Heat is back on big oil companies

For the past 10 years, operating in a deregulated environment, the oil companies managed to avoid the limelight and grilling by legislators. During the same period, the oil industry players, particularly Petron and Shell chalked up record profit levels that were just dreams when ERB was still on their backs.

Now the heat is back on the big oil companies. The shift in attention was triggered by the escalation of crude prices which reached as high as $147 per barrel that brought about the much dreaded weekly pump price increases. Shell and Petron justified the price increases as merely passing on to consumers the additional costs, and consumers – seeing the increasing price of crude in the world market – numbly accepted the bitter pill of high oil prices.

But something happened during the first few weeks of July. As the core of the financial world was rocked by the announced failures and bankruptcies of major international financial entities, crude prices started going down and fast. And this is when the heat on the local big oil companies, Petron and Shell, intensified.

Legislators doubt big oil companies’ transparency

Some legislators now doubt that the oil companies have been transparent in their pricing of oil products. Senator Francisco “Kiko” Pangilinan was reportedly angered by the information that an executive of one of the big oil companies blurted out during a recent meeting of oil companies at DOE that it was normal practice among the players in the industry to discuss and reach a consensus before any of these players initiate changes in prices, up or down.

In the newspaper report, Senator Francisco “Kiko” Pangilinan was further quoted as saying, “The executive who said this should be fired because his statement just proves that all of them are conniving to dupe us.”

Congressman Danilo E. Suarez of 3rd District of Quezon, is raising the question why the reduction in prices are the same for the major oil companies considering they have different sources of supply, different modes of transport and distribution and different operating costs.

“This clearly shows the majors are protecting each other’s profit levels. No one would like to break rank. No one wants to cut into one another’s market share. So there is no real competition here,” remarked Cong. Suarez.

Recently, when Shell announced its biggest price reduction, Shell country chair, Ed Chua, was widely quoted as in effect saying that Shell was moving towards greater pricing transparency. This drew a rebuff from Cong. Suarez who remarked during an interview, “So all this time these big oil companies have not been transparent contrary to what they say that they are just passing on to us their increasing cost.”

Review of Oil Deregulation Law

Being a leading member of the Oversight Committee of the House of Representative, Cong. Suarez recently wrote to Energy Secretary Angelo Reyes requesting DOE to provide relevant information to be used in the review on the implementation and relevance of the existing Oil Deregulation Law.

Among the data being requested covering the period under review are the cost of crude importation, reductions made in gasoline, diesel and LPG prices, reported annual net incomes of Petron, Shell and Caltex (now Chevron) before and after deregulation.

According to Cong. Suarez, analyzing and evaluating the above data is important in determining whether the pricing latitude given to the oil companies by the Oil Deregulation law was being abused. Suarez noted that the double-digit increases in the major oil companies’ profits at the time when consumers were reeling from the price increases are raising concerns of price gouging and unreasonable profiteering.

“It looks like DOE is reluctant to perform its oversight role in the pricing of oil products to protect the interest of the consuming public,” concluded Cong. Suarez.

Beneficiaries of record profits as crude prices soared Cebu Rep. Eduardo Gullas, one of those closely monitoring earnings of oil companies, recently stated that the country’s two biggest oil firms – Pilipinas Shell and Petron – netted nearly P70 billion in cumulative net profits in the first 10 years of oil deregulation.

He observed that the two oil refiners apparently enjoyed massive powers to command pump prices with crude prices volatility in recent months. Thus, their profit levels reached record highs over the last three years. Being publicly listed, at least Petron, is able to share its bounty with local stockholders and the government, which until now holds 40 percent of the company’s equity.

Shell, however, is still unlisted in the local stock market and has managed to elude the deregulation law’s decade-old provision that requires crude oil refining firms to list in the local bourse. Thus, Cong. Gullas noted that only its foreign-based shareholders get the bulk of the benefits from oil’s price volatility.

Other measures aimed at big oil companies

Apart from the possibility of amending some portions of the oil deregulation law, some legislators are considering other measures such as the windfall tax in response to the reluctance of big oil companies to reflect in the domestic pump prices the latest cost of crude and product importations.

While oil firms are entitled to a fair return, Catanduanes Rep. Joseph Santiago said that a windfall profit tax is justified if they are already generating excessive earnings at the expense of consumers.

Cong. Santiago is proposing that the revenues to be generated from the windfall taxes be given as subsidies to marginal households, or to develop renewable and cleaner energy sources that would lessen the country’s dependence on imported oil and reduce harmful emissions.

Smaller oil companies show quicker response

The smaller oil companies that sprouted when the Oil Deregulation Law took effect are now demonstrating their value to the consuming public in a deregulated market. They have been quick in reflecting the downward trend of oil prices. It’s a pity, though, that their distribution network is still on the whole not competitive with that of the big ones.

It is noteworthy, however, that some of these companies, notably FilOil and Flying V of the Villavicencio group of companies, have been putting up more investments in supply logistics infrastructure such as depots, storage facilities and double-hulled barges in order to broaden their distribution network.

These endeavors of local oil marketing companies to expand and broaden their distribution capability deserve public support and government assistance. Only by growing strong can they be able to provide some kind of competitive pressure on the pricing behavior of the big ones. 

 Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.