That’s because Pilipinas Shell has taken every legal maneuver over the past four years to delay compliance with the provision in the Oil Deregulation law that required oil companies to IPO at least 10 percent of their shareholdings within three years from passage of the law.
First they said "the depressed market conditions prevailing in 2001 made it difficult for us to comply." The brutal effects of the Asian financial crisis were obvious to everyone, so it was easy to understand their position. They also managed to get both the Department of Justice and the Department of Energy to see it their way.
According to the DOJ, the three-year period prescribed by the Deregulation Law is directory, not mandatory. The DOE, after a lot of press releases by then Energy Secretary Vince Perez that he will make sure Pilipinas Shell goes public, then issued Memo Circular 2002-10-06, which stated that the IPO can be conducted after the lapse of three years, upon an assessment and determination by an independent financial adviser that the socio-economic, political and financial conditions warrant such an offer. I think the DOJ opinion and the circular of DOE, effectively legislated.
Thanks to DOJ and DOE, the Pilipinas Shell guys are correct to tell me now they are in compliance with the law. Those congressmen who are calling for Pilipinas Shell’s IPO should summon DOJ and DOE officials to explain why they effectively torpedoed the intent of the law. It would seem that Rep. Joseph Santiago of Catanduanes who issued a press release on the matter didn’t do his research well enough.
According to Ed Chua, the CEO of Pilipinas Shell, their "main concerns when we do an IPO are two things: 1. that there is no shareholder value loss to our existing shareholders and 2. that we are clear about the future of the refinery on whether we will shut it down like Caltex or that we will invest to upgrade and expand."
That might be true but then again, I don’t think Pilipinas Shell can just choose the provisions of the Deregulation Law they want to implement and ignore the ones they don’t think is to their advantage. If there is some shareholder value loss in the process of complying with the law, that should be considered part of the cost of doing business here.
But Chua points out that the second item on what to do with the refinery is the more important consideration. If they decide to close down the refinery, as Caltex did, they don’t have to do an IPO. Given refinery margins in the past, there was every business reason to close the refinery down. The Deregulation Law is simply biased in favor of the product importers.
But the tide has turned. Given the tightness in available refinery capacity in the region and the world, both Petron and Pilipinas Shell are now benefiting from their refineries here.
The question however is, would this benefit persist in the long term? Because Royal Dutch Shell is a global player, it has to make the refinery investment decision on the basis of what the other players in the region are going to do. Pilipinas Shell’s market share in our relatively small market will not justify needed massive investments. That’s why they are asking for more time to decide if they will upgrade and expand their refinery. After all, it will cost anywhere from $500 million to $1.2 billion and must last for 20-25 years.
One thing is sure... the present refinery is too small and probably too old to matter in the long term and therefore, not a good basis for an IPO. Chua assured me that they would definitely make a decision on the refinery by the end of next year. Only then will they face the issue of whether to do an IPO or not. "It would totally be unacceptable if we launch the IPO now and only to close the refinery later. This would create an adverse impact on Shell’s reputation as Shell might be accused of deceiving and misleading its investors."
What would make them decide to invest in a world- class export refinery here? A more favorable environment to make decent margins would help tilt the decision to put in the billion dollars needed. The Deregulation Law would have to be amended or as proposed by Energy Secretary Popo Lotilla, an Executive Order be issued to impose a tariff differential between crude and finished petroleum products.
Both Pilipinas Shell and Petron point out that from 1997 to 3Q 2003, local refining margins were almost zero if not negative. The last 18 months have been good but two or three years down the road, there is no certainty that the tight capacity in the region will still persist. Chua recalls "we have all been burned especially for us since our new refinery started up 1994 (three years before the collapse of margins)."
Chua asks: "Why is it that since deregulation we have attracted traders and marketers but no refiner despite the fact that the country is short of capacity and is currently importing 50 percent of its finished product requirements? One refinery was even shut down!"In addition to the local oil industry environment, Chua also warns that local conditions (politics, perhaps?) also contribute to a not so favorable investment climate.
Well, if the government knows what is good for the country, they should do what is necessary to attract the big bucks needed to establish or even just to upgrade oil refineries here. In a sense, the Supreme Court, which nullified the differential, effectively favored the product spot market importers over the refiners. We now suffer the consequences of this business decision made by the court. Since Popo Lotilla is a lawyer anyway, he must sort out this legal issue. A mere EO may not provide enough assurance to get the billion dollars invested here, given our well known tendency to flip flop on investor guarantees.
But we do need Shell’s prospective refinery investment badly. As we are now seeing, in times of crisis, the refiners have a better handle on managing the price surges than the product importers. The importers must reflect every convulsion in the spot market immediately. The refiners have a little more lead time. The refiners who buy crude usually on long-term contracts, also get better prices. It is also clear that having refineries here give us a level of security in supply, specially in these troubled times. It is also a source of export earnings and provide high technology careers for Filipino engineers.
In any case, Chua points out that even without the IPO, Pilipinas Shell is owned 18 percent by Insular Life Assurance Co., which is mutualized. This effectively makes the thousands of Filipino insurance plan holders of Insular Life owners of Shell. Parang IPO na rin daw yun. The other significant shareholder of Pilipinas Shell is Rizal Commercial Banking Corp. of the Yuchengcos, at 1.8 percent. The World Bank through the International Finance Corp. owns 1.9 percent.
And of course, Mike A and family are Pilipinas Shell stockholders too. But before anyone jumps to conclusions, their Shell investments may be small potatoes to Mike A... I don’t think the Pilipinas Shell guys used their Arroyo connection to get favorable rulings from DOJ and DOE on their IPO. They must have other powers of persuasion.
For now, however, I have to disabuse my mind that I am contributing to the explainable wealth of Mike A and brother Iggy every time I load at Shell. That would be difficult to do because I know that every time Pilipinas Shell reports a few billion pesos in profits, which it always declares as dividends, Mike A and Iggy partake of that too... and because it is all legit and unimpeachable, Jose Pidal won’t even have to come into the picture.
Now... if they had done their IPO, I might have had a stake too and that wouldn’t be so bad... even if Mike and Iggy got their share too.
Patient: "Well, Doc, you sure kept your promise. You said I’d be walking in a month and you were right. I had to sell my car to pay your bill."
Boo Chanco’s e-mail address is bchanco@gmail.com