By Beting Laygo Dolor, Contributing Editor

With one of the country’s two domestic refineries ceasing operations, prices of petroleum products can be expected to rise in the coming years, according to the Fitch Group’s research arm.

Worst, the Philippines’s other refinery may also cease operations, or at least suspend its expansion plans for the foreseeable future.

This grim scenario was presented to local media by Fitch Solutions Country Risk & Industry Research last week, which said that the country will have to spend an additional US$600,000 to US$900,000 every year for its fuel imports.

Pilipinas Shell – the local unit of Royal Dutch Shell PLC — announced earlier this year that it was closing its refinery located in Tabangao, Batangas.

Pilipinas Shell said the facility would be permanently closed, even as the country’s other refinery, owned and operated by Petron Corp., was still mulling whether its 180,000 barrels per day (BPD) pru refinery in Bataan would eventually resume operations, or shut down for good.

In 2017, Petron announced that it would invest US$10 billion to upgrade its Limay, Bataan refinery, even as the company was planning on setting up another facility in the southern part of the Philippines. But Fitch said the plans are almost certain to be shelved given the “uncompetitive” taxes in the country.

 

Pilipinas Shell processes 110,000 bpd per day, making it the smaller of the two refineries.

Pilipinas Shell and Petron Corp. ceased operations last May as a result of the Covid-19 pandemic, which caused a sharp drop in demand for fuel following a downturn in the economy.

Should both companies close their Philippine operations for good, it would leave the country “fully dependent” on imports of processed petroleum products, according to Fitch Solutions.

The Department of Energy sought to allay fears of a shortage by saying that the country could replace the lost local output with imports of refined petroleum products.

The Philippines could pay a heavy price for its impending overdependence on petroleum imports.

Fitch Solutions predicted the ratio of imports to locally refined products to rise to 67 percent by 2025, from 48 percent a decade ago. That ratio could rise even more should Petron opt to cease local refinery operations.

According to Fitch, “downsized domestic refining output, next to a rising need for imports, is expected to prove a drag on the trade balance over the coming years, creating pressures for the Philippines’ external financing position when domestic demand for energy is rising.”

The red flag for an over dependence on imports is that the Philippine economy becomes “tied to fluctuations” in global energy prices.

Fitch added that the hiked dependence will pose risks such as an extra burden on foreign exchange reserves as well as the ability to attract foreign investments.

Because of these, there would be a “highly negative” prospect for the Philippines, which is still “deficient in many key infrastructures in and outside of oil and gas.”

Further, there is the added risk of creating depreciatory pressures for the Philippine peso, while import inflation or dis-inflation risk will become more elevated, said Fitch.

While the country can still offset high import costs with a reserves buffer and remittances from overseas workers in the short term, policymakers will have to manage the growing risks that could result in “tighter” monetary policy over the long term.

In depending too much on imports, the Philippines could see a repeat of its past experiences when global oil supply was affected by such factors as war in the Middle East, or a tightening of global supply should the world’s top oil exporters disagree on production targets.

A permanently shuttered Pilipinas Shell and Petron Corp. will also result in the disappearance of the buffer supply that results in stable market prices.

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