The odds are not going in favor of Pilipinas Shell Petroleum Corp. It faces a shrinking domestic market and will likely register reduced profits, if not losses, in 2008 because of declining margins.

Its expansion, which holds the key to its decision to stay put in the Philippines, will likely be deferred due to adverse market conditions. In all, Shell?s presence in the Philippines may come to an abrupt end once its London office formally gives the advice.

Local Shell executives may have seen the writing on the wall as early as last year when the Supreme Court ordered the relocation of the Pandacan oil depot near Malaca?an Palace, after the city of Manila raised concerns about the safety of the facility.

The ruling virtually raised Shell?s investment cost at a time when market forces are not working in its favor. Shell over the last three to four years weighed the investment cost of upgrading its Tabangao refinery in Batangas. The oil refiner came up with a tab of between $1 billion and $3 billion. The investment cost could be much higher now with the Supreme Court?s order to relocate the Pandacan depot, which is jointly operated by Shell, Petron Corp. and Chevron Texaco (formerly Caltex Philippine Inc.)

Adding to Shell?s problems are land zoning policies that local government units can reverse anytime. Shell is also having land-zoning issues with government officials of Cavite, where it operates certain assets, and in Bi?an, Laguna, where it built compressed natural gas refilling stations. Shell much earlier encountered problems with its liquefied petroleum gas refinery in the same Laguna town.

Third refiner

The domestic market, meanwhile, may shrink further for Shell if state-owned Philippine National Oil Co. decides to push through its plan to re-enter the refinery business after selling its remaining 40-percent stake in Petron to London-based Ashmore group.

Says PNOC president Antonio Cailao: ?Our sale of our remaining shares in Petron has not ended our role in the oil refining and marketing industry. In fact, PNOC?s mandate, which is to ensure a stable supply of oil for the country, is still our mandate.?

?Several local and foreign groups have approached PNOC, expressing interest in partnering with us to create the next oil refining and marketing company, the next crown jewel, the next Petron. But we are still studying the matter closely and evaluating our options,? he adds.

PNOC?s refinery option was a result of its success to delete a ?non-compete? clause in the shareholders? purchase agreement with Saudi Aramco, its former Petron partner. Cailao said PNOC managed to remove the clause in May last year as a condition to the sale of Saudi Aramco?s 40-percent stake to the Ashmore group. ?This fact has not escaped the attention of very financially capable investors and companies,? says Cailao.

Crowded market

PNOC?s revelation certainly was not part of Shell?s equation in its investment and expansion plans. The grapevine said a new government-owned refinery would, for all intents and purposes, force Shell to totally abandon its Philippine operations and shift them elsewhere in Asia to get economies-of-scale. Shell could simply follow the lead of Caltex, which earlier told authorities that its own refinery had reached the ?end of its economic useful life? and was too small to effectively compete in the oil industry.

Shell?s possible departure, ironically, will strengthen PNOC?s resolve to put up a new oil refiner. Shell?s withdrawal will make Petron a monopoly, a prospect welcomed by San Miguel president Ramon Ang.

PNOC?s return to the oil refining business and petroleum distribution, meanwhile, will restore state presence in the vital industry.

E-mail: rayenano@yahoo.com or business@manilastandardtoday.com