How to lose an oil refinery

According to NEDA, our real Gross Domestic Product (GDP) expanded by 4.6 percent in the third quarter of this year and this brought the first three quarters of GDP growth to the same 4.6 percent. I forwarded NEDA’s press release to UP economics professor Philip Medalla, a former NEDA chief, and this is his comment:

“I think that GDP growth has been over-stated by one percent to two percent since 2000. So actual growth could be between 2.6 percent to 3.6 percent. It’s hard to believe that in Q3 2008 industry grew by 7.1 percent, manufacturing by 4.7 percent and export-oriented industries by 4.8 percent.”

I reviewed another NEDA release which explained the positive export performance Ralph Recto reported, even as electronic products exports and garments suffered a significant reduction in volume of shipments. Apparently, petroleum and mineral products kept September exports afloat.

”Exports of petroleum as well as mineral products contributed significantly to the increase in total export receipts in September this year. This is despite the drop in the exports of electronic products that triggered the slowdown of the total merchandise exports to 1.2 percent in the said month from the revised 6.6-percent growth in August and the revised 5.1-percent increase posted in the same period last year.” The Recto release claim “both value and volume of petroleum exports posted positive growth rates at 102.6 percent and 16 percent, respectively.”

I asked sources in the petroleum industry why they are exporting so much petroleum products. One explanation: the bulk of their exports is fuel oil, which now has a limited local market as power plants have shifted to other fuels. The Bataan Refinery’s straight run output (i.e., from distillation) is 35-percent to 40-percent fuel oil. Their long-term goal is to have enough upgrading capacity to convert most of the fuel oil to white products like gasoline. While they have started the upgrading, more investment has to be made in additional facilities.

The two refineries here are forced to export excess products so that they don’t have to slow down or shut down the refinery for lack of storage tanks. Mr. Recto may think our export performance looks good in a NEDA report but local oil companies, and the country, actually lose money with these forced exports.

The other sad thing about this fuel export is that they also export diesel when theoretically, we should be a diesel importing country following the shutdown of the Chevron refinery in 2003. However, as smuggling is now so rampant (estimates range from 20 to 30 percent of all diesel consumption), legitimate players especially refiners lose sales and they have to resort to exports mostly at a loss.

I guess this is why Shell has apparently shelved a plan to invest a billion dollars in a new refinery in Batangas. Two years ago, Malacañang prematurely announced not once but twice that this investment was coming— a done deal daw. I doubt if it is going to happen at all. Our oil deregulation law favors traders who just import the petroleum products. That’s why Caltex (Chevron) decided to close down their refinery in Batangas. Shell may just be inclined to close down its refinery too given present regulations and market situation.

The refining sector needs incentives especially a duty differential if we want to save our refineries. Many Asian countries maintain a tariff differential between crude and product imports. In our case, the tariff is the same, and if some players do not pay the full amount of duty, excise tax and VAT on the products they import (as in smuggling), then refiners are actually worse off.

The oil companies with refineries also carry bigger inventories (and incur correspondingly larger financing costs) given that it takes two to three weeks for crude from the Middle East to get here. When prices are quickly falling, Shell and Petron are at a disadvantage since they can’t bring down prices as fast as the importers. But when prices are moving up quickly, having refineries here give us a measure of stability.

The way things are going, we will likely end up losing our refineries and all the oil companies will just totally import their products. Most refineries in the region are now mega refineries (Reliance refinery of India is close to 900 kbcd capacity vs Petron’s 180 kbcd) with high level of complexity! Having a refinery here also provides our top engineers the opportunity to handle a complex technological operation.  

If the economics of having an oil refinery here really sours, we would lose another manufacturing facility. That makes us worse off in the sense that we are losing another industry that could have been part of the foundation for our country’s industrialization.

Clinton initiative

The on-going meeting in Hong Kong of the Clinton Global Initiative (CGI), the first in Asia, will probably be the last. According to the New York Times, to clear the way for the appointment of his wife Hillary as US State Secretary, former US President Bill Clinton agreed with the Obama transition team to no longer hold annual meetings outside of the United States nor accept any new foreign government contributions for the CGI. 

The former US President has leveraged his fund raising prowess to generate resources to address some of the world’s most pressing challenges. After attending thousands of meetings during his career in which urgent issues were discussed but no action was taken to solve them, President Clinton saw a need to establish a new kind of meeting with an emphasis on results. Thus, in 2005, President Clinton established CGI to turn ideas into action.

All CGI members are asked to define and pursue a new, specific, and measurable approach to a global challenge. CGI members are required to make a commitment. Members who do not make a commitment will be unable to participate in CGI events until they do. Since 2005, CGI members have made nearly 1,000 commitments valued at upwards of $30 billion to impact more than 200 million lives in over 150 countries.

Two of the commitments made at the CGI meeting in Hong Kong on behalf of Philippine organizations had to do with saving the environment and improving the quality of education. Despite the ongoing global financial crisis, Lopez Group chairman Oscar M. Lopez reiterated the Philippine conglomerate’s commitment to pursue two projects: help the country’s reforestation drive and promote the expanded use of technology in upgrading teaching standards in public schools through the Knowledge Channel.

Lopez is committing to spend P405 million for a reforestation program to be implemented by Energy Development Corp.(EDC), an energy company that is the second largest producer of geothermal power in the world. Under a greening program called “Binhi”, EDC will increase the awareness of local communities and the youth on indigenous and endemic forest tree species and their importance to biological diversity. EDC will use the Lopez donation to cover 1,000 hectares a year for the next 10 years.

The program will also help in the restoration, rehabilitation and preservation of the country’s forest lands to serve as habitats to valuable flora for biodiversity preservation; and provide additional sources of livelihood to forest dwellers through reforestation.

Lopez also pledged P10.5 million to Knowledge Channel Foundation, which runs the first and only all-educational channel on Philippine cable and satellite. Lopez’s donation will be used to cable 80 public schools in depressed areas in Metro Manila within six months. Public schools provided with access to curriculum-based educational programs that air on Knowledge Channel have experienced significantly improved student performance as seen in division and national assessment examinations.

Thanksgiving

 Dr. Ernie E sent these things you can only say at Thanksgiving.

1. Talk about a huge breast!

2. Tying the legs together keeps the inside moist.

3. It’s a little dry, do you still want to eat it?

4. Just spread the legs open and stuff it in.

5. I didn’t expect everyone to come at once!

6. You still have a little bit on your chin.

7. How long will it take after you stick it in?

8. That’s the biggest one I’ve ever seen!

Boo Chanco’s e-mail address is [email protected]