Leading oil industry player Petron Corporation has laid down the inevitable – that it will be compelled to close shop on its 180,000 barrels per stream day Limay refining facility in Bataan, if no legislative remedies or measures will be passed to level the playing field of taxation in the downstream oil sector.
In a briefing with reporters, Petron Chief Executive Officer (CEO) Ramon S. Ang stated “we might be forced to shut down very soon… we will go that direction.”
He indicated that business step of closing a business will result in thousands of direct and indirect jobs lost at its refinery; which will be a hapless development especially at this time when many Filipinos are still riding the pandemic’s roller coaster drawbacks of keeping their employments and earning enough to put food on the table.
He explained that Petron suffered financial hemorrhage of more than P14 billion losses in the first half of this year, because the tax enforcement on refiners precipitated a business climate that gives rise to massive inventory losses.
In particular, he explained that because of the required higher level of inventory for oil refiners (typically at 60 to 75 days), they could be bringing in crude products in the country at relatively high prices of US$50 to US$60 per barrel and they are also being taxed (primarily with excise taxes and value added tax) at that cost level.
However, because of the lag in refining process – which may take a month or longer – the finished products like diesel and gasoline when sold at the pumps may already be priced lower based on prevailing prices –such as what happened during the height of the lockdown period in March to May.
Basically, Ang expounded that when Petron purchased its crude products that complied with the mandated scale of inventory by the Department of Energy (DOE), they were at more than US$50 per barrel in December 2019 to January 2020, and the company was also taxed at those price levels; then when the oil firm retailed the finished products at the pumps, these were already anchored on US$20 per barrel price in the international market around March to April, hence, the gargantuan losses suffered by the firm in the first semester of this year.
Petron further explained that “oil refiners will not be able to recover the total input VAT (value added tax) paid on crude oil importation since refining yields only range from 90% to 93% by volume, thus, the output tax from the yield would normally be smaller than the input tax originally paid.” As illustrated, “due to the quality of the crude and the nature of the refining operation, not all barrels convert to liquid finished products.”
Placed differently, oil importers can pass on VAT and excise taxes on total volume imported to their customers and they don’t have direct exports, hence, the volume and percentage of indirect exports and tax-exempt sales “may not be significant to allow application of the input VAT against output VAT and absorption of unrecovered excise tax as cost.”
Need for amendatory legislation
The Petron chief executive said the only remaining option for its Limay refinery to be saved from ceasing operations is: if Congress can pass a law that will amend the regime of taxation so it could level the playing field for both refiners and the finished product importers.
But he acknowledged that a Congressional measure on that proposed policy modification may take time; while there is not much leeway anymore for the oil firm to be racked with greater pain of financial losses if it will continue operating its refinery.
“If the Petron refinery will not be on a level playing field with the importers, we will definitely close it down. When will that be? It will be soon,” he reiterated.
Ang said if the remedy on tax rationalization will be through legislation, “that will take time, because the tax laws of the country can only be amended by Congress.”
Conversely, an Executive Order (EO) from Malacanang is viewed as a wobbly policy strategy, and that can be easily repealed or junked by the next administration.
“It’s not good to lobby. If I lobby and I will get this approval now, the next administration can revoke that and may call me a crony,” he opined.
As things stand on Petron refinery’s current tax conundrum, he opined it will be up to the policymakers to ponder and sort a decision on that. He said discussions on this had been done with various relevant government agencies, including the Department of Trade and Industry, Department of Energy, Bureau of Internal Revenue and the Bureau of Customs.
PH to lose out versus ASEAN neighbors
In other countries in the Southeast Asian region, Ang cited, that the likes of Vietnam, Indonesia, Thailand and Malaysia are giving paramount importance to refinery businesses because these are intrinsically linked to their energy security agendas and these are considered key component of their manufacturing sector.
For Petron’s operations in Malaysia, he noted that the refining component of their business will survive because the government gives premium protection to that segment of the industry.
Ang emphasized refineries could provide higher buffer of supply to a country because there could be higher level of inventories; while most finished product importers may just survive on supply inventories of shorter duration (average of two weeks) – and that is not a very comfortable supply cushion especially for a country repeatedly smashed by calamities.
Petron invested US$1.8 billion to US$2.0 billion for the upgrading of its refinery that was completed in 2015; and the value-added proposition to that had been increased output of high value products, including petrochemicals which the company was able to dangle to export markets.
But if the Petron refinery will be forced to shut its operations, even that business leverage and
dollar-saving enterprise for the country will be lost.
“There will be impairment, we will have to write down. The investments in the refinery will have to be shouldered by other businesses. We will have the gas stations and pay for all the debts forever,” Ang stressed.
Nonetheless, he assured the lenders of Petron that the San Miguel group has sufficient resources to settle those financial obligations.
“We will not run away from any obligation – and we will have enough to pay for those obligations in the expansion of the refinery,” Ang said.