Debate over Gross Refining Margins not straightforward, requires nuance

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The ongoing debate about how the state should intervene in capping the gross refining margins (GRM) is something that is easier said than done, industry sources say.

The issue of capping the GRM has propped up around mid-June when oil prices were near all time high and although those high prices of oil has started to abate but still above the $100 per barrel mark.

To make matters worse, some political parties have taken to media to propagate their own hidden agenda of trying to gain importance as elections approach.

The war in between Russia and Ukraine has not helped in any way as fuel supply has been disrupted and both crude oil and natural gas prices have shot through the roof.

The Russia-Ukraine war meant that about 5 million barrels of oil per day from Russia was off the market but some countries around the world did not undertake the sanctions and thus they were able to absorb about 3 million barrels per day. Countries such as China and India have managed to take up but the remaining 2 million barrels that were in the past sold to the European Union is now out of the market and thus leaving a big gap for all countries producing oil to fill up.

“If you put all the capacities in the world to 100% capacity utilization then too the world would not be able to fill the 5 million barrels per day demand,” the industry source said.

Even with about 2 million barrels of oil being cut off from the global supply chain, there is a likelihood that the supply may not be able to cover these 2 million barrels of shortage.

“This product supply demand imbalance resulting at big change in refining margin as there isn’t enough refinery capacity to cope with that missing of 2 million.”

In Thailand, most refinery are running at rated capacity if not above the rated capacity, this means that there is very little room for any kind of raising the capacity in the short-term.

Gross Refining Margin

The GRM at the moment is running at nearly high double digit, with some estimates putting the GRM at $20 +/- per barrel of oil that is refined, which is nearly double the usual times but the GRM across the world are all driven purely by demand and supply in the global markets.

Therefore, capping the price at a certain level may not be the best option for the government because refined oil is global commodity and if there is a price cap in Thailand and it makes more sense to export, then local refineries would be looking to export the product than to sell them domestically.

“Refined products are a global product, where refineries could easily export to other country if there is a price cap in Thailand,” the source said.

Thailand’s 6 refineries operated under Thai Oil Plc (TOP), PTT Global Chemical (PTTGC), IRPC Plc (IRPC), Bangchak Corporation Plc (BCP), Star Petroleum Refining Plc (SPRC), and Esso (Thailand) Plc (ESSO) and they have a 1.24 million barrels.

Way Out for Refineries 

There is little room for maneuvering in the situation that the government of 2014 coup leader Prayut Chan-o-cha has taken the refineries in Thailand this time around.

“Put yourself in our shoes, we are being pressured by the government to lower the GRM, the GRM is dictated by the global markets, we are all listed on the Stock Exchange of Thailand (SET) and are answerable to the investors who will ask why are we donating the money, what answer do you think we will have to give to the shareholders,” the industry source questioned Thai Enquirer.

The government has been asking for each refinery to dish out 1 to 1.50 baht a liter and this is something that refineries say they cannot do. They say that the impact of such a move would be far worse than the public relations that the government will gain from achieving this reduction.

Although the impact on the net profit for each refinery is going to be miniscule, the legal wangle that may entangle the companies would be far worse and therefore it is not going to be easy for the listed companies to undertake the request by the government.

Below is the impact on the net profit after tax (NPAT) on the 6 refineries of undertaking the request by the government.

The way out for such a move could vary but the best way to do that would be 

  1. Pass this bill in the parliament, then it would be a law passed in the parliament that would prevent the listed refineries from being sued by their shareholders.
  • Possibly put a cap on the export market, or the so-called export quota but then if such a scenario takes place, then refineries may cut their production capacity to maintain the economics of the operations.
  • The government probably will ask for 1 baht per liter or $5 per barrel, which is not significant, but it would really be difficult to explain to shareholders.  And this is a little of witch hunt where oil have double from 20 odd baht to 40 odd baht but 1-baht reductions may not have much of an impact
  • Look at possible tax breaks for the longer term, i.e., years down the road for the refineries, as they would be able to sell this tax break to the shareholders as a carrot for cutting the GRM.

The political party that has taken up this issue of GRM and made a big issue out of this issue knows well that the GRM are calculated based on a few days/weeks if not months, but in this case the politician took the peak of the GRM and created a big issue out of something that is not true.

If the government wants to undertake the proposal of this politician of ‘windfall’ taxes, then this windfall tax was put on the upstream business of exploration & production. The United Kingdom did that for the upstream business of all upstream producers and Thailand could undertake similar moves as there is more control over upstream operations than downstream such as refineries.

Also, the UK’s ‘windfall tax’ on more than 10 odd exploration and production companies were all property passed via the parliament and were therefore legitimized action of the parliament.

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