Confusing fuel mix

As crude prices shoot through the roof worldwide, India is finding it increasingly difficult to strike the balance between profitability of its oil companies and preventing consumers from burning a hole in their wallets. There are no two ways about the fact that crude will continue to be expensive and could even breach the $100-per-barrel mark during the course of this year.

The need of the hour, therefore, is optional fuels be it natural gas, gasohol or biodiesel. Selecting the right kind of fuel for the county and promoting it appropriately without any ambiguity would be the best bet. In neighbouring Thailand, the government is trying just that. While it has played a critical role in steering the automotive industry to a strong position, a couple of recent policy decisions have raised serious concerns among automobile companies. The bottomline in any policy is consistency in its implementation and this is where the Thai government has been found wanting.

One company that has been hit badly is Ford Thailand. The country’s finance ministry had, in July 2004, announced a legislation which called for a 20 percent reduction in excise duty for alternative fuel vehicles, including those that run on ethanol. Perceiving this move to be a strong commitment to the National Ethanol Energy Policy, the then president of Ford Thailand, John Felice and other senior management turned vociferously vocal about their company’s success with ethanol-run vehicles particularly in Brazil. They were confident that this success story would be replicated in Thailand too.

However, what followed was complete chaos. Ford Thailand did its bit to come out with an ethanol-run vehicle in the Focus, which is E20 (20 percent ethanol blend) capable, but the support in the form of government-tax benefits was missing. When the car was launched and its manufacturer priced it after factoring in the tax benefits, Thailand’s Finance Ministry reversed the earlier directive and deferred the benefits for ethanol-run vehicles to January 2009. The Focus initially priced at 100,000 baht (Rs 1.2 lakh), which worked out to be much cheaper than its competition, had to re-align its pricing strategy.

The ministry said its main concern in delaying the alternative fuel benefit was the lack of E20 fuel in Thailand. True, ethanol production in Thailand is in a bit of a fix — only three plants are producing the alternative fuel out of the 24 operators licensed to produce 47 million litres a day of ethanol by 2008. However, the ministry and other related agencies were taking steps to rectify the problem. After all, the government had declared it would phase out octane 95 entirely by 2007 to be replaced by gasohol 95, and so local oil companies PTT Plc, Bangchak Petroleum Plc and Shell Co of Thailand also made investments and started selling gasohol 95. That all has increased the demand for gasohol in the first four months to an average 3.4 million litres per day compared with 640,000 litres per day in the first quarter of last year.

FORD REACTION

Ford is clearly disappointed with the policy change. It was quick to launch the E20-capable Focus and had not expected such a reversal of policy. Plus, the availability of ethanol was never put as a condition for the excise duty benefit. Luckily for Thailand, the consequent visit of Ford Motor chairman Bill Ford did not bring out any drastic scaling back from Ford investments in Thailand. He had made a stopover en route from India and was on his way to China. In October 2003, Ford announced that it was investing $500 million along with partner Mazda in the AutoAlliance Thailand plant from where Ford vehicles are exported to over 130 countries. This brings the American automaker’s investment in Thailand to $1 billion.

The policy shift, however, derailed Ford Thailand’s plans to produce ethanol-compatible engines in the kingdom. Felice was a strong spokesperson for this and was unable to conceal his excitement on the future of ethanol technology. But the government’s sudden policy change has forced Ford to make more careful considerations before rushing to support the Thai government. It is important to note here that the company is investing $20 million to build a flexible fuel engine plant in the Philippines. Now, this could have come to Thailand had the government been consistent.

##### According to Peter Daniel, Ford Asia-Pacific and Africa president, the plant would produce 100,000 engines (80,000 for exports to Asia) over the next five years valued at about $100 million. In essence, Ford is now making the Philippines its ASEAN (Association of Southeast Asian Nations) Center of Excellence in Flexible Fuel Technology. These flexible fuel engines, to be available in the Philippines by 2007, will run on E20. It makes sense too since the Focus is built at Ford’s Santa Rosa plant in the Philippines and shipped to Thailand under AFTA (Asean Free Trade Area) benefits. Unlike in Thailand, Ford is very big in the Philippines being the country’s biggest exporter and the only carmaker to benefit from the government’s Automotive Export Program. The Philippines also consistently promotes ethanol use for vehicles to reduce its oil bill.

To add salt to the wound, the latest shift from Thailand is towards using natural gas for vehicles. Even while one set of agencies and officials were promoting ethanol, there were subsequent quotes and interest from another set of ministry officials and agencies which lent support to the use of natural gas for vehicles. The finance ministry has now announced that the excise duty on those vehicles modified to use natural gas will be lowered to 22 percent from 30 percent for 2.5 years. The new rate is applied to vehicles with engines lower than 3000cc and with fewer than 10 passenger seats. In early May, the ministry also announced that the excise duty on factory-modified NGV cars with engines of upto 3000cc would be a preferential 20 percent rate.

A source in Bangkok told Autocar Professional that Ford is once again not happy with the latest government initiative — and rightly so. The government is pushing for CNG after having promoted gasohol for nearly two years. Such policy shifts certainly derails manufacturers’ production plans and marketing strategies. So far, General Motors, Toyota and DaimlerChrysler are supporting CNG for Thailand, the latter already offering its E200 NGT that can run on natural gas. The E200 NGT is also blessed with a 10 percent tax break, being subjected to only 20 percent excise duty compared with 30 percent for petrol-run engines.

But again, the infrastructure for CNG is lacking in Thailand. There are only a few select filling stations, where mostly taxi cabs running on CNG form long queues in the morning. Ford’s experience will have to be remembered. Will the policy on CNG too be reversed a year from now because of a lack of CNG filling stations? One will just have to wait and see.

THE INDIAN EXPERIENCE

If inconsistency has been the virtue of Thailand’s fuel policy, India is not too far behind when it comes to the aspect of pricing. Way back in 1997, a committee drew up a timeframe to free prices of petro products. The biggest hurdle occurred when it came to sensitive products like kerosene, liquefied petroleum gas, petrol and diesel.

Obviously, the government was not going to tamper with the vote bank and the result has been complete chaos especially with rising world crude prices. The oil marketing companies have been pressing for a hike in diesel and petrol prices to the tune of Rs 10 per litre if they have to keep their losses in check. Fortune 500 company, Indian Oil Corporation, has been losing an estimated Rs 100 crore daily and the scenario is pretty grim for both BPCL and HPCL too.

At the time of going to press, the petroleum ministry has already announced its intent to increase prices of these two auto fuels. It is again in this context that the need for optional fuels becomes imperative. It required a Supreme court directive to set Delhi on the path of embracing compressed natural gas as part of the clean air drive. Had this not happened, there was no way this would have been implemented in the first place.

The entire process of conversion was fraught with obstacles as there were huge problems relating to availability of CNG. Long queues at retail outlets became a common sight in Delhi albeit over time, the problem has been overcome and today the city can proudly claim that it pulled off a difficult exercise.

Similarly, Mumbai has been working hard on extending the CNG network to taxis and autorickshaws. The next big step would be to include buses but this is not going to be easy since creation of retail infrastructure remains a peculiar problem in this overcrowded island city which offers little scope for space. By the end of the day, though, it is important to acknowledge that high crude prices are here to stay. The only way out is to focus on CNG and LPG in a much bigger way while giving electric vehicles extra incentives to make them more affordable to the end user.