Will the central bank support govt plan for oil mega project?
For Prime Minister Yingluck Shinawatra, one of her government's most ambitious policies is to eventually set up Thailand's first strategic oil reserve facility, probably in the southern part of the country.
This mega-infrastructure project will cost an estimated US$10 billion, about Bt300 billion. The liberalisation of the country's energy sector is a major requirement that will lead to this huge infrastructure scheme.
On August 26, the government implemented the first policy step by cutting Oil Fund levies collected from premium and regular gasoline, as well as diesel oil. This resulted in a retail price cut of Bt2-Bt7 per litre at the service stations nationwide.
On August 30, the government also cut Oil Fund levies on gasohol so that they were cheaper and remained attractive in the eyes of motorists using these bio-fuels.
Gasohol is a blend of imported gasoline and ethanol, which is made from locally produced tapioca and sugarcane.
The August 26 reduction of gasoline prices diminished the competitiveness of bio-fuels, so Oil Fund levies on the latter products were also cut.
Now, let's take a look at the status of the Oil Fund, which was set up more than two decades ago to stabilise domestic oil prices against the backdrop of volatile world market prices.
The Oil Fund's assets are currently worth about Bt16.70 billion, while its liabilities amount to Bt15.35 billion due to previous subsidies paid for natural gas vehicles (NGVs) (at Bt4.82 billion) and for LPG or cooking gas (at Bt8.28 billion), among other items.
As a result, the Oil Fund's net worth is now only Bt1.35 billion.
Next, the government is expected to use the Oil Fund as a borrowing vehicle for fresh funds to pay for more oil and gas subsidies on behalf of consumers.
These current and upcoming subsidies are estimated to total Bt14.8 billion per month, according to JP Morgan research.
In the days gone by, the Oil Fund used to be over Bt80 billion in the red, when Thaksin Shinawatra was prime minister and the government heavily subsidised diesel oil prices.
This time, subsidies will run to the tune of Bt89-Bt104 billion over the next 6-7 months.
In a related development, the Yingluck government also plans to issue energy coupons and energy credit cards for low-income earners so that they get direct subsidies on cooking gas when prices are floated.
The price of cooking gas, which has been capped at Bt18 per kilo, will nearly double if floated, to reflect the world market price of Bt30.
The government is expected to further reduce the role of the Oil Fund in order to pave the way for the set-up of the strategic physical oil reserve, with the initial investment of Bt300 billion.
Part of this massive fund will likely be tapped from the Bank of Thailand's international reserves.
Finance Minister Thirachai Puvanartnalanuban has already floated the idea of setting up a sovereign wealth fund, part of which could be used to invest in strategic oil reserves.
The government will likely try to sell the oil mega project as the successor to the Oil Fund, as physical inventories of crude oil will be built up and stored at giant depots, probably in southern Thailand, where a feasibility study was earlier conducted for the constructionof a deep-sea port and a land bridge linking the Andaman Sea with the Gulf of Thailand.
That project will also include a huge oil storage facility, which would be built as part of the country's strategic oil reserve.
