An inconvenient truth
In the face of the new oil crisis, when people are wondering how they could survive at a time when the cost of living is blown sky-high but real incomes are in negative territory, the Thai government has yet to settle on a clear direction to solve the escalating problems.
World oil prices hit an all-time high at US$140 a barrel in the first half of 2008 from $100 early in the year. These translated into 40 baht a litre for diesel from 27 baht at local filling stations.
Although surging oil and goods prices are a global phenomenon, wildly fluctuating energy prices and rapid rises of the cost of living have increasingly kept people in Thailand on edge. Growing fears have turned to blind rage and the easiest target is those responsible for running the country - the government.
Never before has the government faced so many demands from so many groups at the same time. Angry businessmen have called for the government's help as soaring prices have dried up their cash flow. Transport operators and fishermen look for oil price subsidies while commuters pray for a freeze in their fares.
But so far, a clear direction has yet to be determined by energy policy planners, led since early this year by the former biochemical lecturer, Lt Gen Poonpirom Liptapanlop, the wife of Suwat Liptapanlop, one of 111 executives of dissolved Thai Rak Thai party.
Prompted by a rush to appease protesters, the measures implemented in the first half of 2008 were confusing at best. Numerous subsidy schemes for mainstream fossil fuels were approved hastily to meet the demands of the day while the many choices of alternative fuels boggled the minds of automakers.
The former energy minister, Piyasvasti Amranand, left the industry in good shape when he stepped down early in 2008, setting the right tone with a series of crucial, albeit painful, reforms that were widely applauded as among the most effective in Asia. They include the passage of energy bills and industrial frameworks, timeframes for energy security projects and the new 15-year power development plan (PDP) ending in 2021.
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| Campaigns and incentives have been launched to promote a switch to CNG although the number of refilling stations is inadequate. |
But from day one, Lt Gen Poonpirom sank the planned phased-in floating of liquefied petroleum gas (LPG) price initiated by Dr Piyasvasti by fixing it at $320 a tonne until July to curb the burden of households, even as its world price had surged to nearly $900 and so many vehicles have been modified to use the fuel, taking advantage of the subsidised rate intended for households.
Thanks to her decision, Thailand, once an LPG exporter, has turned into an importer due to the skyrocketing demand for the artificially cheap LPG in the transport and industrial sectors.
In May, the energy minister, with the support of Finance Minister Surapong Suebwonglee of the People Power Party, "requested" that the oil refineries under the state-owned PTT Group cut their margins for diesel by three baht per litre for the agricultural, public transport and fishery sectors. Truck operators will be the next in line to be included in the scheme thanks to their vocal protests.
As consumption of cheap LPG soared, the Energy Ministry tried to apply damage control by encouraging motorists and industries to replace their LPG systems with compressed natural gas (CNG) ones.
But the solutions only gave rise to new problems. The number of CNG facilities and filling stations remained inadequate despite PTT's plan to hasten construction. The CNG price, at 8.50 baht a kilogramme, is also subsidised, well below the cost of 12 baht.
Stuck at dead ends everywhere in the world of fossil fuels, the state turned to alternative energy with the commercial launch of the greener E85 gasohol two years ahead of its earlier plan.
It also initiated a 15-year renewable-energy plan, focusing on research and development of technology and management of renewable energy (RE).
Since 2003, the government has tried to reduce the country's dependence on fuel oil and diesel, particularly natural gas, for fear of the inevitable - the premature exhaustion of limited domestic natural gas resources - due to heavy use in electricity generation.
Through price incentives, the state aimed at encouraging more private power producers to use more RE, such as solar, wind and biomass instead of fossil fuels. The goal is to raise the country's RE share to 8% of all energy used in 2011 from 0.5%. The share is only 2% now.
Thailand is also carrying out a feasibility study for a nuclear plant to be built by 2020, which could help, provided it does not meet the same fate as two coal plants that were scrapped under the weight of heavy protests a few years ago.
But to date statistics from the EPPO show a significant increase in investment in mainstream fuels such as coal and hydropower, with only a modest fall in the dependency on fuel oils and diesel.
Natural gas still leads in the fuels used for electricity generation, with only a small drop to 66.8% in 2007 from 72.4% in 2003, while the share of coal has increased by 300%. Reliance on imported electricity also rose by 47% in 2007.
Some of the measures have raised concerns among energy experts and businessmen about their long-term effects. The LPG price cap not only boosts consumption out of control and cripples refineries and gas-separation plants, but also triggers smuggling. More fishing boats are reported to have shifted to becoming LPG smugglers to make more money.
In addition to upsetting market mechanisms, subsidies, especially for diesel, keep users out of sync with reality and give them no reason to save on fuel bills or switch to alternatives.
Proper preparation and adequate supply are another concern. Like E20, the E85 push could backfire if ethanol output fails to keep up with soaring demand, expected at 12 million litres a day when the new fuel becomes mainstream. The current capacity stays at 1.55 million litres a day.
Conflicting tax incentives are also a major headache for automakers, who now have E85 to deal with, in addition to eco-cars and E20 to which some have already committed hefty investment.
All these factors could derail government efforts to promote alternative fuels, another waste of big budgets for nothing.
Lt Gen Poonpirom says the public should realise that pump prices will never go down to 30 baht a litre and we must learn to use less energy.
Indeed, the inconvenient truth is that $150 a barrel in the second half of 2008 is not inconceivable, and no subsidies can sustainably help, but will just deplete state coffers. The best solution for oil importers like Thailand is to wean themselves from fossil fuels and use more alternative or recyclable energy.
Time is running out for the government, which needs to focus on long-term development. It also needs to muster the courage to push ahead with unpalatable reforms, rather than compromise them on impulses to please voters.
OIL MARKET
Farewell to cheap oil
BUSRIN TREERAPONGPICHIT
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| What a difference 10 years make. |
Years from now, the first six months of 2008 could be recorded as one of the most memorable periods in history and one of the biggest nightmares for oil-importing Thailand.
World oil prices soared to an unexpected high of $140 per barrel in June from $100 at the beginning of 2008. By then, analysts had abandoned any attempt to calm the frayed nerves. They declared the unimpeded spiral would continue and it would only be a matter of time before they reached $150 a barrel.
Although the trend of high oil prices has been going on since 2003, even the most pessimists have never imagined the extent and speed of the increases.
All fingers have been pointing first and foremost to the growing demand spurred by rapidly developing Asian countries, in particular China and India, where almost half of the world's oil consumers reside.
The economic slump in the United States, triggered by the sub-prime mortgage crisis, only serves to exacerbate the situation. The US dollar, which had until recently plunged to record lows against all currencies, was responsible for the spectacular ascent of oil prices by more than $20 within two weeks.
The dollar decline has also prompted speculators such as hedge funds and sovereign wealth funds to shift their investments from US stock markets to oil, gold and other commodities, creating price bubbles in those markets. Investments in these assets have grown to $235 billion in May 2008 from $70 billion two years ago.
Sporadic unrest and violence faced by some oil producers such as the Middle East and Latin America have worsened the overall situation. As oil is a price-sensitive commodity, such atrocities caused crude prices to swing wildly in the first half of 2008.
Among all analysts, Goldman Sachs seems to have had the most impressive record so far. Two years ago, the American investment bank was the first to forecast that crude prices would hit $100, raising eyebrows across the world. Ominously, it recently upgraded its target price for the second half of 2008 from $107 to $141 per barrel, or $34 a barrel. A few weeks after its announcement, the oil prices hit a record $140 a barrel.
Other investment banks such as Credit Suisse revised up their forecasts as well. They viewed that the global crude supply is expected to be tight because many oil producers, especially non-Opec countries, are struggling to find new reserves due to limitations on foreign investment.
Declining production in mature fields, especially in the North Sea, also put pressure on the supply. Meanwhile, demand from China, India and the Middle East keeps rising, buoyed by government subsidies.
Due to all these factors, which show no sign of abating, most analysts predicted more gloomy figures of $150 to $200 per barrel would be seen over the next six months.
The rest, however, saw the high prices as a sign of imminent bursting of the bubble.
In any case, the oil prices will continue to dictate global economic performance since the prices of other goods hinge on them. How a country fares in the expensive-oil regime depends on the share of the cost of oil in its national income.
Undeniably, for countries with poorly managed, inadequate logistics systems including Thailand, the trend will continue to unleash a disaster, the extent of which depends on the degree of their dependence on imported oil.
Meanwhile, the ability of end-users to reduce their consumption and switch away from oil has proved modest after all these years.
In Thailand, 60% of all transport modes, especially for deliveries of goods and mass transit, remain dependent on oil, especially diesel, which traded above $170 a barrel in Singapore in May.
Not surprisingly, car owners in Thailand moaned about sharp rises in retail petrol prices, from 33.29 baht a litre of premium petrol and 29.74 baht for diesel to 40 baht and nearly 40 baht respectively in May.
For lack of any evidence to the contrary so far, pump prices will continue to soar. The best strategy therefore is to get used to them. Do whatever you can to cut back on your oil consumption and use alternative fuels where possible such as gasohol, biodiesel or compressed natural gas.
NEW FUELS
The right alternative
BUSRIN TREERAPONGPICHIT and YUTHANA PRAIWAN
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| Flavour of the month: PTT and Bangchak have the largest array of alternative fuels to choose from. |
All-time high global oil prices not only hit the world where it hurts the most - high costs of living and gas bills - they also spurred unprecedented demand for alternative fuels, which have hit record highs in recent years.
A few years back, motorists would look suspiciously at a car running on vegetable oil or alcohol and then turn away. The main reason was the lack of belief in the new breed of fuels. After all, who would want to risk destroying the engines of the cars they bought with their hard-earned money?
But in the first half of this year, when the premium petrol price surged to 40 baht a litre from 33 baht within six months, the same motorists would, quite understandably, rush the nearest stations to fill their tanks with the fuels they once derided.
Demand for gasohol, a mixture of ethanol with petrol, and compressed natural gas (CNG) therefore rose sharply during the period and would contiue to soar so long as world oil prices remain high.
Thailand is counted among the most successful countries in promoting the shift from mainstream fuels to alternative fuels.
The campaign started with the launch of gasohol E10, a mixture of 10% ethanol in petrol. While the new fuel met with resistance at the beginning due to strong doubts about its effects on car engines, the increasing prices of fossil fuels eventually overcame the prevailing concern.
Encouraged by the success of the E10, the then military government made an effort to step up to gasohol E20, a mix of 20% ethanol. The new mix went on commercial sales at the end of last year. Priced as much as six baht a litre below the premium petrol price thanks to heavy subsidy, the E20 is sold at most petrol service stations of majority state-owned PTT and Bangchak.
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| LPG remains popular due to the prohibitive price of its NGV or CNG counterpart although its use in cars is discouraged. |
On the automobile front, Thailand proudly became one of the few countries where E20-compatible completely knocked down (CKD) vehicles are produced, as the world's major automakers foresaw huge opportunities in the local market.
The response of motorists to the new type of vehicles was overwhelming, and many drivers sold their cars to buy E20 vehicles. In no time, E20 passenger cars became the main engine driving the sales of the automobile sector in the first half of 2008.
Four months after their launch, almost all of the 63,000 small and mid-sized sedans sold were E20 models.
The projection of sales of E20-compatible models was then revised up to 100,000 units from only 60,000 units recently. Vallop Tiasiri, president of the Thailand Automotive Institute, stepped up his forecast further to over 200,000 in 2008. The models were the clear winner in the compact and mid-sized passenger-car segments during the period.
The spike in their sales, however, had its own downside. During the first six months, E20 car owners had a hard time filling their tanks due to the limited supply of the new fuel, which was available at 100 gas stations in Greater Bangkok, well short of the surging demand.
According to the Energy Planning and Policy Office (EPPO), the consumption of all flavours of gasohol rose by a whopping 100% or more year-on-year in June 2008 to nine million litres a day.
On the other side, total demand for premium and regular petrol dropped to 18 million litres per day in June from an average of 19-21 million litres per day, with gasohol 91 rose to two million litres per day and E20 climbed to 100,000 litres in June from its debut early in the year.
A shift in demand has triggered a boom on the supply of ethanol, a form of purified alcohol derived from farms products, mainly from molasses and cassava, used to mix with petrol to produce gasohol.
According to Somchai Lohvisut, CEO of the ethanol producer Thai Agro Energy, the country's total ethanol demand will soon reach one million litres a day, enough for 10 million litres of E10 gasohol - or about half the amount of regular petrol now consumed.
The ethanol's capacity stood at 1.55 million litres a day, well above the demand of 900,000 litres a day, while an additional of 500,000 litres a day will be added after more plants are ready to begin operation.
Consumption of the B5 biodiesel, a blend of 5% biofuel and diesel, was up nearly 700% year-on-year, to 9.6 million litres daily from 1.072 million litres in the first half of the year..
While high speed diesel demand dropped to 50 million litres per day, a sharp fell from 53 million litres in April.
The EPPO also said that 72,950 vehicles were now using compressed natural gas (CNG), which is marketed locally as NGV or natural gas for vehicles.
It said the Energy Ministry's policy to offer tax exemptions to operators of NGV service stations would help increase the number of the stations to 320 by year-end from 195 in June to serve NGV consumption of 62.8 million cubic feet daily on average from only 41.1 million cubic feet early this year..
Thanks to the energy development policy laid down by Piyasvasti Amranand, the energy minister in the previous military-led government, the country should focus its efforts to develop as many alternative fuels as possible.
His successor, Lt Gen Poonpirom Liptapanlop, in collaboration with Finance Minister Surapong Suebwonglee, has also tried to carry on in this direction, with several measures launched during the first half of this year. One of the latest was the push of the commercial launch of gasohol E85 to October 2008 from the next few years as earlier planned.
Some temporary measures will also be implemented to serve the demand when the supply of E85 car models is still limited. Import tariff exemptions will be offered for flex-fuel vehicles (FFVs), the models that can use any type of fuels, as well as E85-compatible vehicles.
FFVs will therefore be seen in Thailand in the latter half of 2008, imported from Brazil and the United States by General Motor, Volvo and Ford.
As well, additional incentives will be offered through the Board of Investment to encourage car assemblers to build FFV plants here.
To promote the production of new fuel-efficient models here, a low excise tax rate of 25% will be imposed on E85-compatible vehicles, the same as E20 vehicles, compared the 35% normal rate. Corporate taxes for ethanol producers would also be reduced.
However, automobile executives commented that these measures would ironically incur new challenges in the second half of 2008. A wide array of investment privileges offered to many models at the same time could confuse car assemblers, making it difficult for them to finalise their investment plans.
The market leader Toyota is among the most vocal critic on this point. It said the government should instead focus only on a clear road map of fuel types it would like to see.
Too many measures could obstruct alternative-fuel development, as they will have far-flung effects on all parties.
PETROCHEMICALS
Bracing for a soft landing
BUSRIN TREERAPONGPICHIT
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| Cementhai, a petrochemical subsidiary of the Siam Cement Group, is one of the big petrochemical players in Rayong. Through close ties with its US-based partner Dow Chemicals and Japanbased Mitsubishi, SCGhas soughtnewniches by investing in a number of specialty-grade projects. |
High crude prices could prove healthy. They promote conservation of limited resources and innovations in alternative energy. But oil prices that soar at a breakneck pace and only in one direction hardly do anyone any good. Even the petrochemical industry, once a big beneficiary of the upward trend in recent years, has now been counted among the casualties of the spiral that characterised the first half of 2008.
This is because the cost of the industry's raw material, naphtha, has risen too much too fast. In the first half of 2008, its prices crossed the US$1,000-per-tonne threshold from around $600 a year earlier.
Meanwhile, the prices of its intermediate and final products were growing as well but at slower paces, leaving petrochemical producers struggling with narrower profit margins.
Suphon Tubtimcharoon, IRPC's chief planning and administration officer, said the spread margins of some petrochemical products had been trimmed by nearly 50% year-on-year.
For example, the price of commodity-grade ethylene rose to $1,200 and $1,300 a tonne from around $1,000 a year earlier.
"Some ethylene plants that use naphtha as feedstock in China, South Korea and Japan were forced to shut down because their sales were too low to cover the rising costs," he said.
Others that remain in operation need to cut production to only 60% to 70% of total capacities, with the sole purpose of generating cash, not profits.
As the prices of intermediate petrochemical products, such as low-density polyethylene (LDPE) and high-density polyethylene (HDPE) move in the same direction, they rose to $1,400 to $1,500 per tonne on average. The increases of only a few hundred dollars a tonne were hardly enough to compensate the rises in feedstock prices.
During the first quarter, most petrochemical products reported lower margin growth, especially those based on naphtha. The Siam Cement Group (SCG), Thailand's largest industrial conglomerate whose chemical business made up 45% of its total revenue, was not spared from volatile petrochemical spreads, according to Phatra Securities research.
"We believe that every $10-a-tonne change in spread from naphtha to HDPE would affect SCG's earnings by 600 million baht, or 3%, in 2008 and 2009," said Phatra analysts.
However, in the second quarter, the situation improved, as the prices of intermediate products started to rise faster, relieving some of the pressure on those producers' margins from the first quarter.
The trend in the second half of this year, however, remains uncertain. Some producers may see their prices improve while others will continue to struggle, said Mr Suphon.
He said this was due to the fact that the prices of commodity-grade products could not be raised to keep up with the higher costs, while investment to upgrade machinery or technology was too costly.
"I would say that some companies whose plants still use outdated technology, have low efficiencies and produce low-grade products will need to allow the bigger ones to acquire them," he said.
Indeed, some large petrochemical companies are planning to do just that. The PTT group, the majority state-owned oil-and-gas giant, is considering acquiring the good assets of petrochemical producers, not only locally but also abroad through its extensive investment plans.
After all, integrated producers with products that fill all market segments from upstream to downstream, as well as specialty petrochemical products, will have advantages over their peers.
One of the few such producers is IRPC, a PTT affiliate that has not only petrochemical plants but also an oil refinery. Mr Suphon elaborated that its complex was producing a whole range of feedstocks, including expensive specialty-grade products such as ABS. This combination of products has helped IRPC maintain marginal growth in tough times.
SCG is also moving in the same direction. Through close ties with its US-based long-term partner Dow Chemicals and Japanese-based Mitsubishi, the company has invested in a number of specialty-grade projects.
A concern over the next six months will be new rivals. Petrochemicals makers in the Middle East will gradually start their operations, adding to the world supply, starting in September this year, when the global petrochemical industry is projected to softly slide into a cyclical downturn once again.
Mr Suphon added that the key survival strategy for Thai manufacturers was not only to turn to specialty products but also to seek new markets to reduce their dependence on the main China market, where demand would soften after the 2008 Olympic Games.
Other emerging markets, including India, Latin America and East Europe, would be the key engines driving the demand for petrochemical products in the world market, both commodity goods and value-added chemicals products.
He added that even in the old market that was China, the company foresaw large room to grow since development in the world's emerging superpower had to date been concentrated only in some provinces along the Pacific Rim.
"The Chinese government has already set a plan to develop its suburban economy, which comprises a large number of undeveloped provinces and that means huge demand," he said.
The Thai petrochemical industry, therefore, would keep growing, albeit at a modest pace, and the key was to move smartly, he concluded.
