Refining & Downstream

As part of that policy, the Oil Price Stabilization Fund (the OPSF, set up in 1984) helped to protect consumers from fluctuations in product prices while providing refiners with adequate profit margins. Today, the OPSF is running a large deficit and is a drain on public finances to the tune of around $40 million a month. Under the Deregulation Act, domestic fuel prices instead will be adjusted automatically based on the Singapore Import Parity, an average of costs at Singapore refineries, and in line with international prices. Tariff protection is set to continue until 2003 for the three main domestic downstream players: Petron, Caltex Philippines, and Pilipinas Shell. Beginning January 1, 2004, a uniform tariff of 5 percent will be imposed on all petroleum imports.

Economic growth is boosting national oil product demand at around 8 percent annually, and refiners are rushing to meet the increase. Shell Philippines, for instance, completed $600 million worth of upgrades in 1995 on its refinery at Batangas. These upgrades raised capacity at the old 70,000 barrels per day (bbl/d) plant to 155,000 bbl/d. Further work is to be carried out on the Shell refinery as part of a recently awarded $20 million contract with U.S.-based Parsons Corporation. Petron, privatized in 1994, is the country's largest refining company, controlling about 45 percent of the domestic oil refining market. Petron's refinery in Limay, Bataan is the country's largest, with installed capacity of around 155,000 (bbl/d), which it hopes to increase by 25,000 bbl/d by 1997. Petron also is considering construction of a second refinery with a capacity of 100,000 bbl/d.

In April 1996, Caltex (a joint venture of Chevron and Texaco) announced that it was suspending plans for a $620 million refinery expansion plan at Batangas. Caltex cited 2 main factors in its decision: 1) cash flow problems due to rising world oil prices and a depreciating Philippine peso; and 2) the prospect of lower profits and increased competition due to government deregulation efforts and the decision to reduce tariffs and scale back the Oil Price Stabilization Fund. In late August, however, Caltex announced it would spend $500 million to enhance its marketing and refining capacities in the Philippines. Besides its Batangas refinery, Caltex also owns more than 900 branded service stations in the Philippines, which it plans to upgrade as part of a $50 million marketing drive.

Thailand's Petroleum Authority (PTT) is looking to increase its involvement in the Philippines' downstream sector. In May, 1996, PTT announced plans to spend over $200 million and set up five new companies in the Philippines, four of which will be joint ventures. Among these companies are: 1) Subic Bay Petroleum Products Ltd., which will trade petroleum products in the Asia-Pacific region; 2) Subic Petroleum Distribution Inc., which will trade wholesale petroleum products to the Philippines; 3) Subic Bay Petroleum Products Inc., which will handle petroleum sales within the Subic Bay free port zone; and 4) Pipeline and Clark Depot Company, to manage and repair the 12,000 bbl/d pipeline connecting depots as Subic Bay and Clark.

In addition to these efforts, the Ramos government has encouraged increased private sector investment in the country's power sector. Since 1990, Build-Operate-Transfer (BOT) laws have allowed private sector participation in major power projects, and have helped speed power development. Between 1993 and 1999, about 6,000 megawatts of additional power generating capacity will be added through BOT. Since its inception in 1990, BOT is estimated to have paved the way for more than $17 billion in private investment in the Philippine power sector. The largest BOT project currently under development is the Pagbilao power plant, which is comprised of two, 367.5 megawatt pulverized-coal-fired steam/electric generating units being. The Pagbilao complex is being constructed by a joint venture of the state-owned, Philippines National Power Corporation (Napocor) and Consolidated Electric Power Asia Ltd. (CEPA), the power subsidiary of Hopewell Holdings of Hong Kong.

The current Power Development Program (PDP) foresees total capacity additions of 13,000 megawatts between 1996 and 2005, with an additional 32,660 megawatts between 2006 and 2015, and 46,500 megawatts from 2015 through 2025. This will cost an estimated $1.2-$1.4 billion per year. Currently, about two-thirds of Philippine electric generation capacity is oil or coal, with the remainder consisting of geothermal and hydroelectricity. A major long-term goal is diversification of the country's power generation mix by encouraging the development of new and renewable energy sources. Developing alternative energy sources also will help reduce the country's oil import dependence. Despite the push for alternative fuels, this will necessitate a major increase in coal usage (and imports). At present, six large coal-fired power stations (Calaca, Masinloc, Mauban, Pagbilao, Pinamucan, and Sual) are expected to be commissioned by the end of the decade, adding about 4,500 megawatts in capacity to the Luzon grid.

In early October 1996, the Council of Advisers on Energy Affairs (CAEA), an advisory body created by President Ramos to assist energy policy making, recommended that power generation and distribution companies only be allowed to hold up to 20 percent shares in utility transmission companies. Napocor, the country's largest corporation, currently owns the majority of power generation capacity in the Philippines, although its monopoly over power generation ended on January 1, 1995. However, Napocor still is by far the largest power generator in the Philippines, while also maintaining a monopoly on most electricity transmission activities. This could change gradually, however, if the Omnibus Electric Power Industry Bill, which would open up the Phillippines' power industry to greater competition, is passed.

Already, Independent power producers (IPP) are important players in the Philippines. BOT pioneer Hopewell is the largest IPP, with 1,280 megawatts of installed capacity. Enron is another major player in this area. The 1996 PDP gives IPP's a larger role in power generation. Currently, IPPs account for around 27 percent of the Philippines' installed electric generating capacity. Most of this capacity is located on the island of Luzon, with about one-quarter split between Mindanao and Visayas. The private sector's share of Philippine generating capacity is expected to reach 60 percent by 2005.

The Philippines is the only country in Asia with significant exploitable geothermal capacity. At the end of 1995, the country had an installed geothermal capacity of 1,194 megawatts, with plans under the PDP for development of an additional 940 megawatts. Philippine Geothermal Inc., a subsidiary of Union Oil of California, is the largest player in this area. Other U.S. companies involved in geothermal are California Energy, Ormat, and Oxbow.

Hydroelectric power potential in the Philippines also is vast. Napocor has identified hydroelectric potential of 12,308 megawatts in 245 different sites around the country. About 60 percent of this potential is located in Luzon, with around 19 percent in Mindanao. As of the end of 1995, 2,278 megawatts of hydroelectric power capacity were operational.

The Philippines has no operating nuclear plant, although it does maintain a single mothballed station at Bataan. The $2.1 billion Bataan plant, built by Westinghouse, was closed upon completion in 1986 after it was discovered to be sitting on an earthquake faultline. In September 1996, Royal Dutch Shell and Occidental Petroleum expressed interest in converting the Bataan plant into a 1,200 megawatt gas-fired station. A long-running corruption scandal over alleged kickback payments made by Westinghouse in winning the contract led to a ban on the use of Westinghouse technology (lifted in September 1995), and the disqualification of Cepa, due to its inclusion of Westinghouse technology in its bid to convert the plant to natural gas.

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