Author: pip_admin

The Philippine government through the Department of Finance (DOF) launched the Fuel Marking Program in August 2019 in aim to combat oil smuggling in the country thereby generate revenues to finance various infrastructure programs and social investments throughout the nation.

The Fuel Marking Program is the process of marking imported and refined petroleum products such as gasoline, diesel and kerosene using a sophisticated, un-replicable marker after taxes and duties have been paid.  This program, forms part of the Tax Reform for Acceleration and Inclusion (TRAIN Act), enacted into Law on 19 December 2017 and took effect on 01 January 2018.

The DOF mandates its two attached agencies, the Bureau of Customs (BOC) and Bureau of Internal Revenue (BIR) as the lead implementing agencies to execute and oversee the fuel marking in depots, vessels, tank trucks and other fuel-transporting vehicles; and the fuel testing in refineries and its attached depots, retail stations, respectively.  The Consortium of SGS Philippines, Inc and SICPA SA, a Switzerland-based company was commissioned to implement the project under a five-year contract which kicked off in 2019.  The marking cost is P0.06884 per liter, which will be shouldered by the government during its first year of implementation or until the utilization of the approved budget (P1.96 billion), whichever comes first.

Reports from the government, NGO initiated studies, including that of an independent study commissioned by local oil players estimates forgone revenues in the form of excise taxes and value-added taxes (VAT) to be around P26.9 billion by the DOF (2016), P37.5 billion by an Asian Development Bank study and P43.8 from the oil industry.

In 2019, the DOF estimated to have marked a total volume of 15.2 billion liters, with about 6.8 billion liters for the BOC, and 8.4 billion liters for the BIR.  The government expects that all fuel products covered under the fuel marking program will be marked by 03 February 2020, showing proof that customs duties (for imported petroleum products) and pertinent taxes (for locally refined or manufactured petroleum products) have been paid.

The Philippine Institute of Petroleum (PIP) fully supports the government’s initiative to curb smuggling from both outright physical and technical smuggling through the (a) implementation of the fuel marking program, (b) strengthening of the VAT monitoring system, and (c) marine vessel traffic monitoring system. Similarly, the PIP advocates that these programs should be conducted in a safe and efficient manner to ensures unhampered operations and safety within the oil companies’ facilities and personnel.  Furthermore, we believe that the success of this program will depend largely on the equitable and level implementation across all downstream oil players with prioritization on vulnerable trading areas with significant price variations.

In 2006, Republic Act 9357 or the BIO FUELS ACT OF 2006 was enacted to “Direct the use of Bio Fuels, and establishing the Philippine Bio Fuels Program.” This act essentially mandates the use of biofuels as a measure to:

1. develop and utilize indigenous renewable and sustainably-sourced clean energy sources to reduce dependence on imported oil;
2. mitigate toxic and greenhouse gas (GHG) emissions;
3. increase rural employment and income; and
4. ensure the availability of alternative and renewable clean energy without any detriment to the natural ecosystem, biodiversity and food reserves of the country.

Pursuant to Section 15 of the said Act and its Implementing Rules and Regulations (DC 2007-05-0006), the Department of Energy in consultation with National Biofuels Board are granted authority to promulgate, adopt and implement regulations pertaining to the state policy of “reducing dependence on imported fuels consistent with the country’s sustainable economic growth” that would enhance livelihood opportunities for agriculture in the countryside.

Furthermore, Section 5 of the Act, mandates all liquid fuels for motors and engines sold in the Philippines to contain locally-sourced biofuels components – currently at least 10% of bioethanol blend for gasoline fuel (E10) and 2% biodiesel for diesel fuel (B2).  The blending component for bioethanol is ethanol while biodiesel is coco methyl ester (CME).

While members of the Philippine Institute of Petroleum have supported its implementation and has complied with all mandates related to it, we have expressed the following concerns to the Department of Energy.

PIP Position on Bioethanol (E10)

• The cost of local ethanol continues to be high vis-a-vis price of imported ethanol. The widening price disparity can be further affected by the heightened demand for ethanol for use in the manufacture of alcohol for food and medical industry;
• While price of local ethanol has been escalating, some producers are arbitrarily charging additional price premium citing feedstocks price and liens as reason. Note that all these are already included in the current local ethanol pricing formula;
• The need for immediate review of the Bioethanol Pricing Formula since this has long been reviewed in 2015. Specifically, PIP recommends the removal of the “Conversion Cost’ in the computation of local ethanol price since Conversion Cost is composed of manufacturing and financing costs as well as an assured profit margin of 15%.  This further rationalizes that other business expenses should not form part of the pricing formula and the inclusion of this cost discourages efficiency and competition in the local ethanol industry;
• The coverage of Local Monthly Allocation (LMA) participants in the accreditation process should include all oil players including white stations in the spirit of level-playing field. Producers not yet accredited or with suspended/revoked accreditation with ethanol production and inventory should not be part LMA when the Producer gets accredited;
• Commensurate allocation of LMA share of each oil company to their compliance performance (i.e. Oil companies with lower compliance performance in the previous quarter should be allocated a bigger LMA in the next quarter);
• Compliance with production commitment of Ethanol Producers remains a concern among the oil companies in supply planning. Timely notice of issuance for non-production or plant breakdown is extremely important. Oil player would immediately need to source replacement volume (imported) to sustain continuous fuel supply as a result of ethanol producer’s inefficiency.
• Producers’ production and logistical capacity remain a concern among oil players. This includes limitations in storage capacity and lifting capability from production areas to end-users including coverage for future expansion;
• Logistical capabilities of ethanol production facilities must be included as a parameter for accreditation i.e. loading capability for trucks and isotanks, ratable towards plant operations, and loading capability for barges (marine transport).
• Compliance to industry Product Quality and Health, Safety and Environment Standards of Ethanol Producers to ensure product quality and safe operations remain a concern;
• Provision of allowance for ethanol importation should only be allowed to accredited oil players. Allowance to the allowed volume for importation should be available (up to a rolling 3 months’ worth of consumption) to account for operational constraint and unexpected ethanol supply disruption;
• The government must have a long-term program to address high price of molasses. Gasoline demand is expected to increase to support economic growth of the country.  Demand for ethanol will consequently increase and the tight supply of feedstock will continue to cause high ethanol prices – feedstock sustainability versus future production facilities;

PIP Position on Molasses Importation:

• The National Biofuels Program of the government generally aims to achieve “sustainable economic growth that would expand opportunities for livelihood”. This was conceived as a measure, among others to “develop and utilize indigenous renewable and sustainably-sourced clean energy sources to reduce dependence on imported oil”. With this governing policy direction, importation of molasses to optimize local bio-ethanol production in the country runs counter to the principal tenets of the Act where this Program was rationalized;
• The Biofuels Law indicates that in the event of supply shortage of locally-produced bioethanol (during the four-year period), “oil companies shall be allowed to import bioethanol subject to the extent of the shortage as may be determined by the National Biofuels Board (NBB) and the issuance of DOE Certification to the effect that the bioethanol to be imported shall be used for the National Biofuels Program”. The aforementioned specific provision of the Law mandates the downstream oil industry to import bioethanol subject to the specific criteria and time period and not the bioethanol industry;
• The PIP however expresses reservation on whether the foregoing provision covers importation of feedstocks by non-downstream oil industry sector, e.g. bioethanol or biodiesel producers.
• In the event that molasses importation is allowed and eventually institutionalized, the Sugar Regulatory Authority (SRA) may face a great challenge in developing a mechanism to monitor the cyclical utilization of molasses importation vis-à-vis its uses either for biofuels production, food, alcohol, among others where molasses is used as feedstocks.
• The SRA in collaboration with the National Biofuels Board (NBB) should take the lead in monitoring the drivers of molasses prices and in assessing the viability of molasses importation vis-à-vis its impact on local bioethanol and sugar prices;
• The importation of lower priced molasses when used as feedstocks is expected to reduce the price of locally produced ethanol considering its impact on increasing efficiency (economies of scale) which expectedly should redound to the lower-priced locally produced bioethanol, competitive enough to be exported;
• Any incremental bioethanol production resulting from increased feedstocks volume should not be added to the regular LMA.

PIP Position on Increasing the Biodiesel blend (currently at B2)

The Philippine Institute of Petroleum (PIP) positions that the increase in the biodiesel blend will have the following implications on fuel price, technical issues, and local CME supply that needs to be considered to minimize its potential impact to the motorists and consuming public:

• At the current 2% blend, there are confirmed reports of retails stations still selling below the mandated blend of 2% (0.1 to 0.3% only) resulting in an uneven playing field and putting compliant and responsible industry players to a disadvantage;
• The proposed increase from 2% to 5% and consequently to 8% will incur additional costs in biodiesel blend which may create a considerable impact to pump prices at the retail stations.
• Inspite of the CME producers’ expressed compliance with the specifications under the PNS, some crucial quality issues continue to exist which needs to be addressed:

1. Potential flakes formation in the blend which could affect vehicle engine’s performance due to fuel filter clogging;
2. Microbial contamination;
3. Difficult water separation can lead to engine malfunctioning even at 2% blend (B2) which will be more evident with increased blend level;
4. Incidence of low methyl laurate content in biodiesel which indicates substitution/blending with palm-oil based biodiesel (PME) instead of CME. The illegal use of PME promotes an uneven playing field within the oil industry and/or the CME producers;

• Effect on vehicle performance and maintenance particularly in the more sensitive common rail direct injection engine has not been established. Majority of vehicles in the Philippines are diesel-fed.  To increase the blend percentage will require further evaluation to ensure that no adverse impact to the engine performance is overlooked;
• For a proposed much higher blend of 5% and or 8% biodiesel (CME), the assurance of adequate and sustainable local CME supply should be established (constrained by the insufficient coconut oil feedstocks) so as not to repeat the inadequate supply concerns in anhydrous bioethanol.