Asian oil markets gradually move towards more freedom

Dec 29, 1996 01:00 AM

A hive of activity is expected in Asia's oil markets in 1997 as the region moves to lower trade barriers, spurring much-needed foreign investment in refineries. With Asian energy demand forecast to rise, refineries need to be upgraded and expanded to meet the region's growing appetite for oil products. Oil industry officials and analysts said many countries need to take further steps to fully open their oil markets. Some of these measures are due to take place in 1997. "As domestic oil product prices in Asia are liberalised, Asian oil markets will become more attractive to foreign investors,'' a Japanese oil industry official said. "If oil product prices are freed from control, refinery profit margins are freed and no longer fixed,'' he said. Currently retail prices of domestic oil products remain under government control in Malaysia, Taiwan, Vietnam, Indonesia, India and China. Japan, South Korea and the Philippines have decided to let market forces set prices. South Korea plans to liberalise domestic oil product prices from January 1997, and in the Philippines, the transition to market-oriented prices will end in March next year.
With domestic prices poised for freedom, strong interest in investing in the downstream industry has become evident in the Philippines. The country's biggest refiner, Petron Corp, owned 40 % by Saudi Aramco, has said it will invest $ 3 bn in new capacities over the next five years. Other foreign oil firms such as the Petroleum Authority of Thailand have expressed interest in downstream investment. In South Korea, plans to expand refining capacity took off ahead of deregulation. From 1995, major South Korean oil firms started building new refineries. LG-Caltex Oil Corp, a unit of the LG Group, is poised to start commercial operation of a new 270,000 bpd refinery in the near future. More refineries are planned. The energy think-tank Institute Energy Economics (IEE) forecasts oil demand in Asia-Pacific nations will rise by an average 3.7 % every year until 2005 from 1995. "As more and more Asian countries are expected to liberalise their markets, the more foreign investment is likely to flow in,'' the oil industry official said.
In Taiwan, the state Energy Commission laid the groundwork for liberalisation of state monopoly Chinese Petroleum Corp (CPC) by agreeing in June to allow private oil imports. To meet qualifications as an importer, petrochemical giant Formosa Plastics is constructing a refinery that is a key component of its $ 9 bn petrochemical complex. The situation differs slightly in Japan where refining capacity outstrips demand. Japan in April, liberalised its oil product import market, allowing companies other than oil firms to import oil products such as gasoline and kerosene. Only a handful of firms have taken advantage of the deregulation as profitability has been squeezed by low domestic retail prices. In the past two years, Japan's gasoline retail prices have plunged by about 13 % as retailers raced to cut prices, fearing an influx of cheap imports after deregulation.

On the electricity front, New Zealand launched a competitive wholesale electricity market on October 1 in the latest stage of deregulation of the industry. The new market determines prices on the basis of supply and demand, as opposed to the cost-based method of the past. In November, the New Zealand Futures and Options Exchange launched what it says is the world's first cash-settled electricity futures contracts, but early signs are that liquidity will be a long time in coming. In Malaysia, plans to restructure Tenaga Nasional Bhd, were announced in October. The plan to break up Tenaga's generation, transmission and distribution functions into three units would help make the state-run electricity utility more accountable to shareholders and to the government.

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