Why the Oil Fuel Fund is overburdened
The state fund subsidising fuel prices is now 102.5 billion baht in the red
The Energy Ministry an-nounced that the mounting debt of the state Oil Fuel Fund exceeded 100 billion baht as of yesterday. While a recent nudge from Kla Party leader Korn Chatikavanij, a former finance minister, shed more light on pressing issues surrounding energy and resulting in the government requesting cooperation from oil refineries to channel their profits into the fund, no subsidies for the prices of fuel requested from six Thai refiners have been finalised yet.
What is the current state of the Oil Fuel Fund?
As of Tuesday, the Energy Ministry reported that the state Oil Fuel Fund is now 102.5 billion baht in debt. The fund's significantly wider loss ballooned from 96.5 billion baht on June 19 as the money is currently being used to subsidise and cap the pump price of standard diesel under the government's subsidy scheme at 35 baht a litre.
The move aims to alleviate the cost of living amid rising inflation and prices of food and fertilisers globally due to the supply disruptions caused by the Russia-Ukraine war. Diesel is also Thailand's main fuel for transportation.
FSS International Investment Advisory Securities estimated that the government via the oil fund will incur a daily cost of 850 million baht to subsidise the current crude oil price of US$115 per barrel.
During the global oil price surge from 2004 to 2005, the fund ran a hefty loss of 92 billion baht, but the Finance Ministry helped pay for it by selling state bonds at attractive interest rates.
However, under the Oil Fuel Fund Office Act of 2019, the office became a public organisation, so the government no longer guarantees debts incurred by the fund.
What are the accusations against the oil refineries?
Around the middle of June, Kla Party leader and former finance minister Mr Korn published a series of social media videos with data showing Thai refineries' gross refining margin (GRM) surged 10-fold over the past two years.
GRM, which is the difference between prices of crude oil and refined oil, refers to costs added to the crude oil price during the refining process. It eventually becomes part of drivers' retail oil prices at petrol stations.
Mr Korn said the higher margin places a financial burden on consumers and similarly allows refiners to "rob" the Oil Fuel Fund, which is now in the red with debt mounting to over 100 billion baht from subsidising fuel and LPG.
He gave an example that the oil refinery margins have increased by 10 times per litre, standing at 8.5 baht on June 10, compared with 0.87 baht on June 10 last year and 0.88 baht on June 10 in 2020.
"I have been told that these refineries still turned a profit last year when the GRM stood at just 80 satang per litre," Mr Korn said.
As for solutions, the Kla Party leader proposed that the government impose a "windfall tax" on refiners' profits, provide an additional 60-billion-baht loan to improve the liquidity of the Oil Fuel Fund, and subsidise oil prices for selected sectors.
How did oil refineries respond?
The Petroleum Refining Industry Club -- comprised of several powerful companies, including PTT Plc, PTT Global Chemical Plc, Bangchak Corp, Esso (Thailand), Star Petroleum, Thai Oil and IRPC Pl -- swiftly denied the accusations of overcharging customers for refined oil and insisted the current GRM is reasonable.
According to the club's recent statement, the average GRM of 0.72 baht in 2018 and 2019 only increased to 1.19 baht a litre in the first quarter of this year. Hence, "a tenfold increase to more than eight baht is inaccurate".
The club added that the difference of 0.47 baht was attributed to the low fuel demand during the Covid-19 pandemic. Some people were misled into thinking GRM has increased to an unusually high level because certain observers cherrypicked the data by comparing the current GRM to the level during the pandemic.
Chawalit Tippawanich, president and chief executive of IRPC, further explained that the GRM covers only some major costs during the refining process, such as crude oil and transport, but not depreciation and maintenance costs, which have increased significantly. As suggested by some observers, these costs explain why refineries are not making high profits.
Thai Oil president and chief executive Wirat Uanarumit added that if one country decides to manipulate the GRM, which is determined by supply and demand in the crude and refined oil markets, at a different rate than other countries, it will risk "distorting the free market".
What did the government plan to do?
On June 21, the cabinet approved a plan to ask for cooperation from oil refineries to channel about 8.5 billion baht of their monthly profits into the Oil Fuel Fund from July to September to help control fuel prices. The cumulative contribution of 24 billion baht by September would be from diesel and gasoline refineries and gas separation plants.
It is essential to note the government is carefully treading the line here because asking for cooperation does not necessarily translate into a requirement, meaning there is no guarantee that refineries will abide by this attempt to limit fuel prices. The government is expected to finalise the subsidies for the prices of diesel and gasoline requested from six Thai refiners soon, but no date has been set yet.
As for other measures, the government resolved to cap the marketing margin for diesel at 1.40 baht per litre. It will also subsidise 50% of the diesel price from July to September if the retail price exceeds 35 baht per litre.
The government is capping retail prices of natural gas at 15.5 baht for NGV vehicles and at 13.6 baht for NGV taxis in Greater Bangkok till Sept 15.
What is the oil industry outlook?
While the recent actions targeting the oil industry have greatly affected these major refineries' stocks, Suwat Sinsadok, managing director and head of research at FSS International Investment Advisory Securities, said Thai refiners are still attractive at their current share prices.
"The subsidy downside is likely to be lower than the market previously expected as the cabinet has revealed after discussions with refiners that the likely subsidy amount could range between 0.5 billion and 1.0 billion baht a month [a total of 3-6 billion baht] for each refiner for three months. This is lower than the 8.5-billion-baht subsidy the government previously indicated," Mr Suwat said.
He also added that the market GRM has continued to strengthen, surpassing the US$30 per barrel mark for the first time in history, mainly driven by the spiking margins of gasoline, diesel and jet fuel. As a result, the market GRMs coupled with inventory gains will boost the net profits of Thai refiners during the second to fourth quarters this year.
Meanwhile, Wiriyachai Jittawattanarat, head of Investment Consultant and Product at Krungthai CIO, cautioned that the contribution requested by the government to the Oil Fund could impact foreign investor sentiments in Thai oil refineries. He cited certain investors will not see the government's move as a "one-time hit" on the refineries' profits or a "short-term impact".
"Looking at it from a regional investor's perspective, they are bringing in fund flows from overseas and they know that they have choices. No need to always pick Thai refiners because there are others in Asean that are not prone to this risk [of getting part of their profits taken away].
"So with this, I don't think that the share prices of Thai refiners would bounce back that quickly," Mr Wiriyachai said.
Thailand is not alone in appealing for help from oil firms. The UK imposed a windfall tax on oil and gas giants at the rate of 25% of their profits in late May. This tax will be phased out when global commodity prices settle down.