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.
Supply contracts
As an importer, the
government does not have to impose a tariff or duty on its own oil imports
even as it continues to charge such tax on private importers (i.e. prior
to full centralized procurement). With the government as a major (and
eventually exclusive) importer of oil and a leading refiner and
distributor (through a 100 percent state-owned Petron) at the same time,
ordinary consumers as well as industrial users of petroleum will be
assured of a more reasonable price of oil. This will also give the minor
Filipino oil firms the leverage they need to be able to effectively vie
for the local market against the transnational corporations (TNCs).
Meanwhile, the country will be able to diversify its import sources
considering that at present, two countries– Saudi Arabia and Iran– already
account for more than 85 percent of total crude oil imports that endangers
our oil supply security.
In addition, the
government can utilize various means of procuring imported petroleum
unlike the current system wherein the local units of TNCs are being
supplied by their own mother units therefore making oil artificially
expensive through transfer pricing (i.e. the practice of bloating the
price of a product as it is being transferred from one unit to another
unit of the same TNC until it reaches the end-consumer). PNOC, for
instance, can bid out supply contracts to prospective exporters of crude
oil and refined petroleum products, particularly to state-owned oil
companies from oil-producing countries, to be able to purchase the
cheapest petroleum.
However, when looking
for potential suppliers, the Philippine government must be cautious in
dealing with these state-owned companies since some of them have strategic
linkages with the oil TNCs and therefore collaborate with them. Saudi
Aramco, which controls 40 percent of Petron, for instance, has refining
and distribution arrangements with oil giants Royal Dutch Shell and Exxon
Mobil. Priority must be given to state-owned companies that oil TNCs have
relatively less influence such as the PDVSA of Venezuela.
Non-traditional trade
Another option is for
the Philippine government to pursue a bilateral agreement with the
national government of oil-producing countries. As an official pact
between sovereign states, the Philippines can push for special terms in
exchange for equally favorable concessions to the exporting country. One
example that the national government must seriously study is the bilateral
deal between Venezuela and Cuba where the former supplies the latter with
100,000 barrels a day of subsidized oil. In return, Venezuela receives
medical help from more than 17,000 Cuban doctors and dentists stationed in
Venezuela.
Further, PNOC can
also consider a system of commodity swap, which is a trade practice where
parties involve swap products instead of buying each other's exports with
foreign exchange. The Philippines
can consider this scheme in order to minimize the impact of the
fluctuations in the US dollar and peso exchange rate on the price of oil
and to reduce the pressure of high global oil prices on the country's
dollar reserves.
At present, of the 16
biggest crude oil exporters in the world, the Philippines sources its
crude oil imports from seven countries but five of them only account for
14 percent while the rest come from Saudi Arabia (51 percent) and Iran (35
percent). On the other hand, the country exported a total value of $3.1
billion to 11 of these countries, but with Malaysia alone covering more
than 80 percent of the amount. The country has no trade relations (for
petroleum or other commodities) with major crude oil exporting countries
Algeria, Iraq, Libya, and Kazakhstan which have a combined export capacity
of 5.6 million barrels per day.
The main imports of
these countries include agriculture, food and consumer goods, which the
Philippine government has already been promoting for exports. All this
shows that the country has a lot of trade opportunities to explore if it
would look for possible commodity swap partners. Aside from commodity
swap, the government can also negotiate for a bilateral agreement wherein
the country would purchase petroleum imports using the Philippine peso,
which the oil exporting country can use in the future to pay for their
imports from the Philippines. The Department of Trade and Industry (DTI)
may be tasked to conduct studies on which petroleum exporting countries
would such arrangements be most feasible.
Other reform measures
Centralized
procurement of imported oil should be complemented by other important
reform measures that will give the government more authority to intervene
in the oil industry so as to make certain that the people have a secure
supply of reasonably priced petroleum. De-privatizing Petron, improving
the local refining capacity, establishing a buffer fund, and strictly
regulating pump price adjustments are some of the urgent reforms that the
industry needs today to cushion the impact of frequent and drastic oil
price hikes on the economy and the people. Parallel to the efforts to
regulate the downstream oil industry should be efforts to institute
important policy changes in the upstream level of the industry. The
Service Contract system, like the Malampaya project, should be abolished
and replaced with a system that will uphold the constitutional guarantee
of full State control and supervision of the country's petroleum resources
for the sake of national interest.
But these reforms
should not substitute for the strategic objective to nationalize the
entire oil industry. Oil is too important a commodity that any government
seriously pushing for industrialization cannot risk to completely put in
the hands of foreign corporations whose preoccupation is to profit without
regard to the overall economic development of the country. To achieve
this, a major overhaul of the national economic framework that is too
dependent on foreign technology and capital, must first be initiated. In
the meantime, the executive and legislative branches of the government
have the doable option to regulate the various aspects of the industry,
through centralized procurement and other reforms, even as it allows the
participation of foreign corporations. Ibon Features/Posted by
Bulatlat
BACK TO
TOP ■
PRINTER-FRIENDLY VERSION ■
COMMENT
© 2005 Bulatlat
■
Alipato Publications
Permission is granted to reprint or redistribute this article, provided
its author/s and Bulatlat are properly credited and notified.