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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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Philippines Cracks Down On Fuel Pirates

pirate security

Oil smuggling has been a thorn in the side of the Philippine government for decades, with both overt oil smuggling, the transfer of oil cargoes from one vessel to another off shore and away from the watch of the Philippine Coast Guard or customs officials, as well as the even more difficult to catch, so-called technical smuggling.

When global oil prices tanked between 2015 and 2017, oil smuggling declined as well. However, with global oil prices now hovering in the high $60s to mid $70s range per barrel, oil smugglers are once again seizing the chance to make handsome profits at the expense of the government.

How they do it

First, there is what has been labeled “high seas smuggling” where fuel products usually come from nearby countries where petroleum prices are much lower due to government subsidies. Smaller ships withdraw fuel from the mother ship for delivery to customers to be resold in the new country.

With direct smuggling some oil companies actually bring in vessels, dock in small ports, and discharge the fuel directly to waiting tanker trucks who then deliver to service stations. Some of the largest oil refining companies in the Philippines have at one time of another been accused of engaging in direct smuggling, though most claim to have active programs to fight against the practice.

Petron, the country’s largest oil refiner, said two years ago that it cut ties with five major service stations to avoid the risk of being associated with oil smuggling. However, in the Philippines large companies accused of smuggling, the media, and government and customs officials often battle each other’s accusations and innuendos over oil smuggling, while the problem is mostly unsuccessfully dealt with.

Technical smuggling usually involves the import of oil products being declared as another less valuable product, with lower duties collected. At times, its more pervasive with customs agents looking the other way, usually for a bribe.

There is also subsidy abuse where higher-priced, non-subsidized, and taxed fuels are diluted with smuggled lower-priced or subsidized fuels. This affects governments irrespective of their fuel policies, with tax evasion on higher-priced fuels, and subsidized fuels being diverted from their intended beneficiaries. Related: U.S. Drillers Add Double Digit Oil, Gas Rigs

To prevent fuel fraud, governments like the Philippines have developed comprehensive fuel-marking programs, using advanced technology molecular markers and sophisticated management systems that result in timely, actionable intelligence, allowing governments to mitigate tax evasion and subsidy abuse, minimize financial losses, and raise revenue.

A recent Asian Development Bank (ADB) report said that all countries are susceptible to fuel fraud, but for developing countries where every dollar in revenue counts, fuel fraud can substantially reduce a government’s total revenues. The report added that oil smuggling costs the Philippine government around US$750 million a year in lost revenue, a massive sum for the still developing Southeast Asian nation.

The government strikes back

To battle the resurgent problem, on August 8 the Philippine Bureau of Customs (BOC) said it had formed a team to oversee the implementation of its new fuel marking program. For 2018, about 21.9 billion liters of fuel are expected to enter the Philippines’ 25 ports and sub-ports.

However, implementing the fuel marking system can take time and is not fail proof. A first step under most marker systems is to reveal the quality and condition of the downstream fuel supply chain by examining it at every stage. This begins with the country’s refineries or fuel depots, following products through wholesale depots and the transport network (including trucking firms and pipelines), and eventually verifying how petroleum products are sold at the retail level.

To ensure the integrity of the entire fuel supply chain, safeguards need to be implemented into every phase of the process, which includes requiring marker and analyzer technologies that integrate security measures directly into the different types of fuel. Related: What Happens To Syrian Oil Post-Civil War?

Marker technologies that blend an invisible marker with the fuel at very low concentrations—often measured in parts per billion—provide the highest level of security for the entire supply chain. Even at very low concentrations, their presence or absence in fuel can be detected at retail outlets with sophisticated but easy-to-use analyzers.

In the Philippines, two bidders for the implementation of the new nationwide fuel marking plan submitted bids in late July for plans to be part of a part of a larger tax and anti-oil smuggling plan.

According to a report in the Manila-based Philippine Inquirer the winning firm will assist in establishing and operating a fuel marking system that will supply and inject fuel markers in all taxable oil products, except Jet A-1, Avgas, Crude Oil and LPG. The company that wins the bidding round will also implement and manage a fuel testing program, including fuel analysis and data management nationwide, and train and ensure technology transfer to the BOC and Bureau of Internal Revenue personnel.

By Tim Daiss for Oilprice.com

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