Bangkok--26 May--Fitch Rating
Fitch Rating has said that the proposed reduction of Thailand’s strategic oil reserve requirement would lower the debt financing needs of Thai refiners. This would be particularly helpful for the highly leveraged refiners, including IRPC Public Company Limited (A-(tha)/Negative/F2(tha)) and ESSO (Thailand) Public Company Limited (F1(tha) for its bills of exchange programme).
On 14 May 2015, Thailand’s National Energy Policy Council (NEPC) agreed in principal to reduce the country’s oil reserve requirement to 25 days (about 7% of Thailand’s domestic oil consumption: 6% for crude oil and 1% for refined oil) from 43 days (about 12%). The reduction follows an excess supply of crude oil in the market, which has reduced the risk of a domestic oil shortage. The effective date for the lower reserve requirement has not yet been determined.
The decrease in the oil reserve requirement would reduce refiners’ working capital and thus lower their need for debt. In addition, holding lower stocks will reduce the refiners’ exposure to the fluctuation in oil prices. The sharp drop in global oil prices resulted in large inventory losses for refiners in 2H14.
Fitch estimates that the refiners’ demand for debt could decrease by about THB31bn as a result of the lower oil reserve requirement, based on oil prices of USD65 per barrel and 2014 domestic refined oil production. The estimated debt reduction would roughly be about 9% of the 2014 aggregate adjusted debt of the five listed-oil refiners, who together account for 87% of the country’s total refining capacity. However, the benefits to each Thai refiner will be different, depending on the level of their existing reserves, their oil reserve policies, their cost per unit for storage and their cost of funding to finance the inventory.