Shell to permanently shut Philippine refinery: Update

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Shell is shutting its 110,000 b/d Tabangao refinery in the Philippines and converting it into an import terminal because of regional oversupply and the impact of the Covid-19 pandemic.

Fuel prices are lower than or about equal to the cost of refining crude, making it economically unviable to run the refinery, said Shell's Philippine president Cesar Romero.

Shell said the shift to an import terminal is designed to strengthen its financial resilience in the Philippines, amid significant changes and challenges in the global refining industry and the "new normal" resulting from the pandemic. It also prepares the company for a cleaner energy future.

The Tabangao refinery has been shut since May because of a slump in demand. Philippine oil product demand fell by 20-30pc in March and 60-70pc in April compared with February because of domestic Covid-19 lockdowns, according to government figures. Shell's Philippine operations made a loss of 6.7bn pesos ($137mn) during January-June after booking a profit of P3.7bn a year earlier.

Sales volumes recovered in May and June, but Shell said it remains cautious about the domestic market outlook because a spike in Covid-19 cases has led to new localised lockdowns. Dividend payouts for shareholders in the company's Pilipinas Shell arm have been suspended as the company works towards a target to save P2bn in operating and capital expenditures this year.

Import reliance

The shutdown leaves the Philippines with only one refinery, the 180,000 b/d Bataan plant operated by domestic private-sector firm Petron. Bataan has extended a temporary shutdown that started in May until August or September.

The closure of Tabangao will add to the country's growing reliance on oil product imports and open more opportunities for export-oriented refiners in the region. Shell had a share of just under 20pc of the domestic fuel market in 2019, behind Petron with around 25pc.

Philippine imports have already been rising, hitting almost 310,000 b/d of diesel, gasoline, jet-kerosine, fuel oil and LPG in 2019, up by 15pc from a year earlier, according to government data. Diesel and gasoline made up the bulk of imports, rising by 27pc to 135,000 b/d and by 17pc to 61,000 b/d respectively.

Most imports came from northeast Asia, with China dominating diesel supplies in particular with 64pc of total imports last year. South Korean refiners have also been expanding their share of the Philippine import market, as the two countries work towards a free trade deal.

The impact on crude flows may be less pronounced, given Shell took a mix of grades at Tabangao. Around 65,000 b/d of crude arrived at Batangas port, which serves the refinery, in the 12 months to April, data from oil analytics firm Vortexa show. The biggest proportion came from Abu Dhabi, at around 16,000 b/d of mainly medium sour grades. Imports also included about 10,000 b/d of Malaysian light sweet, 9,000 b/d of Brazilian medium sweet and 8,000 b/d of Russian medium sour ESPO crude, as well as 2,000 b/d of US WTI and Eagle Ford light sweet grades. About 15,000 b/d was delivered from South Korean storage tanks, the origin of which is unclear.

The Philippines produces only marginal amounts of domestic crude, leaving refiners reliant on imports.

Tabangao is the first major Asia-Pacific refinery to permanently close since the Covid-19 pandemic slashed regional demand. Refining NZ is considering the closure of New Zealand's sole refinery, the 135,000 b/d Marsden Point plant, with a decision due later this year.

By Kevin Foster, Azlin Ahmad, Sarah Giam and Jaslyn Ying