes, and will see less impact from the decline in spreads,” Halan said.

Moody’s expects refinery upgrades by Asian refiners to l increase as fuel oil spreads remain depressed.

“Most of the rated Asian refiners have been looking to upgrade their refineries so that they can use heavy crude, available at a discount to benchmark crude, and also to minimize production of fuel oil,” Halan said.

In July last year, Petron announced plans to put its expansion plans on hold amid a challenging business environment.

It was supposed to expand its world-class facility in Bataan to add 90,000 barrels per day and bring the refinery’s total capacity to 270,000 barrels per day by 2021.

Petron’s refinery in Limay, Bataan, which supplies 40 percent of the country’s fuel requirements, is the biggest and pioneering refinery in the Philippines.