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Shell’s mood turns sour over RP’s policy flip-flops

Manila Standard Today: Shell’s mood turns sour over RP’s policy flip-flops

By Ray Enano
Thursday 3 April

Senior officials of Pilipinas Shell Petroleum Corp. are sporting long faces today in stark comparison with their mood a month ago when they were upbeat about the company’s prospects. Reporters covering the energy beat quoted an unnamed official in early March as saying that top executives of the Royal Dutch Shell Group were arriving within the same month to announce the results of a study on the viability of expanding its Philippine refinery.

That Shell’s top officials are arriving in the Philippines to announce the results of the study (presumably in the presence of President Gloria Macapagal Arroyo) strongly suggested that something positive was coming out from the London office. The unnamed official said the study might recommend a “scaled-down” upgrade of Shell’s refining facilities in Batangas.

Shell’s top honchos, however, did not arrive in March, fueling speculations in the local industry that the London-based company may have changed its mind at the last minute.

Edgar Chua, the young chairman of Pilipinas Shell, was mum last week about the no-show of his bosses. He evaded direct questions from reporters about the supposed visit of top Shell executives but just the same, Chua said a lot that one would think that the country’s second largest refiner was close to abandoning the Philippines.

“The situation now is different than before. The Pandacan depot has complicated matters,” Chua told reporters, adding that any business uncertainty would have an impact on the company’s investment decisions.

The Supreme Court earlier ordered the relocation of the oil depot near Malacañan Palace after the city of Manila raised concerns about the safety of the facility, which is jointly operated by Pilipinas Shell, Petron Corp. and Chevron Texaco (formerly Caltex). The depot supplies half of the country’s petroleum requirements.

Pilipinas Shell, thus, is back to square one—it can either expand its Batangas refinery or shut it down, depending on market conditions and the level of government support.

Local governments an issue

Shell’s problems are not limited to the Pandacan depot ruling. A source with close relations with expatriate executives here said foremost of the company’s woes had something to do with land zoning policies that local government units can reverse anytime.

“Long-term investments in the Philippines face risks, especially if local government units decide to re-classify an area from an industrial zone to a commercial one,” said the source, adding that “stability in policies is crucial to investment decisions.”

Pilipinas Shell, it turns out, is also having land-zoning issues with government officials of Cavite, where it operates certain assets, and in Biñan, Laguna, where it built compressed natural gas refilling stations. Shell much earlier had encountered problems with its liquefied petroleum gas refinery in the same Laguna town.

Shell’s LGU encounters are no different from its predicament in the Pandacan depot after the Supreme Court ordered its relocation. But the government flip-flops have weakened Shell’s investment resolve.

Shell over the last two to three years had explored investment and “upgrading options” for its Tabangao refinery in Batangas. It said two years ago that it was “too overheated to do an economic project, as the cost of raw materials and services increased substantially, resulting in abnormally escalated cost estimates.” Its refinery expansion plan was earlier estimated to cost between $1 billion and $3 billion.

Caltex’s option

The heavy investments in meeting higher fuel standards set by the Clean Air Act is also expected to weigh on Shell’s competitiveness against other facilities in Asia. It needs a lead time of three years if it wants to expand its Batangas refinery to conform to the demands of the Clean Air Act.

Otherwise, Shell could follow the lead of Caltex, which told authorities that its own refinery had reached the “end of its economic useful life” and was too small to effectively compete in the oil industry.

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