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GULF OF THAILAND OIL SPILL: The price PTTGC will have to pay

Publication Date : 02-08-2013

 

While PTT Global Chemical (PTTGC)'s share price does not yet fully reflect the cost of compensation and clean-up operations, there is little doubt the company will have to shoulder huge financial losses.

Five days since PTTGC's crude-oil pipeline leaked 50,000 litres of oil into the Gulf of Thailand, its share price has hardly moved as both authorities and stock analysts appear uncertain about the magnitude of the losses. Losing 0.75 baht on Monday and 3.25 baht on Tuesday, the stock lost another 4 baht on Wednesday, before gaining 3 baht yesterday to 69 baht - only 6.8 per cent lower than the price before the oil disaster. While authorities are busy with clean-up and rehabilitation plans, stock analysts are crunching the potential compensation figures.

In its research note, Kiatnakin stated that in the worst-case scenario, the company would face expenses from this incident that would just reach the equivalent of its 2013 earnings, estimated to be 35.7 billion baht (US$1.14 billion). The financial burden resulting from the spill would be gradually realised from the third quarter onwards, it said. Though PTTGC stands to benefit from a recovery in the refining margin, a delay in insurance compensation could hit the oil giant's 2013 profits, it explained.

Based on the assumption that compensation will be calculated on financial losses over a year - ensuring protection of the fishing industry - Maybank Kim Eng Securities (Thailand) estimates that PTTGC would have to pay 4.9 billion baht for top insurance coverage - an equivalent of 14.4 per cent of the company's 34-billion-baht earnings forecast.

In 2009, another PTT subsidiary was involved in the Montara oil spill, one of Australia's worst oil disasters, in the Timor Sea off western Australia. The volume of Saturday's oil spill is only 1 per cent of the Montara incident, so the clean-up cost is expected to be lower. However, with the oil slick reaching Koh Samet, compensation estimates are much higher and will be gradually realised from the third quarter onwards. Insurance compensation is also expected to be paid from the fourth quarter of this year to the first half of next year.

Trinity Securities said it expects PTTGC to shoulder above-insurance coverage costs of 3 billion baht-5 billion baht, noting that the figures are moving higher due to the possibility of lawsuits from the government sector.

DBS Vickers Ballas Securities (Thailand) noted it was obvious that third-party liability insurance coverage of 1.5 billion baht would not be enough as the oil slick is shaving 2 billion baht-2.5 billion baht off tourism revenue.

In a filing to the Stock Exchange of Thailand, PTTGC said that it had insurance coverage under Property Damage and Business Interruption, Marine Cargo, and Third Party Liability. PTTGC and its insurers are currently in the process of appraising the value of the claim.

While the first two insurance policies should cover expenses involved with the cleanup, the third would cover compensation claims, including those of business operators in Koh Samet.

According to Kiatnakin, the coverage of the Third Party Liability amounts to US$50 million or 1.56 billion baht. It remains to be seen if this will be enough, as a Rayong tourism operator said the oil slick was already washing ashore and scaring away tourists. As a result, the province may not be able to meet its annual revenue target of 20 billion baht this year.

The Marine Department plans to file a lawsuit. According to Marine Knowledge Hub's website (http://www.mkh.in.th), data from the department shows that during 1997-2010, nine severe incidents - with over 20,000 litres or 19.64 tonnes spilled - were recorded. By volume, PTTGC's incident - involving 49 tonnes - is smaller than some, but it is worth noting that other spills did not hurt tourist destinations.

In many ways, the PTTGC incident is a reminder of what BP witnessed in 2010, when its Deepwater Horizon oil rig in the Gulf of Mexico exploded - spilling out over 700,000 tonnes of oil. BP estimated oil spill costs of nearly $10 billion. With some of the oil also hitting the US Gulf Coast - which was estimated to generate $34 billion in revenue annually - BP had to strike a deal with the US government for a $20-billion compensation fund. However, by some estimates, the spill-related expenses could still exceed $50 billion.

The Pollution Control Department's data shows that compensation is compulsory for damage to living and non-living entities as well as the cost of rehabilitation. For example, any company responsible for an oil spill must pay 4,633 baht per annum for every square metre of coral reef destroyed, until the reef condition is restored. This is aside from the annual rehabilitation cost of 2,316 baht (http://marinepolicy.trf.or.th).

In two weeks, the dust should have settled. For now, though bullish on PTTGC's business prospects, brokerage houses admit that due to widespread negative news, investors looking for short-term gains should avoid this stock.

US$1 = 31.25

 

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