Petron’s Love-Hate Relationship With the Philippine Populace

Petron’s Love-Hate Relationship With the Philippine Populace

Petron, the Philippines largest domestic oil player and refiner, continues to dominate headlines in Manila. From monopoly accusations from smaller independent oil firms to watch dog groups who claim that the Manila-based company smuggles oil, to the average Filipino that accuses Petron of unfairly hiking gas prices, the company has developed a love-hate relationship with the Philippine populace.

For example, on April 1 Petron chairman and CEO Ramon S. Ang said that about one in every three liters of gasoline or diesel sold in the Philippines is smuggled, resulting in P30 billion ($730 million) to P40 billion ($972 million) in yearly forgone government revenue.

“On top of lost government revenue and an uncertain investment climate in the oil industry, smugglers are cheating consumers since these products are of uncertain quality,” he said.

However, a lot of people believe that Ang’s statements are disingenuous since Petron has been accused of being one of the biggest oil smugglers in the country with deep pockets and a plethora of connections to ward off any indictments that could follow.

Pushing aside oil smuggling allegations, the company is expanding throughout Southeast Asia. In 2012, Petron acquired ExxonMobil’s downstream business in Malaysia. Earlier this year, Petron opened its Malaysian operations, rebranding all Esso and Mobil stations across the country. Currently, Petron owns over 550 retail fuel stations in Malaysia.

Monopolistic tendencies

According to a March 18 disclosure to the Philippine Stock Exchange, Petron ended 2012 with over 2,000 service stations in the Philippines. The company said it was the largest retail network in the local industry and that its network was more extensive than its two closest competitors combined.

In fact, it’s Petron’s size that has others accusing it of being a monopoly. And, it appears that Petron’s actions support those allegations. In 2011 smaller Philippine oil player Eastern Petroleum accused Petron of “harassment, monopolistic tendencies and restraint of trade” for attempting to block the opening of a retail gas outlet in Subic, a free port zone in the northern Philippines. It was the third time Eastern accused Petron of unfair trade practices.

Eastern Petroleum chairman Fernando Martinez told reporters that Petron had signed a waiver allowing Eastern to construct a gas station within Petron’s “so-called 800-meter radius exclusivity.” Martinez said that Petron then reneged and wanted to nullify the waiver.

Martinez claimed that Petron committed the crime of “cartelization.” Section 11 of the Philippine Oil Deregulation Law states that cartelization refers to “any agreement, combination or concerted action by refiners, importers and/or dealers of their representatives, to fix prices, restrict outputs or divide markets, either by products or by areas, or allocate markets, either by products or by areas, in restraint of trade or free competition.”

Several activist groups refer to Petron along with Shell-Philippines and Caltex (Chevron), who also operate in the Philippines, as the big three oil cartel.

They blame the big three for high fuel prices and collusion, claiming that they have used movements in global oil prices as a blanket rationale for substantial oil price hikes and small reductions. They also accuse Philippine President Benigno Aquino III for allowing the oil companies to openly disregard the country’s Oil Deregulation Law.

However if Petron was too big for the likes of many of its competitors and the general public, it gained even more muscle when Philippine conglomerate San Miguel Corp. entered the picture. In December 2010 San Miguel acquired majority ownership of Petron with promises of injecting up to $2 billion in the company, a pledge that they have made good on in the ensuing two-and-a half years.

San Miguel is the Philippines largest beverage, food and packaging company that also diversified into power and utilities, mining, energy, toll-ways and airports, becoming an Asian corporate juggernaut. They have operations in the Philippines, China (including Hong Kong), Vietnam, Indonesia, Malaysia, Thailand and Australia.

San Miguel’s consolidated net profits surged 57 percent to 27.6 billion pesos ($677.55 million) last year, boosted by strong turnover from new businesses.

Though Petron’s parent company has deep pockets, the Philippine oil player announced in March that it raised $250 million through the sale of US dollar-denominated capital securities, which is on top of a recent $500-million issuance.

Lack of refining capacity

Petron said that the proceeds would be used to fund the company’s capital and other expenditures in conjunction with phase two of its refinery master plan in Limay, Bataan, a $2-billion project.

According to Petron, the funds will enhance the refinery’s operational deficiencies, and also increase the production of petrochemicals, making Petron the only oil firm in the Philippines capable of producing Euro 4-standard fuels. It is expected to be completed some time next year.

Petron is also building a new cogeneration plant in Limay worth $500 million that will replace some of the facility’s existing turbo and steam generators. The cogeneration power plant will completely fulfill the refinery’s current and expected future electricity and steam requirements and will reduce the company’s refining costs.

If so, the Philippine oil industry needs all the refining help it can get. Currently, the country has just two refineries, Petron’s Limay refinery and a smaller one owned by Shell-Philippines. Consequently, a large part of Philippine gasoline requirement is imported due to low refinery output

Four of every 10 barrels of gasoline in the Philippines has to be imported as finished product, said Zenaida Monsada, director of the Philippine Department of Energy Oil Industry Management Bureau, at an energy forum in Manila last year. A similar situation also exists with diesel, a major source of fuel used in the country.

Hopefully, Petron can use its immense clout and financial muscle to change this situation and lower prices in addition to increasing refining capacity and efficiency. However, don’t hold your breath for that to happen. If history is any indication of the future, the Philippine oil industry will likely remain the same in the foreseeable future, and Petron will still cause the average Filipino to flinch at the mention of its name.

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