Political obstacles curb energy reforms: Expert

Political obstacles curb energy reforms: Expert

SINGAPORE (Reuter): The pace of deregulation of the oil markets in many Asian countries has slowed in the face of social and political obstacles and rising crude prices, a leading American energy expert said yesterday.

But the need to get prices down and get private capital in will ensure that some of these countries keep pushing for reforms, said Dennis Eklof, senior consultant with U.S.-based Cambridge Energy Research Associates.

"I see more caution because some fundamental things are standing in the way," Eklof told Reuters in an interview.

He said Asian countries were deregulating their energy sector either to lower manufacturing costs or to attract private sector capital to develop power and refining capacity.

The unwillingness of people to pay high prices for their fuel needs simply to ensure supplies, as was the case in the 1970s, also increased pressure for reforms, he said.

"People have a certain degree of comfort in maintaining supply from the Middle East. There is more emphasis now on cost competitiveness and less on security," Eklof said.

Previously, Japan was willing to pay higher prices for its liquefied natural gas (LNG) as an alternative to oil for security reasons, but now it was not, he said.

Japan deregulated its energy markets last April and the first year of reforms resulted in a major shake-up leading to leaner operations and competitive prices.

The increased competition forced 26 gasoline stations to close in 1996, but analysts expect the current number of petrol stations, 60,000, to be reduced to about 38,000 in 2005.

The retail price of gasoline has fallen by about 13 percent in Japan over the past two years.

But protected economies such as India and China are not likely to enjoy similar benefits, said Eklof.

Large government subsidies on kerosene and diesel, which have kept prices artificially low in India, make it very hard the sector there to deregulate.

"The social and political backlash is too much. The removal of price subsidies is more difficult in a rising market," Eklof said.

He said unless international oil prices fell, it would be tough to push reform as retail prices would have to be raised in a liberalized market to keep up with the higher costs.

Reforms are also being handled cautiously in countries such as Taiwan, China, Indonesia and Vietnam where state-owned companies have a monopoly in the retail oil market.

Eklof said it such cases the government was giving the state monopolies more time to rationalize their operations before introducing deregulation measures.

"It will cost CPC a substantial market share," he said of Taiwan's China Petroleum Corp.

Taiwan is due to open its refined oil product market to domestic competition in 1999 when Formosa Plastics opens a refinery.

China Petrochemical Corp (SINOPEC), the state giant which owns about 80 percent of all Chinese refining capacity, is also working hard to bring its costs down to stay competitive ahead of the inviable reforms.

To give SINOPEC more time, the Chinese government has kept foreign companies out of the domestic refining sector. Indonesia and Vietnam have yet to announce deregulation plans.