Asian oil markets set to grow amid falling trade barriers

Asian oil markets set to grow amid falling trade barriers

TOKYO (Reuter): A hive of activity is expected in Asia's oil
markets in 1997 as the region moves to lower trade barriers,
spurring much-needed foreign investment in refineries.

With Asian energy demand forecast to rise, refineries need to
be upgraded and expanded to meet the region's growing appetite
for oil products.

Oil industry officials and analysts said many countries need
to take further steps to fully open their oil markets.

Some of these measures are due to take place in 1997.

"As domestic oil product prices in Asia are liberalized, Asian
oil markets will become more attractive to foreign investors," a
Japanese oil industry official said.

"If oil product prices are freed from control, refinery profit
margins are freed and no longer fixed," he said.

Currently retail prices of domestic oil products remain under
government control in Malaysia, Taiwan, Vietnam, Indonesia, India
and China. Japan, South Korea and the Philippines have decided to
let market forces set prices.

South Korea plans to liberalize domestic oil product prices
from January 1997, and in the Philippines, the transition to
market-oriented prices will end in March next year.

With domestic prices poised for freedom, strong interest in
investing in the downstream industry has become evident in the
Philippines.

The country's biggest refiner, Petron Corp, owned 40 percent
by Saudi Arabia's Saudi Aramco, has said it will invest $3
billion in new capacities over the next five years.

Other foreign oil firms such as the Petroleum Authority of
Thailand have expressed interest in downstream investment.

In South Korea, plans to expand refining capacity took off
ahead of deregulation. From 1995, major South Korean oil firms
started building new refineries.

LG-Caltex Oil Corp, a unit of the LG Group, is poised to start
commercial operation of a new 270,000 bpd refinery in the near
future. More refineries are planned.

The energy think-tank Institute Energy Economics (IEE)
forecasts oil demand in Asia-Pacific nations will rise by an
average 3.7 percent every year until 2005 from 1995.
"As more and more Asian countries are expected to liberalize
their markets, the more foreign investment is likely to flow in,"
the oil industry official said.

In Taiwan, the state Energy Commission laid the groundwork for
liberalization of state monopoly Chinese Petroleum Corp (CPC) by
agreeing in June to allow private oil imports.

To meet qualifications as an importer, petrochemical giant
Formosa Plastics is constructing a refinery that is a key
component of its $9 billion petrochemical complex.

The situation differs slightly in Japan where refining
capacity outstrips demand.

Japan in April, liberalized its oil product import market,
allowing companies other than oil firms to import oil products
such as gasoline and kerosene.

Only a handful of firms have taken advantage of the
deregulation as profitability has been squeezed by low domestic
retail prices.

In the past two years, Japan's gasoline retail prices have
plunged by about 13 percent as retailers raced to cut prices,
fearing an influx of cheap imports after deregulation.

"Imports of oil products are not expected to rise sharply in
1997, as prospects for imports to become profitable are quite
bleak," Yoshiki Ogawa, economist with the IEE said.

On the electricity front, New Zealand launched a competitive
wholesale electricity market on October 1 in the latest stage of
deregulation of the industry.

The new market determines prices on the basis of supply and
demand, as opposed to the cost-based method of the past.

In November, the New Zealand Futures and Options Exchange
launched what it says is the world's first cash-settled
electricity futures contracts, but early signs are that liquidity
will be a long time in coming.

In Malaysia, plans to restructure Tenaga Nasional Bhd, were
announced in October. The plan to break up Tenaga's generation,
transmission and distribution functions into three units would
help make the state-run electricity utility more accountable to
shareholders and to the government.