Extension of the Pilot Implementation of Department Order (DO) 23-2007 As Amended by DO 06-2008 on the Marking of Imported Kerosene and Diesel

February 27, 2009 DOF DEPARTMENT ORDER NO. 012-09 ( Declared Overtaken by Events by D.O. 29-16 ) SUBJECT : Extension of the Pilot Implementation of Department Order (DO) 23-2007 As Amended by DO 06-2008 on the Marking of Imported Kerosene and Diesel In the exigency of the service, the effectivity of Department Order No. 23-2007, as amended by Department Order No. 06-2008, is hereby extended for three (3) months or up to May 31, 2009. CTaSEI This Order shall take effect immediately. (SGD.) MARGARITO B. TEVES Secretary ATTACHMENT Pilot Implementation of Department Order (DO) 23-2007 as amended by DO 06-2008 on the Marking of Imported Kerosene and Diesel Executive Summary The pilot implementation of the fuel marking project began at the Ports of Subic and Clark on 02 December 2008 and at the Port of Batangas on 29 January 2009. All diesel withdrawn on a tax exempt basis is subject to marking as is all kerosene whether or not tax-exempt. Marking activity During the period 02 December 2008 up to 21 February 2009, a total of 660 withdrawals were marked by the service provider, SGS S.A. amounting to 31.8 million liters. In terms of volume the largest markings took place at Subic which is the loading port for barges which carry fuel to large scale users such as Semirara. Effect of the program on the oil industry One of the purposes of the pilot was to find out whether the scheme would cause any significant increase in cost or inconvenience to the oil industry. In terms of cost, the fee paid by the users is US$0.00275/L (PHP0.13/L) which was equivalent to only 0.4% of the retail pump price of diesel during the month of December 2008. This is not a significant additional burden to the industry which would require an increase in price to the consumer. DSATCI With regard to additional procedures, it was established that the marking is done with the minimum of inconvenience. Enclosed is a video of the marking process showing that a 20,000 liter tanker truck can be marked in only 2 minutes and 20 seconds. In addition no complaints of operational difficulties or unsafe practices have been received either from the oil industry or owners of the storage facilities. We can say therefore that the pilot has already proved the system to be low cost, fast, efficient and safe. Changes in the pattern of withdrawals There has been an observed tendency that the number of withdrawals of tax free fuel has been declining during the period of the pilot. Laguna Technopark and Hacienda Luisita both declined as well as deliveries declared for the use of the Clark SEFZ locators. There has been significant decline in withdrawals to Ecozones outside Subic. There has also been a substantial decline in withdrawals for bunkering foreign vessels. There could be two reasons for this, either that the decline is the result of the economic downturn or that withdrawals prior to the pilot were excessive. On the other hand the deliveries to gasoline stations in both Clark and Subic have significantly increased which requires further investigation. Results of tests for the presence of the marker So far 171 tests have been conducted on fuel covertly sampled from gasoline stations. There have already been three positive results in January and February indicating the presence of tax exempt fuel in gasoline stations not authorized to possess it. In the case of the first two, surveillance operations still continue whereas in the case of the third a raid was authorized by the Commissioner of Customs on 26 February and seizure proceedings have been instituted. Recommendations of the Project Implementation Office Although in terms of the results so far the pilot has already proved that the fuel marking service is already a valuable means of combating fuel smuggling, the PIO is of the opinion that the pilot should be extended by at least more 3 months to gather more data on the supply chain of smuggled fuel and to gain further experience of Batangas. The PIO also recommends the extension of the pilot program to Bataan. The PIO has also come to realize that diesel which is tax-paid but subject to drawback should also be included in the pilot as this could be an important source of leakage onto the domestic market. Suitable amendments to DO 23-2007 modifying the scope of the pilot will be submitted to the Secretary after final evaluation of the matter. aEIcHA (SGD.) ATTY. ESTELA VALDEZ-SALES Undersecretary and Chairman, PIO (SGD.) ATTY. GREGORIO B. CHAVEZ BOC Deputy Commissioner Member, PIO ATTY. GREGORIO V. CABANTAC BIR Deputy Commissioner Member, PIO (SGD.) SALLY MONTEIRO Executive Director Petroleum Institute of the Philippines Progress Report on the Pilot Implementation of Department Order (DO) 23-2007 as amended by DO 06-2008 on the Marking of Imported Kerosene and Diesel Pursuant to Section 9 (f) of Department Order (DO) No. 23-2007, the Project Implementation Office (PIO) respectfully submits this progress report on the pilot implementation of the Fuel Marking Program at the Ports of Subic, Clark and Batangas. 1.0 Markings Undertaken Pilot implementation commenced for the Ports of Subic and Clark on 02 December 2008 following the provisional registration of the Authentix PH03 marker by the Department of Energy on 28 November. For the Port of Batangas, implementation of the pilot marking only commenced on 29 January 2009 caused by the misunderstanding that only kerosene declared as duty and/or tax exempt are to be marked. Thus far, this has been corrected. All Kerosene are to be marked under DO 23-2007, as implemented. 1.1 Number of Markings : For the period 02 December 2008 up to 21 February 2009, a total of 660 markings where conducted by SGS, the designated fuel marking service provider, broken down below for which an equal number of Certificates of Marking were issued: EIaDHS PORT Number of Markings PORT Number of Markings Subic 341 Clark 312 Batangas 7 Total 660 === 1.2 Number of Liters Marked While the number of liftings marked for Subic and Clark are almost even, the amount in liters marked in Subic far exceeded the two ports because barges (motorized tankers) load thereat destined for such large scale users such as Semirara Mining in Antique, Kao Pilipinas in Cagayan de Oro and the foreign vessels in Manila. List below shows what has just been explained: Port Volume of Liters Marked Subic 22,463,463 Clark 6,578,000 Batangas 2,767,344 Total 31,808,807 ========= 1.3 Cost of Marking The cost to the users of marked fuel which is USD$0.00275/L (PHP0.13/L) is approximately 0.4% of the retail pump price of diesel using the peso to US Dollar rate during the month of December. 2.0. Marking Procedure Observed CMO 16-2008 implementing DO 23-2007, as amended, prescribed the marking procedure from the time the Notification to Purchase is filed up to the issuance of the Certificate of Marking and the release of the goods. Marker preparation takes place while the tankers are in the process of loading. Actual doping of the fuel is a very simple process. Enclosed as Annex "A" is a video of an actual marking showing that the application of the marker to a truck loaded with 20,000 liters of diesel takes only 2 minutes and 20 seconds. One of the objectives of the pilot implementation is to ascertain whether or not the marking procedure will create any difficulty and/or pose safety concerns on the liftings and deliveries from the storage facilities. During the period of pilot implementation, no operational difficulty, complaint of delay or safety incidents were raised either by the storage facility operator or by the buyers of the goods. SACTIH 3.0 Analysis of Levels of Markings 3.1 Port of Clark 3.1.1 Transshipments: a. Laguna Technopark. Transfers during the 3-month pilot period was less than 10% of the withdrawals for the same period for 2005-2006. (Table 1). While the reduction appears to have started a year earlier, it may be advisable to audit the very high transfers during the 2005-06 period to insure that these have been authorized and actually received at the Technopark. Table 1. Clark : Laguna Technopark (3-months) Port Volume in liters Dec 05 900,000 Jan 06 760,000 Feb 06 820,000 Dec 06 80,000 Jan 07 100,000 Feb 07 120,000 Dec 07 59,400 Jan 08 59,400 Feb 08 - 0 - Dec 08 60,000 Jan 09 60,000 Feb 09 (1-21) - 0 - b. Hacienda Luisita To a lesser extent, a similar drop in transfers have been recorded for this ecozone outside Clark Special Economic Zone (Table 2). It may do well for a similar audit to be undertaken. aSDCIE Table 2. Clark : Hacienda Luisita (3-months) Port Volume in liters Dec 05 740,000 Jan 06 520,000 Feb 06 740,000 Dec 06 740,000 Jan 07 860,000 Feb 07 120,000 Dec 07 831,400 Jan 08 811,400 Feb 08 - 0 - Dec 08 480,000 Jan 09 420,000 Feb 09 (1-21) 340,000 3.1.2 On-Base Consumption A significant amount of markings undertaken was for diesel used by the ecozone locators in their business operations as well as those sold duty and tax-free at the gasoline stations inside the CSEZ. a. Gasoline Stations. While the amount of monthly deliveries to the on-base gasoline stations remains the highest during the 2006-2007 period, the level during the pilot showed a significant rise over the same period of the previous year (see Table 3). The increase in consumption may be explained by the drop in the price of diesel but it may also indicate diversion to the domestic market. It may be advisable to look into this development as well as to audit the 2006-2007 period for possible excesses. Table 3. Tax and Duty Free Diesel Consumption of Gasoline Stations On-Base Dec 05 598,000 Jan 06 468,000 Feb 06 418,000 Dec 06 617,000 Jan 07 618,000 Feb 07 588,000 Dec 07 344,900 Jan 08 424,120 Feb 08 354,420 Dec 08 598,000 Jan 09 568,000 Feb 09 374,000 (1-21 Feb) b. Manufacturer-Locators. The amount of diesel declared for use by CSEZ locators for their manufacturing operations had significantly gone down during the period of the pilot (Table 4). Indications are that the reduction is mainly a reflection of the global economic downturn. Table 4. Clark Manufacturer/Locators Consumption of Diesel Month Volume in liters Dec 05 758,000 Jan 06 918,000 Feb 06 1,026,000 Dec 06 1,523,000 Jan 07 1,560,000 Feb 07 1,724,000 Dec 07 1,605,580 Jan 08 1,795,400 Feb 08 1,736,460 Dec 08 1,080,000 Jan 09 1,524,000 Feb 09 - 0 - 3.1.3 Other On-Base Consumptions. As shown by Table 5 below, the level of other on-base consumptions such as those by CDC Golf seems not to be affected by the economic downturn, an unlikely scenario which may be worth looking into. aEIcHA Table 5. On-Base Consumptions Dec 05 144,000 Jan 06 44,000 Feb 06 78,000 Dec 06 24,000 Jan 07 92,000 Feb 07 56,000 Dec 07 65,340 Jan 08 69,300 Feb 08 69,300 Dec 08 64,000 Jan 09 66,000 Feb 09 40,000 3.2 Subic 3.2.1 Transshipments a. Bataan Export Processing Zone (BEPZ) The companies enumerated below bought diesel from Subic during the years 2006-2007 but did not have any purchases of marked fuel in December 2008 and January to Feb 2009. Mitsumi Phils. lifted 3,730,000 liters in 2006 and 1,640,000 liters between Jan-Aug 2007 but is reportedly now buying tax paid diesel from Petron. Chun Chiang Enterprises lifted 254,000 tax-free diesel in 2006 and 100,000 liters between Jan and Aug 2007. The company is now reportedly sourcing duty and tax paid diesel from CS &T in Subic. b. Zambales Umicore Specialty lifted 345,000 liters and 10,000 liters for the same periods but are now buying tax and duty paid diesel from CS &T. c. Subic-Manila There has been a big drop in withdrawals from Subic for bunkering foreign vessels in Manila. Motorized tankers MT JORS, OYELLE, PAROS and BMI PATRICIA are no longer lifting in Subic. It may be advisable to undertake audits of those big bunkering operations that have stopped. DSAacC 3.2.2 On-Base Consumption While transfers to ecozones outside Subic have significantly gone down, total on base consumption in January shot up to 1,500,600 liters, an increase of 57% compared to the same month last year. February 2009 trend shows this growth will be sustained with full month on-base consumption exceeding 1.8 million liters. Since manufacturing activity has been scaling down as well in Subic, the growth is mainly expected to come from the gasoline stations inside the freeport. 4.0 Enforcement 4.1 Testing. From 16 December 2008 to 17 February 2009, a total of 171 testings were conducted on various gasoline stations by the Joint Intelligence Group (JIG). While only pumping stations in the provinces of Zambales, Pampanga and Bataan were initially subjected to testing in December, the search was however subsequently expanded to include those in Bulacan and Cavite and later on to stations in Metro Manila and other cities. All December test were negative. In January, three (3) separate tests conducted on a diesel sample obtained from one station in Fairview, Quezon City yielded positive results following laboratory analysis in Subic. The Bureau of Customs' Intelligence Service decided to surveil the station to identify where the station is sourcing its diesel which was eventually traced to a storage facility in Nagtahan known to be lifting from Subic and engaged in some illicit traffic of diesel. The gas station is still to be operated on. On February 17, three (3) diesel samples from a station in Cavite also tested positive for the marker following analysis at the Subic laboratory. Two days after the discovery, an enforcement team from the Bureau of Customs went to the site to covertly obtain samples and do confirmatory test with the intention to serve a prepared Mission Order signed by the Customs Commissioner should the test be positive. Unfortunately the results were negative. It was gathered that during the two days between the discovery by the Joint Intelligence Group (JIG) and the operations of the Enforcement Operations Group, the station already cleaned up its tanks in preparation for an audit by the Bureau of Internal Revenue. On February 26, operations were conducted by the Bureau of Customs on one gasoline station in Lubao, Pampanga following the positive results for marked fuel on a sample earlier obtained. The time elapsed from the taking of the initial sample covertly done to the next positive sampling was less than 48 hours. From this experience, follow up operations should be conducted within 24 to 48 hours from the initial testing. CIHAED 4.2 Other Intel Operations. The Bureau of Customs on its own conducted surveillance operations against two storage facilities suspected of engaging in the illegal trade of diesel. These operations are still on-going. Continuous intelligence gathering is being done on some Subic locators identified to have supplied marked fuel to buying agents known to supply chains of gasoline stations in the Luzon and Mindanao area. The Presidential Anti-Smuggling Group (PASG) for its part has likewise started sampling of suspected outlets in collaboration with the Subic Customs for testing at the service provider's laboratory. These operations are continuing. 5.0 Recommendations 5.1 Three-Month Extension of the Pilot. The pilot implementation to date of the Fuel Marking Program has already achieved some of the purposes for which it was created under DO 23-2007. For one, the pilot run has already demonstrated that fuel marking can be undertaken with hardly any adverse effect on the industry supply chains. For another, the cost of the marking was proven to be very minimal as to affect the pump price of the marked diesel and kerosene. The above notwithstanding, it is the PIO's considered view that the period of the pilot should be extended for at least 3 months to complete the gathering of data needed to support a decision whether or not to roll out the program on a national scale. Attached as Annex "B" is a prepared Department Order extending the pilot implementation for another three months. It is being further recommended that the issuance of the DO be made immediate considering the fact that the pilot implementation will end on February 28, 2009. More enforcement operations are needed to ascertain the effectiveness of the program and for the following reasons: Late Batangas Implementation. As of this report, less than a month's marking has been logged in Batangas since implementation only commenced on the 29th of January. Wait and See Period. While intelligence operations and tests for marker conducted so far has yielded some positive results of some marked fuel being diverted to the local market, indications are that those involved in the illegal trade are still in general laying low and are in a wait and see mode. EaICAD Time must be provided for the illegal traffickers to resume their illegal trade and give them a false sense of complacency for apprehensions to be possible. The negative results of the operations conducted earlier on the target gasoline station in Cavite during the early part of February and the latest positive operation seem to bolster this analysis. Manual of Operations It took awhile for the law enforcement agencies to submit their comments on the Manual. Consequently, participation of concerned law enforcement agencies will still be forthcoming. 5.2 Expansion of the Coverage of the Program to Cover the District Port of Limay and Mariveles in Bataan. Even prior to the pilot implementation of the program, the Philippine Institute of Petroleum (PIP) has recommended the inclusion of the Ports of Limay and Mariveles in Bataan in the pilot implementation. Although the Commissioner of Customs and concerned officials of the Department of Finance agreed to the recommendation, the understanding was to initially implement the pilot in the ports already identified ( e.g. , Subic, Clark and Batangas) before issuing an amendment to DO 23-2007. This recommendation however would still be subject to further discussion with the PIP upon their representation that there may be small volume of fuel that is subject to marking in the said Port in line with recommendation 5.7 below. 5.3 Inclusion of Diesel Subject to Drawback in the Pilot Implementation. During the meetings held prior to the commencement of the pilot at Subic as well as during the meetings to assess the progress of the pilot, it was agreed by DOF and BOC representatives to recommend that DO 23-2007 be amended to include duty and/or tax paid diesel but represented to be subject to drawback. This move is to prevent the shift in evasion from tax-exempt sources such as Subic and Clark to drawback sources such as Batangas and Pandacan. Attached marked as Annex "D" is a prepared Department Order expanding the coverage of the fuel marking program to tax and duty paid diesel and kerosene for which tax and duty drawback will be applied. 5.4 Creation of a multi-agency saturation drive that can be implemented by the Enforcement Operations Group and the Joint Intelligence Group. This would expand the covert sampling and testing to other possible illegal windows/sources of marked fuel instead of the current procedure which is limited to retail outlets. cEDIAa 5.5 Audit by the BIR of trucking companies used by oil companies to establish a time frame that will help strengthen the timing of enforcement operations. 5.6 Synchronized audit by BOC and BIR on the oil companies subject of the operations conducted on February 26 in Lubao, Pampanga. 5.7 Conduct further study and discussion on the different methods being employed to defraud the government of revenues through false drawback claims and other illegal activities in the Port of Limay and Mariveles. Respectfully submitted for your consideration. (SGD.) ESTELA VALDEZ-SALES Undersecretary and Chairman, PIO (SGD.) ATTY. GREGORIO B. CHAVEZ BOC Deputy Commissioner Member, PIO ATTY. GREGORIO V. CABANTAC BIR Deputy Commissioner Member, PIO (SGD.) MS. SALLY MONTEIRO Executive Director Petroleum Institute of the Philippines