Centralized Procurement of Imported Oil: A Doable Alternative to Reduce Prices

One of Ibon’s proposals is a system of centralized procurement of imported crude oil and refined oil products, a necessary step to ensure the steady supply of reasonably priced petroleum in the country.

By Arnold Padilla
Ibon Features
Posted by Bulatlat

It has now become obvious that the Arroyo administration does not have a credible program to lessen the impact of high oil prices on the domestic economy and the people’s livelihood. Pump prices continue to soar in spite of the downward trend in the price of Dubai crude and improvement in the foreign exchange in August to October. Worse, the government will impose the value added tax (VAT) on petroleum products starting November that will further push up the pump prices. The much-publicized energy conservation program of the Department of Energy (DOE) has failed to bring immediate relief for the public since the most urgent problem is not the over-consumption of oil but the exorbitant price.

Independent think-tank Ibon Foundation has been staunchly advocating for the repeal of Republic Act (RA) 8479 or the Downstream Oil Industry Deregulation Act of 1998 to allow the government to control and regulate the activities of the oil companies operating in the Philippines. One of our proposals is the implementation of a system of centralized procurement of imported crude oil and petroleum products to minimize the effects of the cartel operation of big foreign oil companies on prices.

Counter-cartel

Almost 9 out of every 10 liters of oil sold in the Philippine market come from the Big Three, a group of companies that have their own oil fields abroad as well as their own global network of pipelines, tankers, depots, refineries and retail stations. Such commanding position has allowed Shell, Caltex and Petron to impose exorbitant prices on the domestic oil market. Deregulation, or the lack of substantial government intervention in the oil industry, has given these companies more room to manipulate the price of petroleum at the expense of the consumers and the economy. A system of centralized procurement of imported crude oil and refined oil products is therefore necessary to ensure the steady supply of reasonably priced petroleum in the country.

Under centralized procurement, the Philippine National Oil Company (PNOC) becomes the sole importer of crude oil and refined petroleum products, which refiners and retailers operating in the country will have to purchase from. Consequently, PNOC must have substantial control over the country’s oil storage facilities. There are around 119 oil depots nationwide, and PNOC can at first control the most strategic among these storage facilities such as the Subic Bay terminal (the largest in the country with a storage capacity of 3 million barrels), which at present is being operated by a joint venture of US-based Coastal Corporation and the Petroleum Authority of Thailand. At the same time, PNOC can also utilize Petron’s storage facilities and lease privately-owned depots to meet its storage requirements.

Gradual centralization

For example, under a five-year program, PNOC would import on the first year a volume that is equivalent to 20 percent of the country’s total import volume in the previous year. By the second year of its program, PNOC would import 40 percent of the import volume in the preceding year and so forth until it reaches the 100 percent level by the fifth year. By the time PNOC is already procuring 100 percent of the previous year’s volume, its imports may be higher or lower than the actual need of the country. Under this situation, the surplus imports will be stored as a buffer supply of PNOC in case of any shortage or extremely high global prices, while it will have to withdraw from the said buffer and/or increase its imports to bridge the gap between its imports and actual domestic need.

Based on the annual growth average in volume (-2%) and value (18%) of oil imports from 1998 to 2004, Ibon estimated that by 2006, under a gradual centralized procurement program spread over a five-year period, the government would have to import 24.7 million barrels of oil worth $1.2 billion. By 2010, the volume would reach 113.9 million barrels (or 100 percent of the 2009’s estimated total imports) worth around $11.2 billion. The cost is expected to be lower as government negotiates for special terms and arrangements with potential suppliers.

The government can use its earnings from Petron and the specific taxes imposed on petroleum products to partly finance PNOC’s centralized procurement activity. From 1998 to 2003, collection from specific oil taxes averaged P24.9 billion while government’s earnings from its 40 percent-equity in Petron averaged P820 million during the same period. Additional funds may also be sourced from royalties and taxes that the government earns from petroleum exploration and production, and government revenues from the corporate income tax being collected from the oil companies. In Malampaya alone, for instance, the government is expected to earn $400-500 million a year in royalties.

Share This Post