Loss of domestic refining seen driving up PHL fuel costs; risks to forex

THE Philippines will have to spend more on imported petroleum products over the coming years should it be left with one domestic refinery or none at all, Fitch Group’s research arm said.

Fitch Solutions Country Risk & Industry Research said with zero or one domestic refinery, the Philippines will have to spend an additional $600,000 to $900,000 each year on imported fuel.

In May, the two domestic refineries shut down due to weak demand. One, run by the Philippine unit of Royal Dutch Shell PLC, has since announced a permanent closure due to worsened margins.

The other refinery, run by Petron Corp., is also considering closing its 180,000 barrel-per-day (bpd) refinery in Bataan, which would leave the Philippines “fully dependent” on imports of processed petroleum products, Fitch Solutions said.

With the expected rise in consumption over the next few years alongside the economic recovery, Fitch Solutions forecast the ratio of imports by 2025 to rise to 67% from 48% over the past decade. The share of imports could still rise “depending on Petron’s decision,” it said.

In turn, the “inability to offset rising fuel import needs with its own production” will likely lead to greater import costs.

“Downsized domestic refining output, next to a 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,” Fitch Solutions said.

In the six months to June, Pilipinas Shell Petroleum Corp. and Petron reported a 19% decrease in combined output to 3.878 billion liters of refined petroleum, according to the Energy department’s Oil Industry Management Bureau.

Fitch Solutions said refining capacity may dwindle by “nearly 40%,” the lowest level since the 1960s, if only the Petron refinery is operational.

Petroleum imports totaled 5.954 billion liters over the same period, down 35.4% decline from a year earlier.

The Department of Energy said in August that the shutdown of Pilipinas Shell’s 110,000 bpd refinery in Tabangao, Batangas will not affect the fuel supply as the company will replace its output with more imported refined petroleum.

As the Philippines becomes more dependent on energy imports, its economy will also be “tied to fluctuations” in global energy prices.

Fitch Solutions warned that heightened dependence will pose risks like an “extra” burden on foreign exchange reserves or the ability to attract foreign investment — a “highly negative prospect as the country is still deficient in many key infrastructures in and outside of oil and gas.”

There is also the risk of creating depreciatory pressures for its own currency, while import inflation or disinflation risk will become “more elevated.”

While the Philippines can still offset high import costs with a reserves buffer and remittances in the near term, policymakers will have to manage the growing risks that could result in “tighter” monetary policy over the longer term.

The closure of Pilipinas Shell’s refinery is part of a larger rationalization scheme of the Anglo-Dutch multinational. It has cut a quarter or $5 billion of its capital expenditure this year, and billions more from operations through asset divestments and streamlining operations. It specifically planned to reduce the number of its global refineries to 10 from 17 last year.

Not only are Shell’s cost-cutting efforts seen in the downstream oil sector, but also in the exploration segment as Shell Philippines Exploration B.V. will also sell its operating stake in the country’s sole natural gas field project in Malampaya, northwest of Palawan.

Meanwhile, Petron may shelve its plans to invest further in its refinery business, Fitch Solutions said, given the operational challenges and the “uncompetitive” tax regime for refiners. In 2017, the company said it will invest $10 billion to upgrade its refinery in Limay, Bataan, while also building a larger one in the southern Philippines. — Adam J. Ang