Why the Oil Fuel Fund is overloaded

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Petrol dispensers at a PTT gas station in Bangkok. Varuth Hirunyatheb

The Ministry of Energy announced that the growing debt of the State Petroleum Fuel Fund exceeded 100 billion baht since yesterday. While a recent nudge from Kla party leader Korn Chatikavanij, a former finance minister, highlighted pressing energy issues and led the government to seek cooperation from oil refineries to channel their profits towards the fund, any subsidies for fuel prices requested from six Thai refiners have not yet been finalized.

What is the current status of the Petroleum Fund?

On Tuesday, the Energy Ministry said the State Petroleum Fuel Fund was now in debt by 102.5 billion baht. The fund’s much larger loss fell to 96.5 billion baht on June 19, with the money currently being used to subsidize and cap the pump price of standard diesel under the government’s subsidy program at 35 baht. the liter.

The move aims to ease the cost of living amid rising inflation and rising food and fertilizer prices around the world due to supply disruptions caused by the Russian-Ukrainian war. Diesel is also the main fuel used in Thailand for transportation.

FSS International Investment Advisory Securities estimated that the government, through the oil fund, would incur a daily cost of 850 million baht to subsidize the current crude oil price of $115 a barrel.

During the global oil price spike of 2004-2005, the fund suffered a heavy loss of 92 billion baht, but the Ministry of Finance helped pay for it by selling government bonds at interest rates attractive.

However, under the Petroleum Fund Board Act 2019, the board became a public body, so the government no longer guarantees the debts incurred by the fund.

What are the charges against oil refineries?

Around mid-June, Kla party leader and former finance minister Mr Korn posted a series of videos on social media with data showing the gross refining margin (GRM) of Thai refineries had multiplied. by 10 in the last two years.

GRM, which is the difference between the price of crude oil and refined oil, refers to the costs added to the price of crude oil during the refining process. It eventually becomes part of the drivers’ retail oil prices at service stations.

Mr Korn said the higher margin places a financial burden on consumers and also allows refiners to ‘steal’ the Oil Fuel Fund, which is now in the red with over 100 billion baht in debt in subsidizing fuel and LPG.

He gave an example that oil refinery margins increased 10 times per liter to 8.5 baht on June 10 from 0.87 baht on June 10 last year and 0.88 baht on June 10, 2020.

“I was told that these refineries still made a profit last year when the GRM was only 80 satangs per litre,” Mr Korn said.

As for solutions, the Kla party leader proposed that the government impose a “windfall tax” on refiners’ profits, provide an additional loan of 60 billion baht to improve the liquidity of the Petroleum Fund and subsidize oil prices. oil for certain sectors.

How have oil refineries reacted?

The Petroleum Refining Industry Club – made up of several powerful companies including PTT Plc, PTT Global Chemical Plc, Bangchak Corp, Esso (Thailand), Star Petroleum, Thai Oil and IRPC Pl – quickly denied accusations of overcharging customers for oil refined and insisted that the current GRM is reasonable.

According to the club’s recent statement, the average GRM of 0.72 baht in 2018 and 2019 only increased to 1.19 baht per liter in the first quarter of this year. Therefore, “a multiplication by ten over eight baht is inaccurate”.

The club added that the 0.47 baht difference was attributed to low fuel demand during the Covid-19 pandemic. Some people have been misled into thinking that the GRM has risen to an unusually high level because some observers picked the data by comparing the current GRM to the level during the pandemic.

Chawalit Tippawanich, President and CEO of IRPC, further explained that GRM only covers some important costs during the refining process, such as crude oil and transportation, but not depreciation and maintenance costs. , which have increased considerably. As some observers suggest, these costs explain why refineries do not make high profits.

Chairman and CEO of Thai Oil, Wirat Uanarumit, added that if a country decides to manipulate the GRM, which is determined by supply and demand in the crude and refined oil markets, at a different rate than the other countries, it would risk “distorting the free market”. “.

What is the government planning to do?

On June 21, the cabinet approved a plan to seek cooperation from oil refineries to channel about 8.5 billion baht of their monthly profits to the Oil Fuel Fund from July to September to help control fuel prices. The cumulative contribution of 24 billion baht by September would come from diesel and gasoline refineries and gas separation plants.

Crucially, the government is carefully toeing the line here because asking for cooperation doesn’t necessarily translate into a demand, meaning there’s no guarantee refineries will respect this attempt to cap fuel prices. . The government is expected to finalize the diesel and gasoline price subsidies requested from six Thai refiners soon, but no date has yet been set.

As for other measures, the government has decided to cap the diesel marketing margin at 1.40 baht per litre. It will also subsidize 50% of the diesel price from July to September if the retail price exceeds 35 baht per liter.

The government is capping retail natural gas prices at 15.5 baht for CNG vehicles and 13.6 baht for CNG taxis in Greater Bangkok until September 15.

What are the prospects for the oil industry?

While recent actions targeting the oil industry have strongly affected the shares of these major refiners, Suwat Sinsadok, managing director and head of research at FSS International Investment Advisory Securities, said Thai refiners are still attractive at the current price of their actions.

“The subsidy cut is likely to be less than the market previously expected, as the firm revealed after discussions with refiners that the likely subsidy amount could range between 0.5 billion and 1.0 billion baht per year. month. [a total of 3-6 billion baht] for each refiner for three months. This is less than the 8.5 billion baht subsidy previously announced by the government,” Mr Suwat said.

He also added that the market’s GRM continued to strengthen, surpassing the $30 per barrel mark for the first time in history, mainly due to higher gasoline, diesel and jet fuel margins. . As a result, market GRMs coupled with inventory gains will boost net profits for Thai refiners in the second to fourth quarters of this year.

Meanwhile, Wiriyachai Jittawattanarat, head of investment and product consulting at Krungthai CIO, warned that the government’s requested contribution to the Petroleum Fund could impact the sentiments of foreign investors in Thai oil refineries. He cited that some investors will not see the government’s decision as a “one-time impact” on refinery profits or a “short-term impact”.

“From a regional investor’s point of view, they are bringing in funds from abroad and they know they have a choice. You don’t always have to choose Thai refiners because there are others in ASEAN who are not subject to this risk. [of getting part of their profits taken away].

“So with that, I don’t think Thai refiner stock prices would rebound that quickly,” Wiriyachai said.

Thailand is not alone in seeking help from oil companies. The UK imposed a windfall tax on oil and gas giants at the rate of 25% of their profits at the end of May. This tax will be phased out when world commodity prices stabilize.

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