Lower refinery output in PH may push fuel prices up – report

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Metro Manila (CNN Philippines, October 22) — Declining supply of locally-refined fuel will have "substantial" impact on the Philippine economy, Fitch Solutions warned following Shell Philippines' decision to shut down its processing facility in Batangas.

In a reported released to media on Thursday, the market research unit warned that the company's move will leave the Philippines more dependent on oil imports, which could raise risks in terms of inflation, the trade gap, and the exchange rate.

"The Philippines’ refining sector has been left reeling in the wake of Shell’s decision to permanently close its crude oil refining facility after decades of being in operation," Fitch Solutions said, referring to the August announcement that Shell was shutting down its refinery in Tabangao town. 

Shell decided to scale down its operations in the Philippines as its finances have been crimped by the global pandemic. It also placed its 45% stake in the Malampaya gas-to-power project up for sale, a facility it has maintained since 2001.

Fitch pointed out that new tariffs implemented since May pumped up the price of imported petroleum products. President Rodrigo Duterte hiked oil import duties to 10% to raise badly-needed revenues as the government struggles to fund its COVID-19 response.

This is on top of the "heavy" taxes imposed on fuel companies, Fitch said, such as the higher excise taxes in place since 2018 under the Tax Reform for Acceleration and Inclusion law and the cost of the state's fuel marking program passed on to companies and consumers.

Shell's move leaves Petron's Bataan refinery as the sole source of locally-processed fuel — but even that may be at risk of closure following reports quoting its president and chief executive officer Ramon Ang about challenging operating conditions and an unfair tax regime for refiners.

"A potential closure would leave the Philippines fully dependent on imports for its fuels needs," the report said, with the Philippines seen to import at least two-thirds of its requirements in the next few years. This could rise further should Petron decide to follow Shell's path.

Chevron, which runs Caltex retail stations nationwide, was first to pull out its refinery operations in 2003.

"The economic repercussions could prove to be substantial," the Fitch unit added. "In our view, greater dependence on energy imports will leave the Philippines economy more tied to fluctuations in global energy prices."

The Philippines will be forced to spend an additional $900,000 each year if it needs to fully import all of its fuel needs, with demand seen to continue growing in the coming years. Actual import duties paid for fuel product hit about $7.5 billion in 2019, Fitch Solutions said, based on data from Trade Map ITC.

A heftier oil import bill could push domestic fuel prices up, with risks to inflation seen more elevated. Oil plays a big role in the cost of basic goods, primarily due to transport, power, and logistics.

This would also mean a wider external trade gap that could put pressure on the country's ability to attract foreign investments, and may also soften the recent strength of the peso against the US dollar.

However, the Fitch unit noted that the Philippines has built up its dollar reserves to over $100 billion, providing a healthy cushion should import payments climb.