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Thailand's Oil Fund administrator says LPG, diesel subsidies should be scrapped

Highlights

Thailand's retail subsidies for diesel and LPG are coming under increased pressure and should be scrapped, the director of the country's Energy Fund Administration Institute said last week.

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The subsidies as they currently stand are a "time bomb if you keep them going," said Chainoi Puenkosum, who heads EFAI, an "independent public organization" under the Energy Ministry that manages the receipts and payments of the country's Oil Fund, from which the subsidies are paid.

Subsidies are costing the country Baht 165 million/day ($5 million/day) at current levels, according to the EFAI. The subsidies keep diesel pump prices under Baht 30/liter, well below international prices, and LPG at staggered rates that are as low as one-third of international prices.

The price of LPG for cooking is fixed at Baht 19/kg and accounts for 32% of consumption, and at Baht 21/kg for automobiles that consume 24% of the total. Industrial consumers, predominantly petrochemical plants using LPG as feedstock, pay Baht 30/kg and account for 44% of consumption.


Subsidies for both diesel and LPG have been in place for decades in Thailand, with diesel considered the fuel that drives agriculture and manufacturing, while low LPG prices for cooking impact household living costs.

Diesel is subsidized at Baht 0.70/liter, paid directly to retailers, accounting for Baht 40 million/day on consumption of 57 million liters. Its retail price, considerably lower than benzene and gasohol, or ethanol blended gasoline, is further reduced by the waiving of a Finance Ministry-imposed Baht 5.3 excise tax and a Baht 0.7 municipal tax.

The subsidy for LPG is paid by the Oil Fund to domestic refiner PTT for local production and to importers based on a formula that weights the difference in a 24:76 ratio between a domestic price cap and the current international price. Thailand's LPG imports and local production are about equal in volume, with consumption up 1.4% year on year over January-October at 6.2 billion mt.

The LPG subsidy accounts for Baht 100 million/day, according to EFAI. While it has been reduced since prices underwent a managed float in January 2012, the gap between the capped price and the international trading price has grown considerably, increasing the need for financial support.

Ethanol blended gasolines E20 and E85 are further subsidized, accounting for the balance of disbursements. Income to the fund comes from levies applied only to ULG 95, E10 and 91 octane gasohol.

ASEAN INTEGRATION

Chainoi said that apart from the financial discrepancy of the subsidies that requires a revolving credit facility of Baht 60 billion from local banks, integration into the ASEAN Economic Community by 2015 means that significant differences between prices in neighboring countries "must go away."

Levies are determined by Thailand's Energy Ministry, while the Energy Policy Administrative Committee oversees the balance of payments. However, it is the National Energy Policy Council chaired by the Prime Minister that has the final say on subsidies.

Several experts involved in government policy said Thailand's troubled political situation and imminent election made it unlikely any changes that would increase retail prices would be implemented any time soon.

However, one source said: "Consumers have been spoilt for far too long and this has greatly distorted market prices and demand."

--Gary van Zuylen, newsdesk@platts.com --Edited by Wendy Wells, wendy.wells@platts.com