Petron refinery’s strategic value

DEMAND AND SUPPLY - Boo Chanco (The Philippine Star) - January 11, 2021 - 12:00am

We are about to lose the last oil refinery and no one in government seems the least bit concerned about it. The reaction of the Department of Energy was sheer nonchalance. The Secretary of Energy merely said he respects the business decision of Petron.

That’s the problem when the folks in government do not understand the gravity of the situation. An oil refinery is a vital and strategic asset of a country. It protects us, to some extent, from the unexpected ups and downs in the volatile oil market.

Petron’s Bataan Refinery gives us at least a couple of months leeway in case of disruptions in international oil supplies or sharp changes in prices.

Letting ourselves become 100 percent dependent on the spot market for petroleum products puts us in a very dangerous situation if prices and/or supplies tighten overnight. Such situations have been known to happen specially when political tensions flare up in the Middle East.

An October 2020 paper of Fitch Solutions Country Risk and Industry Research said as much. It observed that the closure of the Petron and Shell refineries leads to “economic repercussions that could prove to be substantial.”

Fitch noted that our fuel import bill has risen every year since 2016 as demand rose.

“As domestic fuel demand is expected to grow over the coming years, the Philippines will have little choice but to raise import volumes in response… the inability to offset rising fuel import needs with its own production is likely to result in further added import costs down the line.

“In our view, greater dependence on energy imports will leave the Philippines economy more tied to fluctuations in global energy prices.

“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’ external financing position when domestic demand for energy is rising…

“In addition, risks related to import inflation or disinflation will become more elevated… as import volumes grow, the risks policymakers need to manage will inevitably grow, potentially resulting in tighter monetary policy over the longer-term.”

I was with the Ministry of Energy and PNOC when responding to the energy crisis was top priority. Oil price increases were worrisome, but more problematic was the occurrence of temporary shortages when no oil could be bought at any price.

The situation has tremendously improved through the years, but we must never forget the lessons of the past. The disruption to our economy from an unexpected oil price increase or oil supply shortage can be devastating.

Oil may not seem as important as it was in a country’s energy mix these days, but it is still significant specially for transportation.

The reason for Petron’s decision to shut down, perhaps temporarily, can be easily remedied by passing legislation that will level the playing field in terms of how taxes impact on Petron’s bottom line. Petron is not asking for special treatment. It only wants to be levied the same level of taxes their competitors pay.

Beyond supply continuity and strategic oil storage, keeping the Petron refinery going enables us to keep high quality technical and engineering professionals within the country.

A refinery is about the most complicated in terms of engineering among our various industries. Working in a refinery is the challenge that whets the ambitions of budding engineers. Indeed, during our time, many engineers in that same Bataan refinery had worked with distinction in other refineries overseas.

Ramon Ang, CEO of Petron, a mechanical engineer, knows the value of the refinery from a professional perspective. That’s why he didn’t flinch when he decided some years ago to invest $3 billion to upgrade it. He saw the strategic advantage not just to Petron, but also to the country to have a modern refinery within our borders.

That’s why he quietly assumed the tax disadvantage for years, earning less per liter of product than competitors. Less profits, so long as there are profits, was not bad for Ramon who always takes a national perspective.

But the COVID lockdown that resulted in a dramatic drop of demand forced his hand. He couldn’t run the refinery indefinitely and bleed. Besides, with such low demand, they would run out of storage tanks for finished products. A refinery, like a nuclear power plant, cannot be instantly switched on and off.

This led to the decision for an “economic shutdown.” Petron said it plans to execute maintenance activities on key process units at the refinery. Whether they resume operations and when depends on market conditions and tax reform.

Ang said that because of excessive taxes, it makes sense to just import finished petroleum products rather than import crude oil and have it refined in the country.

Oil refiners are slapped a 12-percent value-added tax (VAT) for imported crude oil which will be refined and later sold as finished products to the market. Finished products are also levied with a 12-percent VAT and excise tax.

On the other hand, Petron’s competitors that do not have a refinery only pay VAT and excise taxes when they bring out the imported finished products from their terminals.

Ang said Petron’s concern about “tax imbalance” in the country was already raised with the government. He said the only recourse he could think of is for Congress to amend the law.

The current tax regime, he stressed, is weighing heavily on Petron’s finances. The company suffered a whopping P14.2-billion net loss in the first half of 2020 from a net income of P2.6 billion in the same period the previous year.

Then again, I was wondering if the nonchalance of DOE is because they are planning to take over the refinery after it is shut down and claim national security concern. PNOC already tried to get the land (and the refinery on it) and that case is still pending in court.

If they tried that again, that would leave a real bad taste in the mouth as that would reek of government bad faith. That dooms us from getting any investments foreign or local. I sure hope they aren’t that stupid.



Boo Chanco’s email address is bchanco@gmail.com. Follow him on Twitter @boochanco

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