This is a re-posted opinion piece.
P-Noy was correct to reject an offer from Petron for the government to reacquire the oil refinery in Limay, Bataan. It is not in the public interest. Government must surely have more urgent and better use of its scarce resources. More importantly, buying back the refinery will not bring about lower gasoline and diesel prices contrary to what some uninformed people are saying. An oil refinery only processes crude oil. And if world oil prices remain high, there is nothing government ownership of an oil refinery can do about it.
In fairness to Petron, I suspect they made the offer to sell the refinery back to government as a PR gesture in the wake of a growing public disgust over rising oil prices. Petron officials know government does not have the resources to buy back the refinery and keep it going. Neither can government afford to put in substantial amounts to finance the refinery’s annual capex program. I guess Petron officials just don’t want it said that they stood in the way of realizing what some people mistakenly think is a viable option to bring down oil product prices.
Leftist firebrands like that Bayan Muna congressman must make the effort to understand oil industry economics before opening their mouths. A refinery owner must buy crude oil for processing. And unlike the traders who only buy enough finished products they intend to sell over a short period of time, a refinery owner must stockpile crude to make sure the refinery keeps running. That means refineries have significant inventory costs that the traders don’t have to carry.
And when the crude is processed, certain very definite amounts of products are produced, not necessarily the products they can sell in the local market. As in the case of Philippine refineries, depending on the crude type they use, they usually produce a large amount of fuel oil (as much as 40 percent or so) that has little market now that Napocor has phased out just about all of its fuel oil power plants and industries don’t use as much of it too. With its recent upgrading, the Petron refinery can reprocess some of the excess fuel oil to produce some middle to light products including diesel but they are often forced to export the unwanted fuel oil at a loss.
From the time a refinery orders crude from let us say Saudi Arabia, it takes about 60 days for that to be transported and processed into finished products. Aside from the inventory carrying cost, they have to worry about price fluctuations in the market… 60 days being an eternity compared to the week or two of the traders.
A refinery owner can lose a whopping bundle if the crude they bought at a high price must be sold as products at a very low price 60 days after. Of course it could go the other way but when it does, they will be accused of overpricing. Two variables are very volatile: exchange rate and world market price of crude/products.
The problem is really more about the oil companies’ lack of credibility. Consumers distrust what the oil companies are saying about their finances. But a government owned Petron will also face, as it did face, the same credibility problem. Perhaps what could help is for government to buy back enough Petron shares to get itself a board seat. That would give government an insider’s view of an oil company’s operations (marketing as well as refining) and have complete access to its financial records.
It is not a total solution, however. Even a board seat in present day Petron is not enough to influence Petron management’s decisions on how to price their products. In fact, most boards of directors are quite inutile in the way companies are managed. They get to know only the operational details that management wants them to know and often belatedly.
P-Noy had the right instincts when he expressed doubt about the wisdom of letting government run an oil company. Our experience with the PNOC companies, including Petron after EDSA 1 had not been good. Politicians came in and exacted their pounds of flesh. This happened even in Petron during Tita Cory’s watch, reason enough for me to ask for early retirement at the ripe old age of 41. Many other career officials left Petron in disgust at about the same time.
Let us not get started at what politicians did to PNOC EDC, including multi-billion peso blunders (e.g. Northern Negros geothermal power plant) the new private owners are now trying to correct at a huge cost… and the billions of pesos lost by PNOC Alternative Fuels Corporation on jatropha during Ate Glue’s watch. Even now, old time professionals at PNOC EC have expressed problems with the political protégés P-Noy appointed on top of them. Just ask Energy Secretary Rene Almendras.
Getting involved in the oil business will give P-Noy a major headache that could make his Matuwid na Daan even more difficult to believe. Rather than getting lower priced oil products, politicians negotiating for oil purchases will likely add their tongpats so that we end up with higher priced products which government ends up subsidizing. We should learn from the lessons of NFA.
San Miguel must be careful when they make such gestures as they did on Petron’s refinery. It makes them look needy… as if they are running out of ammunition to finance their aggressive acquisition binge. Offering to sell Petron’s refinery and a power plant in Limay back to the government smells like they need a bailout. It doesn’t help that there are rumors some people claiming to be close to the President tried to convince him to take the offers possibly in anticipation of generous commissions.
Then again, I can understand if San Miguel wants to get rid of the refinery. Our oil deregulation law is more favorable to oil traders like the independents, even if the hand-to-mouth business model of traders is not good for our national energy security. That’s why Caltex gave up its refinery and I have heard, Shell has abandoned plans to upgrade its refinery and may even be thinking of closing down their small refinery in Batangas.
It would be easier for San Miguel to make money on Petron’s marketing operations if it didn’t have to take all those refinery-related risks, inventory carrying costs and spend large sums of money on capex to ensure the refinery’s efficiency and safety. Besides, San Miguel just bought the Exxon refinery in Malaysia that can be used to process products for sale here. But if this is the intention, there is bad faith in the offer. What would government do with a refinery without the marketing network of Petron? Consumers buy gasoline and diesel from a service station, not a refinery. Offering the refinery to government without the marketing network supposedly to help reduce retail prices is clearly a bad idea.
But I have a good idea for the noisy leftist fringe to include some jeepney driver associations constantly picketing oil company offices protesting oil prices and maybe even Raul Concepcion of Consumer Price Watch. Our oil deregulation law does not stop them from getting together and importing the oil products their members need. Maybe they can team up with one of the independents and buy their own diesel and gasoline from Singapore or wherever. Since they won’t believe oil company figures, they should go out there and find out for themselves.
P-Noy should be congratulated for being savvy enough to see through the offer to buy back the refinery and the power plant. Government must just regulate the oil industry. The last thing we need is another NFA draining billions of pesos from the Treasury at the expense of more urgent needs in education, health and social welfare and infrastructure.
A walking economy
This is from 7thspace.com.
This guy is walking with his friend, who happens to be a psychologist. He says to this friend, “I’m a walking economy.”
The friend asks, “How so?”
“My hair line is in recession, my stomach is a victim of inflation, and both of these together are putting me into a deep depression!”
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By: Boo Chanco – Demand and Supply
Source: The Philippine Star, October 24, 2011
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