PILIPINAS Shell Petroleum Corp. (PSPC) will cease its refinery operations and instead import finished petroleum products because it is no longer viable for the oil company to run its Tabangao, Batangas, oil refinery.
The second largest oil company in the country blamed the Covid-19 pandemic for depressed refining margins, as fuel demand has plunged since the community quarantine was imposed by the government.
According to the Department of Energy (DOE), demand for petroleum products declined by 20 to 30 percent in March and by as much as 60 to 70 percent in April during the imposition of the enhanced community quarantine, compared to February levels.
“The regional refining margins which have been weak for some time due to the oil supply/demand imbalance in the region have worsened due to demand destruction from the Covid crisis. As such, it is no longer economically viable for us to run the refinery. It is with a heavy heart that we announce the cessation of oil-refining activities in Tabangao,” said PSPC president Cesar Romero.
No supply disruption
The permanent closure of Shell’s refinery operations will not affect the oil supply in the country because the oil firm will continue to fill its market share by importing refined petroleum products.
The Tabangao refinery has a production capacity of 110,000 barrels per day to supply the needs of its 1,129 retail stations nationwide.
Romero said PSPC will transform its Tabangao refinery into an importation terminal to cater to the fuel needs of Luzon and Northern Visayas. This means that the oil company’s supply chain will shift from manufacturing to full-import based.
PSPC media relations manager Cesar Abaricia commented that it is cheaper to import. “If you check on MOPS, the price of refined products like gasoline is the same price of crude. No use in importing crude and have it processed because it’s not viable. When you import, it is already finished product that will arrive,” he explained.
Meanwhile, the company’s North Mindanao Import Facility (NMIF) in Cagayan de Oro will serve the growing needs in the balance of Visayas and Mindanao regions.
“As to supply, the supply for Luzon is sourced from importation since the last week of May until now when Shell initially notified the department of their decision to implement an economic shutdown mainly due to very low demand,” said DOE Director for Energy Resources Development Rino Abad when sought for comment.
In May, PSPC announced a one-month temporary shutdown of its refinery that started on May 24 this year, as a result of a thorough valuation of the refinery’s economics mainly due to the decline in demand for oil products and the deteriorating refining margins brought about by the pandemic.
The price of crude oil plummeted from $67 per barrel at end-December last year to $20 per barrel in April this year.
“Now that the decision has become permanent, their supply will be from full importation. This model is not new since the supply on Visayas and Mindanao comes from full importation from the NMIF,” added Abad.
Displaced workers
The DOE said it respects the decision of Shell. “It is unfortunate that PSPC had to permanently close its refinery operations in the country. I respect the decision of the Shell management business model to adopt the existing market situation,” said DOE Secretary Alfonso Cusi.
“What saddens me is the plight of the workers that will be displaced due to the closure. I hope they will find employment with the other industry players,” added the energy chief.
Abaricia could not yet comment as to how the closure will affect its workers. “There is no specific number yet because there is no final org chart. But there are 210 plus staff in the refinery,” he said, when asked how many PSPC employees will be affected.
Abad commented that any change in company strategy depends on various factors affecting the rationalization of facility operation. Usually, he said, these changes are necessary to maximize the company’s global asset portfolio and profit.
“So that is largely a company policy, which the DOE respects. The DOE has always supported the downstream oil industry—not only Shell or Petron—to pave the way for them to continue doing business without much interference from the government which may adversely affect their operation; however these [forms of] assistance are limited likewise by the laws that govern a deregulated industry,” said Abad in a text message.
Net loss
PSPC said it is making strategic choices to secure the long-term sustainability of its business and thrive in both the ongoing energy transition and the new normal.
It narrowed its net loss in the second quarter to P1.2 billion from P5.5 billion in the first quarter this year, as crude oil and product prices slightly improved and stabilized. The company booked a total net loss of P6.7 billion in the first six months of the year.
Despite seeing volume and earnings recovery in the months of May and June, the company remains cautious given the spike of Covid-infected cases in the country and the consequent decision to place Metro Manila, Bulacan, Cavite, Laguna and Rizal under modified enhanced community quarantine (MECQ) again.
To ensure the company remains financially resilient, and to preserve cash, the board of directors of PSPC has decided to cancel dividend payouts for 2019 financial results.
“We are committed to make the right sustainable decisions now to protect our shareholders for the long term,” said Romero. “The pandemic has definitely posed some challenges, but we have a strong balance sheet, retained earnings, and a reasonable gearing of 40 percent. We intend to maintain financial resilience.”
To date, the company has been making headway in its cash preservation efforts to deliver sustainable cash flow, achieving a total of P1.3 billion (P800 million in operating expenditures and P500 million in capital expenditures) against the P2-billion savings target for 2020.
Petron refinery
Meanwhile, Petron Corporation president Ramon Ang said its refinery in Bataan will resume operations on September 1.
“We have advised the Department of Energy that we are now doing preparatory work at the Petron Bataan Refinery, for the resumption of operations on September 1,” said Ang.
He said the Covid-19 pandemic has greatly affected the Philippine fuel industry and that no one is immune to its adverse economic impact.
“Even Petron Corporation has not been spared but we continue to be committed to serving Filipinos and doing our part in helping our country and economy manage the setbacks.
“Moving forward, we will work to ensure our operations are efficient, maintain high product and service quality levels, protect the jobs of our employees in every way we can, and continue to be a long-term partner in our country’s recovery and growth,” said Ang.