One step forward, two steps back

The government's ambitious policy agenda for reforming the national energy sector has encountered serious delays and setbacks, and pressure to keep consumers from grumbling represents a further challenge in an era of high oil prices

By SOONRUTH BUNYAMANEE and YUTHANA PRAIWAN

Apart from active intervention to cap energy prices to help consumers, pledges to reform national energy sector development policies have shown little progress.

Since it took office in early 2001, the government's agenda for developing the energy sector has faced a number of setbacks, not least of which was an unexpected spike in petroleum prices.

However, Energy Ministry Prommin Lertsuridej, in a recent interview, said that Thailand's four-point energy industry reform programme remained on track, despite encountering some major obstacles.

He said the four main planks of the national energy strategy were: first, increase the efficient use of energy for transport and industry; second, preserve energy security and reserves; third, improve infrastructure potential and competitiveness in the energy sector; and fourth, improve energy management and integration. The strategy includes energy sector deregulation and energy hub development, he added.

"Under the strategy, we aim to reduce the ratio of energy consumption growth to economic growth to 1:1 within five years from 1.4 to 1 currently," said Dr Prommin.

Analysts say Prime Minister Thaksin Shinawatra's government was lucky it came to power after the economic crash had bottomed out and the turnaround had already begun. However, it can't be denied that the government's populist policies have also played a major role in driving the economic recovery.

Thailand's thirst for energy has returned gradually to pre-crisis levels, with overall oil and gas consumption rising steadily each year.

A key element of the country's power development plan aimed at bolstering supply to the national electricity grid was derailed by strong opposition from environmentalists and villagers from Bo Nok and Hin Krut districts in Prachuap Khiri Khan against the planned construction of coal-fired power plants. Eventually, both facilities were forced to relocate and switch from coal to cleaner-burning natural gas, resulting in a delay of three to four years before the plants come online, originally scheduled for 2004.

Peak power demand in 2001 and 2002 grew by 7-8% a year against the backdrop of a roaring economic recovery and the rapid rise in consumer demand for automobiles.

In the meantime, global oil prices began to climb from slightly over US$20 a barrel in the first quarter of 2002 to $24-27 level in the second, and then another $2 over the rest of the year, due to stronger demand and the fear that a war in Iraq might disrupt oil deliveries from the Middle East.

Pre-war tensions combined with an increase in world energy consumption during the winter months pushed the average price of Dubai crude oil to $30.02, from $25.73 in December 2002. During that period premium gasoline in Singapore shot up to $40.14 a barrel from $30.25.

Local premium petrol prices then rose to 17.29 baht a litre in early 2003, from 15.59 baht in December the year before. The price of diesel also climbed to 15.09 baht from 13.89.

Higher oil prices threatened the ongoing economic recovery, fuelled by the government's populist policies and booming exports. As a result, the government intervened with a fuel price cap to prevent a shock to the economy.

On Feb 8, 2003, the government set a cap of 16.99 baht for premium petrol, 15.99 baht for regular petrol and 14.79 baht for diesel. It instructed the Government Savings Bank to lend to the State Oil Fund the amount needed to subsidise the difference between the capped price and the market price. The cost of the subsidy reached 3.7 billion baht during the war in Iraq.

The hike in oil prices also put upward pressure on the cost of electricity.

Since 70% of Thailand's power plants run on natural gas, the fuel cost passed on to consumers in their utility bills is based on the average price of fuel oil over the previous six to 12 months.

PTT was asked to negotiate with gas producers, including its subsidiary PTT Exploration and Production Plc and Unocal, on a proposal to effectively freeze the price of gas by changing the basis used for the gas price formula to weigh more heavily on coal prices, which tend to be more stable than fuel oil.

Oil prices had been in decline since April 2003 in line with the end of the war and the coming of summer in the northern hemisphere. The price of Dubai crude dropped to $25-25 a barrel in mid-May, dragging down the litre price of premium petrol to 15.59 baht and diesel to 13.29 baht.

As a result, the government scrapped the price cap in May 2003, allowing local retail oil prices to fall.

The decline in oil prices gave the government a break and allowed it to pay more attention to its fundamental restructuring plans.

Plans to deregulate the national power supply by attempting to privatise the state-owned Electricity Generating Authority of Thailand (Egat) were begun. The administration was forced to shelve indefinitely its plans to reform Egat after running into vociferous opposition from the state enterprise's labour union.

On the petroleum side, Thailand took an important step forward last year in its ambitious campaign to overtake Singapore as Asia's oil trading hub with the opening of its first petroleum trading centre in Si Racha, Chon Buri.

Another key element in the ambitious scheme involves a plan to build a 230-kilometre oil pipeline in southern Thailand from the Andaman Sea to the Gulf of Thailand.

The proposed landbridge would serve as an alternative oil transport route from the Middle East to the Far East. Oil is currently shipped through the congested Straits of Malacca.

Unfortunately, the respite from high oil prices turned out to be brief. Energy prices, particularly petroleum products, on the international market had been climbing since late last year, spurred by rapid growth in the global economy, particularly in China and the United States.

In line with trends in global markets, local petrol prices have jumped six times between October and December of last year. After gasoline prices exceeded trigger levels and diesel oil edged closer to the cap levels set in early 2003, the government decided to resume the oil price intervention scheme on Jan 10 by capping the price of premium petrol at 16.99 baht per litre, regular at 16.19 baht and diesel at 14.59 baht.

The government guessed wrong, unfortunately. The expectation that oil prices would fall by the second quarter was later proven to be incorrect.

In February 2004, Opec cut oil production by 1.5 million barrels per day to 23.5 million, which pushed crude oil prices over $30 a barrel from around $28 the previous month. In addition, the threat of terrorism and the unstable situation in the Middle East, especially in Iraq, led to speculation and renewed fears of disruptions in the world's oil supply.

Crude oil for June delivery hit $41.85 per barrel on the New York Mercantile Exchange on May 17, then edging ever-higher to $42.45 on June 1, the highest price since the market began trading crude oil futures 21 years ago, sparking panic among both consumers and producers. Since the cost of power production per unit from fuel oil is double that of natural gas, Egat was allowed to raise the Ft charge to 38.28 satang per unit in early June from 26.12 satang in February, up 12.16 satang, resulting in 4.8% higher electricity bills, or 2.63 baht per unit.

The power bill hike came amid a new round of protest against deregulation of the electricity generation system and Egat's proposed privatisation.

The government's bold plan to make Thailand a net oil seller by the middle of the year seems unlikely to be achieved.

An oil trader participating in the government's trading centre project said the main obstacle in the project's path was the overabundance of regulations governing trading in petroleum. "Thailand's strict laws against oil smuggling also cover oil trading in Sri Racha, which the government plans to develop as the country's first oil trading market."

Of the 14 petroleum traders who applied for registration at the Si Racha hub last year, only three have so far been endorsed by the Energy Ministry. They are PTT Plc, BE Moors Ltd, and ISS Thoresen. The ministry says the others have failed to submit all of the required documents. Viroj Klangboonkrong, director-general of the Energy Business Department, said the project was going to take time.

"It took Singapore 30 years to become the region's oil trading hub. This is a job where we have no prior experience, so we will need time to set up the necessary infrastructure and eliminate obstacles," he said.