Shell shuts down refinery in boost to oil imports

MANILA, Philippines — Pilipinas Shell Petroleum Corp. has shut down one of the Philippines’ two oil refineries due to the pandemic, transforming it into a storage facility that effectively increases the country’s dependence on oil imports. 

In a disclosure to the stock exchange on Thursday, Shell said operations will no longer resume at the company’s crude oil refinery in Tabangao, Batangas which have been suspended since mid-May. Instead, the facility will be converted into a “world-class” terminal for imported liquefied natural gas. 

The closure leaves a supply hole of 110,000 barrels per day, which Energy Secretary Alfonso Cusi said will not severely affect the Philippines’ oil supply. As it is, the Philippines is net oil importer that only generated 1.1% of its oil supply onshore in 2017, while the rest were shipped in, energy department data showed.

Without Shell’s refinery, where crude is transformed into final products like gasoline, Ang-led Petron Corp. is left as the lone local refiner that produces a bigger 180,000 barrels per day at its Bataan plant, at least before the coronavirus disease-2019 (COVID-19) outbreak also forced it to temporarily close since May 5.

"We do not expect this to be immediate. It would take months or years before Shell can decommission their facilities and import," Energy Undersecretary Rino Abad said by phone.

"As it is, right now, oil supply in Visayas and Mindanao from Shell is all imported, and by our estimates, only 50% of demand is able to be met by these refineries. The rest are imports," Abad added.

But Peter Lee, senior oil and gas analyst at Fitch Solutions, is pessimistic. "Life without Tabangao in operation is certainly bearish for the Philippines as it implies even greater dependence on imported fuels for the quarters ahead," Lee said in an e-mail.

In terms of costs, Shell estimated to asset losses of P6 billion from the refinery’s termination. “Said impairment will not have a cash impact on the corporation,” the company said.

“Due to the impact of the COVID-19 pandemic on the global, regional and local economies, and the oil supply-demand imbalance in the region, it is no longer economically viable for us to run the refinery,” Cesar Romero, Shell’s president and chief executive, said in a statement.

Cusi, in a separate statement, lamented the plant’s closure while assuring the public of sufficient oil supply while most of the country remained under some form of movement restrictions, which included a suspension of public transport, most notably in Metro Manila.

“What saddens me is the plight of the workers that will be displaced due to the closure. I hope they will find employment with the other industry players,” Cusi said. It was unclear how many employees will be affected by the decision.

Incurring losses

Local oil firms have reeled from lockdown orders that kept people— and their cars— at home. Public transport was shut down anew in the metropolis from Aug. 14 to 18 after a renewed tightening of restrictions, denying oil firms their biggest clients. 

Citing energy department data, Shell said demand for petroleum products “is not yet back to its normal levels” since it declined by as much as 60-70% year-on-year in April at the height of enhanced community quarantine in Luzon.

Plummeting global crude prices added to the injury. On average, oil prices sank to $20 per barrel in April from the end-2019 price of $67 per barrel, resulting into “substantial” losses of P5.8 billion as a result of holding into huge inventories that have already depreciated in value.

As a result of this double whammy, Shell’s balance sheet took a dive into the red. In the second quarter, the company reported a net loss of P1.2 billion, albeit narrower than first quarter’s P5.5 billion loss as oil prices “slightly improved and stabilized” during the period.

From January to June, the oil firm swung to a net loss of P6.7 billion, a reversal from P3.7 billion net income booked in same period last year, financial results showed. Shell has cancelled dividend payouts for this round “to ensure the corporation remains financially resilient and to preserve cash.”

“We are committed to make the right sustainable decisions now to protect our shareholders for the long-term,” Romero said. “We have been serving Filipinos for 106 years and we intend to continue to do so for the next 100 years or more.”

Shares in Shell dropped 4.11% to P16.78 apiece at close on Thursday.