Thai R&M fights currency crisis

David Knott
London
[email protected]

Since Thailand's government floated its currency in July, the baht has fallen 50% against the dollar, hitting the country's refiner/marketers hard.

The economic collapse has led to shrinking domestic oil products demand, declining refiner margins, and higher operating costs. The government sees product exports as a short-term lifeline.

Thaioil, the kingdom's largest refiner, reported that pre-tax profits in the first 9 months of 1997 plunged to 100 million baht ($2.2 million) from 1 billion baht ($22 million) for the same period in 1996.

Kasame Chatikavanij, Thaioil chairman and managing director, cited reduced oil exports to China since January, the effects of depreciation on debts, slowed growth in domestic retail sales, and an oil products glut in Asia caused by excess regional refining capacity.

State firm Petroleum Authority of Thailand (PTT), which owns 49% of Thaioil, refused to inject an expected 2.7 billion baht of fresh capital into the company as government cut PTT's investment budget (see related story, p. 18).

Difficulties ahead

Kasame predicts Thaioil will have difficulty operating in 1998, if it cannot increase its capital, because of anticipated fiercer competition in the retail market and slim profit margins from exports.

However, Rayong Refinery Co. (RRC) and Star Petroleum Refining Co. (SPRC) were advised by PTT, their major shareholder, to operate at full capacity despite the slowdown in domestic products consumption.

Both companies are consequently expected to boost their oil products export volumes to 20% from 10% of total output. RRC has already exported 20,000 metric tons of diesel fuel to Argentina.

PTT Gov. Pala Sookawesh said exports are the only solution for RRC and SPRC, which have a $2-3/bbl refining margin but cannot reduce output without losing the benefits of economies of scale.

Next year, SPRC will invest $15 million to boost its refining capacity from 130,000 b/d to 150,000 b/d. Debottlenecking will enable SPRC to reduce refining costs by $1/bbl, said Managing Director Don Romano.

Meanwhile, PTT plans next year to raise its own products exports from the current 25% of total supplies to 40%.

Stocks aid

The Thai government has tried to ease pressure on refiners by allowing them to reduce required petroleum stocks to help ease liquidity problems, save foreign exchange, and reduce storage costs.

Thai refiners and traders can reduce their reserves of refined products by 2%. Refiners are no longer required to maintain a crude oil stock surplus of 11% in excess of anticipated demand.

These measures are expected to lower refining and marketing costs and inject 11.06 billion baht ($240 million) into the struggling R&M sector. Companies have agreed not to use this money to pay foreign debts.

Before the crisis, Thailand had anticipated importing 200 billion baht ($4.34 billion) worth of crude oil and products in 1998. The government expects the stock reduction to reduce imports spending by 9.43 billion baht ($205 million).

Government officials stress that the reduction of required reserves is a temporary measure. If there is any threat to Thailand's security of petroleum supply, stock requirements will be increased immediately.