"A closure would have meant the layoff of some 3,000 workers, among the most skilled and technical people in the country."
On Dec. 14, 2020, Petron Corp., the Philippines’ largest oil refining and marketing company, announced a planned shutdown of its $3.5-billion refinery in Bataan.
Just recently modernized at a cost of $3 billion and with assets of P395 billion, Petron is probably the country’s single largest and the most modern and most integrated industrial facility. An additional P3 billion was to be spent over the next five years to further improve the efficiency of its integrated operation.
A closure would have meant loss of refining capacity of 180,000 barrels per day, some P1.4 billion in daily revenues, and P10.2 million in daily pre-tax profits. And the layoff of some 3,000 workers, among the most skilled and technical people in the country.
At average utilization in 2019, Petron supplied about 30 percent of the total Philippine demand (using 2019 total Philippine average daily demand of 470.4 MMB), giving the country three months reprieve in case of an abrupt international supply disruptions.
Alarmed, Petron’s 3,000 workers petitioned the government to avert closure of the refinery. Just what the workers wanted was not clear. Petron President and CEO Ramon S. Ang had complained of an “uneven playing field” between the sole refiner (Petron) and the oil importers—on top of a challenging business here and abroad because of the pandemic.
Petron has been subject to all kinds of duties and taxes whenever it imported oil. In addition, every time it imports crude, the company has to assume a peso-dollar risk, an inflation risk, a cost of money risk, warehousing costs, refining costs, plus the cost of freight and insurance. Those vagaries and risks are not incurred by Petron’s rivals.
Petron’s two main competitors, Shell and Caltex, have shut down their refineries and have resorted to simply importing refined oil products. The other oil brands? Well, either they import legitimately refined oil products or simply smuggled them into the country, thus avoiding paying duties, taxes, other impositions and costs. Oil smuggling amounts to P200 billion yearly.
On Feb. 6, 2021, the House of Representatives and the Senate ratified the landmark CREATE –the Corporate Recovery and Tax Incentives for Enterprises Act.
Petron may not need to shut down permanently which was to have begun from the second week of January 2021. Instead, any stoppage would be for maintenance work.
House Ways and Means Committee chair Rep. Joey Sarte Salceda says CREATE could saved 3,000 oil refining jobs, ensure energy security, and help in infra modernization and expansion with the assurance of reliable oil supply for the country.
Under CREATE, crude will not be imposed taxes, and will only be imposed VAT and duties once removed from the refinery. Direct importers will also be unable to benefit from tax incentives under CREATE due to their low value-added.
The Albay solon said the CREATE “probably saved 3,000 crude oil refining jobs, as it leveled the tax treatment between direct importers and refiners of petroleum products in the country.”
Salceda, the principal author of CREATE Bill in the House, said that the reform will ease the fears of some 3,000 workers who are employed in the last refinery in the country. Petron’s Bataan refinery is the only crude oil refinery left in the Philippines after Shell closed down its refinery last year due to rising costs of refining.
“Earlier in 2020, Petron was very transparent in saying they need a fairer tax treatment or they will have no choice but to shift to direct importation, which will cost us thousands of jobs and hit our energy security. It is very difficult for a net importer of oil not to have a refinery, especially in times of disasters or conflict,” the House tax panel chair said.
“What I told them publicly was this: Send a proposal, and I’ll take it up if it’s reasonable. During the House’s discussions prior to CREATE bicam, we received proposals. I said no to new tax exemptions that would erode revenues. But I couldn’t say no to provisions that made tax treatment fairer simply because they made economic sense,” Salceda said.
“The problem was this: Under current law, we tax both crude and refined petroleum. In the process, billions of pesos get stranded in VAT credits, because our tax administration is not yet efficient. That is cash that the refiner is unable to use to average down when global crude prices are cheap. Direct importers do not have that problem. We are rewarding direct importation even if they produce less gross value added than crude oil refining. That doesn’t make sense to me,” Salceda added.
“We are in fact the only major country in the region to treat crude oil and refined petroleum products the same way, in tax terms. The best model, of course, is Singapore, which ring fences refiners, and only taxes them once you remove oil products from the licensed area. That makes perfect economic sense,” the House tax panel chair explained.
“Of course, in the long run, I want to phase out the use of fossil fuels. But not yet at this phase of our development,” Salceda pointed out.
“It doesn’t make accounting or economic sense to have to import very low value petroleum products like asphalt for Build, Build, Build. Having a local refiner means we have that available domestically. Having a local refiner means we can more easily phase out coal and move to diesel in our power supply, a much cleaner if still imperfect move,” Salceda explained.
“The key really is that we can average down when crude prices are low. That is very important to energy security,” Salceda stressed.
“We are one of the largest non-oil producing economies in the region. We expose ourselves to plenty of risks if we will disincentivize refining. That’s not good economic or national security policy, in my strongest view,” Salceda concluded.