Ethanol use is expected to double in 2007 once gasohol 91, introduced by Bangchak Petroleum in December, becomes widely available.

Considerably higher cost pressure on Thailand's economy is expected in 2005, the result of rising prices for oil, gas and electricity.

A decision to lift the current fuel price subsidy is unlikely to come before the Feb 6 general election. With the threat of a political backlash sidelined, such a move is almost certain to come soon after the ballots have been cast.

The year 2004, the final year of the Thai Rak Thai-led government's term of office, has seen the administration delay many decisions which might have resulted in a negative impact on the general public. The subsidy on energy prices is perhaps the most blatant case in point.

The Thaksin administration first decided to freeze retail oil prices on Jan 10, 2004, just as oil prices in international markets had begun climbing. Initially, the intervention was expected to be short-lived, and was to be terminated once global oil prices declined. But the government guessed wrong, and the assumption that oil prices would fall by the second quarter was later proven to be incorrect. Several incidents, including the shortening oil supply, fears of terrorist attacks and the worsening situation in Iraq drove Dubai crude to US$37.50 a barrel in October, up from around $28.80 in January.

West Texas crude oil futures hit $55 per barrel, up from $34.20, while Brent spot prices shot up to $51 per barrel from $31.20 over the same period.

The astronomical cost _ up to 42 billion baht _ resulted in the government's decision to terminate the cap on petrol prices on Oct 20. However, the price of diesel, which accounts for 70% of the country's total oil consumption, remains capped at 14.59 baht a litre.

As of Nov 24, the total cost of the diesel price subsidy was 45.6 billion baht, while for gasoline it was steady at seven billion, according to the Energy Policy and Planning Office (Eppo).

Besides oil, the price of electricity has been subsidised to some extent. The Electricity Generating Authority of Thailand and PTT Plc have been instructed to jointly absorb fuel costs worth 1.74 billion baht for electricity production in order to keep the energy cost adjustment charge, commonly known as the Ft rate, for the October-January period at 9.42 satang per unit (kilowatt/hour) below the actual cost.

The government recently allowed Egat to raise the Ft charge by five satang per unit, resulting in a 2% increase in household power bills, despite the utility's request for a 15-satang hike.

The government also continues to subsidise the price of liquefied petroleum gas (LPG) used for cooking at 2.89 baht a kilogramme, at a cost of almost 900 million baht a month based on November figures. The government originally planned to cut the subsidy to no more than two baht per kg this year, down from three baht in 2003.

LPG prices in international markets jumped to $467 a tonne in November, a steady climb from $400 in October, $345 in June and $265 in March.

However, it's quite clear that those subsidies are unsustainably high, given the tendency towards higher global energy prices.

According to Goldman Sachs Economic Research, the average crude oil price in the West Texas Intermediate market is forecast at $47.30 per barrel in 2005, compared to $39.20 in 2004.

Save up before it rises.

Energy Minister Prommin Lertsuridej has said that despite favourable odds for a respite from the current oil supply crunch expected next year, Dubai crude prices are unlikely to trade lower than $30 per barrel ever again. Such a level translates into pump prices for all of next year at around 19-20 baht a litre at local petrol stations.

An industry analyst said that although the cost of subsidies was usually treated as an off-budget expense, it would eventually have an impact on the fiscal account one way or another.

As of November, the subsidy on oil prices alone was worth about 1.5% of the country's gross domestic product, or 4.3% of projected state revenue in the 2005 fiscal budget.

The government is widely expected to abandon most of its energy subsidy schemes as it comes under budgetary pressure due to a string of costly election campaign promises.

With the general election behind it, the new government _ widely expected to be led by Thai Rak Thai _ would be in a better position to allow energy prices to rise to normal levels in order to reduce the burden on the public purse.

At any rate, such a move's effect on the government's popularity would be minimal as it enters the first year of its second four-year term.

The government has clearly sent a signal that the cap on the diesel price will be gradually lifted to match market prices after March 2005, the end of the winter season in northern climes.

It has also called on the general public and businesses to prepare themselves for higher fuel prices in 2005.
As well, gas and power prices are likely to be raised to appropriate levels sometime soon.

According to an Eppo official, the cooking gas price is scheduled to be liberalised by July of 2005.

He added that such a move had been postponed three times already for political reasons.
The impact of a diesel price hike is of great concern regarding the economic outlook. The rise would have an adverse effect on local consumption, a key engine driving the kingdom's economy over the past four years.
In addition, an energy price increase could bring about cost-push pressure on the consumer price index or inflation rate. If inflation rises, it is possible that the Bank of Thailand would introduce a tightened monetary policy in order to cope, which could in turn hobble economic growth.

According to a joint study conducted by the Energy Ministry and the National Economic and Social Development Board, if diesel rises 1.4 baht a litre from the current capped price of 14.59 baht, inflation would see a corresponding increase of 0.27% and economic growth would drop by 0.39%. If it were to increase by 3.4 baht a litre, inflation would rise 0.63% and economic growth would fall 0.92%.

Of total diesel consumption, currently about 1.6 billion litres a month, or 72.6%, is used in the transport sector, with 21.4% in agriculture, 5.1% by manufacturing and the rest used by the construction, services, and mining sectors.

Between October and November, the real market price of diesel floated around five to seven baht a litre higher than the capped price.

Chakramon Phasukvanich, permanent secretary of the Industry Ministry, said production costs in the manufacturing and transport sectors would reflect actual energy costs in 2005. As a result, energy costs would be among the key negative factors on economic growth, unless the government introduces new measures to cope with volatile energy prices or to improve transport efficiency.

Meanwhile, Dr Prommin has said that the energy price subsidy was only a temporary measure. As a net energy importer, Thailand needed to reduce its reliance on overseas energy and develop indigenous energy instead.

Thailand imported almost 500 billion baht worth of goods in 2004, a 30% increase from 2003.
Dr Prommin said alternative fuels and renewable energy would be the prime focus of the government's energy development policy in the future.

The government planned to raise the import tariff on methyl tertiary butyl ether (MTBE), an octane-boosting additive, to 20% from 1% currently. The country imports three billion baht worth of MTBE a year. Petroleum companies would then be forced to use ethanol to replace the MTBE additive, which is to be banned by 2006.
By 2006, at least one million litres per day of ethanol are expected to be used for blending with premium petrol to produce gasohol 95. Ethanol use is expected to double in 2007 once gasohol 91 becomes commercially available.

the cost of subsidies was usually treated as an off-budget expense, it would eventually have an impact on the fiscal account one way or another.

As of November, the subsidy on oil prices alone was worth about 1.5% of the country's gross domestic product, or 4.3% of projected state revenue in the 2005 fiscal budget.
The government is widely expected to abandon most of its energy subsidy schemes as it comes under budgetary pressure due to a string of costly election campaign promises.
With the general election behind it, the new government _ widely expected to be led by Thai Rak Thai _ would be in a better position to allow energy prices to rise to normal levels in order to reduce the burden on the public purse.

At any rate, such a move's effect on the government's popularity would be minimal as it enters the first year of its second four-year term.

The government has clearly sent a signal that the cap on the diesel price will be gradually lifted to match market prices after March 2005, the end of the winter season in northern climes.

It has also called on the general public and businesses to prepare themselves for higher fuel prices in 2005.
As well, gas and power prices are likely to be raised to appropriate levels sometime soon.

According to an Eppo official, the cooking gas price is scheduled to be liberalised by July of 2005.
He added that such a move had been postponed three times already for political reasons.

The impact of a diesel price hike is of great concern regarding the economic outlook. The rise would have an adverse effect on local consumption, a key engine driving the kingdom's economy over the past four years.
In addition, an energy price increase could bring about cost-push pressure on the consumer price index or inflation rate. If inflation rises, it is possible that the Bank of Thailand would introduce a tightened monetary policy in order to cope, which could in turn hobble economic growth.

According to a joint study conducted by the Energy Ministry and the National Economic and Social Development Board, if diesel rises 1.4 baht a litre from the current capped price of 14.59 baht, inflation would see a corresponding increase of 0.27% and economic growth would drop by 0.39%. If it were to increase by 3.4 baht a litre, inflation would rise 0.63% and economic growth would fall 0.92%.

Of total diesel consumption, currently about 1.6 billion litres a month, or 72.6%, is used in the transport sector, with 21.4% in agriculture, 5.1% by manufacturing and the rest used by the construction, services, and mining sectors.

Between October and November, the real market price of diesel floated around five to seven baht a litre higher than the capped price.

Chakramon Phasukvanich, permanent secretary of the Industry Ministry, said production costs in the manufacturing and transport sectors would reflect actual energy costs in 2005. As a result, energy costs would be among the key negative factors on economic growth, unless the government introduces new measures to cope with volatile energy prices or to improve transport efficiency.

Meanwhile, Dr Prommin has said that the energy price subsidy was only a temporary measure. As a net energy importer, Thailand needed to reduce its reliance on overseas energy and develop indigenous energy instead.

Thailand imported almost 500 billion baht worth of goods in 2004, a 30% increase from 2003.
Dr Prommin said alternative fuels and renewable energy would be the prime focus of the government's energy development policy in the future.

The government planned to raise the import tariff on methyl tertiary butyl ether (MTBE), an octane-boosting additive, to 20% from 1% currently. The country imports three billion baht worth of MTBE a year. Petroleum companies would then be forced to use ethanol to replace the MTBE additive, which is to be banned by 2006.
By 2006, at least one million litres per day of ethanol are expected to be used for blending with premium petrol to produce gasohol 95. Ethanol use is expected to double in 2007 once gasohol 91 becomes commercially available.

PTT enjoys steady ride uphill

Thai Oil, PTT's 49.99%-owned subsidiary, will continue to enjoy high refining margins because no refineries have been built in Asia since the financial crisis almost a decade ago.

BASED ON increasing demand in the oil industry, PTT Plc expects that its core businesses, ranging from petroleum exploration, refining, oil trading, natural gas extraction and petrochemicals production, to remain buoyant amid a prolonged growth cycle set to last for at least the next few years.

The company has set a tentative budget of 3.8 billion baht for investment from now until 2008 on the assumption that the country's gross domestic product and energy consumption will increase at a normal rate.

Prasert Bunsumpun, the company's president, said petrochemical prices would continue to increase at least over the next two years due to hefty demand in Asia. Refining margins were likely to stay high because no refineries have been built in Asia since the financial crisis almost a decade ago.

At the same time, the natural gas business was set to grow along with the region's power consumption.
He said PTT enjoyed impressive profit growth in 2004 even though no returns were seen from some ongoing investments, partly because prices for all petroleum products have edged up.

Next year, the company is likely to register exceptionally high revenue and profits once the billions of baht invested in the expansion of its petrochemicals production capacity, the construction of a third gas pipeline route and acquisition of Shell's oil refining business start to produce concrete returns.

"We are upbeat about our future revenue and profit growth. But that does not mean we have forgotten the bitter experiences of the financial crisis in 1997. We expect performance improvements in the next decade. We have enjoyed more flexibility in fund mobilisation and management now that we have been privatised into a public company.

"In the past, we made excessive investments because we didn't expect that the economy would be plunged into a crisis in 1997. At that time, many assets owned by our refineries and petrochemicals arms such as The Aromatics Thailand and Thai Olefins had become big money-losers.

"We were sunk in gloom. Everything about the future seemed terrible. We saw that we would be faced with a lot of hurdles, whether we chose to improve the businesses or simply sell them off. In the end, we could do nothing but sustain them and negotiate with creditors until the economy picked up more than six years later."
Mr Prasert said the company planned to add value to its existing assets in the refinery, natural gas and petrochemicals businesses. Future investments would focus on enhancing maximum production efficiency with the aim of achieving lower costs.

PTT would not stress investment in new assets. Instead, it would attempt to improve efficiency and increase the production capacity of its refineries.

For the petrochemicals business, PTT would place a priority on integrated development and increased production capacity to ensure maximum benefits from improved economies of scale.
As for new investment, PTT would take into account long-term growth potential.
He estimated PTT's sales would increase to 500 billion baht in 2004, up from 400 billion in the previous year. Net income for the first nine months of 2004 totalled 42.17 billion baht, up 49.3% from the same period of 2003.

To list or not to list?

The government's policy to privatise state enterprises has met with strong resistance.

PRESSED BY an upward trend of oil fuel prices over the coming year, the Electricity Generating Authority of Thailand (Egat) seems to have no choice but to go through some kind of privatisation to finance its increasing power-generation cost and further investments.

Although it is anticipated that the government will allow electricity prices to increase next year to reflect higher fuel cost, the rise will likely to be smaller than the actual increase in the fuel cost. Once again, Egat is what it has always been for decades _ a key mechanism for the government to absorb increases in the power cost.
Besides, the power utility has been forced to revamp its operations for more efficiency after the government decided in mid-2004 not to guarantee any more loans for its future investments to keep lid on ballooning public debts.

These factors result in an inevitable restructuring of the country's largest utility, which employs as many as 30,000 people.

Egat governor Kraisi Karnasuta conceded that the agency would likely lose its status as a wholly owned state enterprise sooner or later.

"Since the government decided not to guarantee loans for Egat, it becomes crucial for us to efficiently manage our cash flow and liabilities," he said.

He added: "This means Egat will not be able to expand its business if it's not privatised."
Over the next five years, Egat will need at least 200 billion baht to finance its four new power plants and related facilities, including transmission lines, to meet an increasing power demand.

Mr Kraisi said the government planned to announce a new power-price structure in 2005. If Egat is not privatised by then, the new power price structure could deal a big blow to its financial status.
He said Egat's management had shortlisted eight solutions out of the 14 alternatives considered. The most acceptable solutions as chosen by its employees would then be proposed to the government for approval by the end of this year.

But it goes without saying that any solution to be endorsed by the government must be one that the government, general public and Egat's staff can agree on. In other words, it must be the solution that keeps electricity bills at the minimum while providing sufficient capital for Egat's future investments.
"Most importantly, whatever solution is chosen or even if Egat is to be privatised, there will be no layoffs," said Mr Kraisi.

At present, Egat's management is trying to make its staff understand the necessity of privatisation.
The eight solutions are:

*maintain Egat's state-enterprise status and use power-purchase contracts to guarantee bank loans;
*maintain state-enterprise status but list new power plants on the stock market;
*corporatise Egat and list new power plants on the stock market;
*corporatise Egat but let it remain wholly owned by the government like CAT Telecom and TOT Corporation;
*privatise Egat using the same model as PTT Plc;
*list Egat's transmission system and thermal power units on the stock market;
*list only thermal power units on the stock market; and
*corporatise Egat and list only existing power units with low generation costs and new power units.

An Egat source said although the international credit ratings agency Standard & Poor's recently raised Egat's credit rating to BBB+ from BBB, on par with those of PTT Plc and PTT Exploration and Production Plc, financial institutions were reluctant to extend loans to Egat or invest in its debt instruments since under the state enterprise law, assets of state enterprises could not be seized or subject to asset disclosure by the private sector. Consequently, Egat's loans or debenture issues are not feasible under the risk management systems of financial institutions.

In another development, Ratchaburi Electricity Generating Holding Plc, Egat's 45%-held subsidiary, is set to expand its power business ahead of the government's plan to open new bids for independent power projects in 2011.

The company announced an investment budget of two billion baht next year, excluding an outlay in Laos which is still under review.

Locally, Ratchaburi will invest more in Ratchaburi Power Co, a 1,400-megawatt, gas-fired power plant formerly known as Hin Krut, which is 25% controlled by Ratchaburi. It will also invest in a capital-increase plan of Siam Ethanol Export Co, an ethanol producer in Rayong, with a production capacity of 100,000 litres per day.

the cost of subsidies was usually treated as an off-budget expense, it would eventually have an impact on the fiscal account one way or another.

As of November, the subsidy on oil prices alone was worth about 1.5% of the country's gross domestic product, or 4.3% of projected state revenue in the 2005 fiscal budget.

The government is widely expected to abandon most of its energy subsidy schemes as it comes under budgetary pressure due to a string of costly election campaign promises.

With the general election behind it, the new government _ widely expected to be led by Thai Rak Thai _ would be in a better position to allow energy prices to rise to normal levels in order to reduce the burden on the public purse.

At any rate, such a move's effect on the government's popularity would be minimal as it enters the first year of its second four-year term.

The government has clearly sent a signal that the cap on the diesel price will be gradually lifted to match market prices after March 2005, the end of the winter season in northern climes.

It has also called on the general public and businesses to prepare themselves for higher fuel prices in 2005.
As well, gas and power prices are likely to be raised to appropriate levels sometime soon.

According to an Eppo official, the cooking gas price is scheduled to be liberalised by July of 2005.
He added that such a move had been postponed three times already for political reasons.

The impact of a diesel price hike is of great concern regarding the economic outlook. The rise would have an adverse effect on local consumption, a key engine driving the kingdom's economy over the past four years.
In addition, an energy price increase could bring about cost-push pressure on the consumer price index or inflation rate. If inflation rises, it is possible that the Bank of Thailand would introduce a tightened monetary policy in order to cope, which could in turn hobble economic growth.

According to a joint study conducted by the Energy Ministry and the National Economic and Social Development Board, if diesel rises 1.4 baht a litre from the current capped price of 14.59 baht, inflation would see a corresponding increase of 0.27% and economic growth would drop by 0.39%. If it were to increase by 3.4 baht a litre, inflation would rise 0.63% and economic growth would fall 0.92%.

Of total diesel consumption, currently about 1.6 billion litres a month, or 72.6%, is used in the transport sector, with 21.4% in agriculture, 5.1% by manufacturing and the rest used by the construction, services, and mining sectors.

Between October and November, the real market price of diesel floated around five to seven baht a litre higher than the capped price.

Chakramon Phasukvanich, permanent secretary of the Industry Ministry, said production costs in the manufacturing and transport sectors would reflect actual energy costs in 2005. As a result, energy costs would be among the key negative factors on economic growth, unless the government introduces new measures to cope with volatile energy prices or to improve transport efficiency.

Meanwhile, Dr Prommin has said that the energy price subsidy was only a temporary measure. As a net energy importer, Thailand needed to reduce its reliance on overseas energy and develop indigenous energy instead.

Thailand imported almost 500 billion baht worth of goods in 2004, a 30% increase from 2003.
Dr Prommin said alternative fuels and renewable energy would be the prime focus of the government's energy development policy in the future.

The government planned to raise the import tariff on methyl tertiary butyl ether (MTBE), an octane-boosting additive, to 20% from 1% currently. The country imports three billion baht worth of MTBE a year. Petroleum companies would then be forced to use ethanol to replace the MTBE additive, which is to be banned by 2006.
By 2006, at least one million litres per day of ethanol are expected to be used for blending with premium petrol to produce gasohol 95. Ethanol use is expected to double in 2007 once gasohol 91 becomes commercially available.