Every time oil price adjustments hit the newswires, the media, out of habit, get his views or comments. As the affable president of the New Petroleum Players Association of the Philippines, Fernando Martinez is the voice of the 60 or so new companies that entered the local oil industry after its deregulation in 1998.

But not too many people know Martinez, CEO of Eastern Petroleum, started his career and stayed for almost 20 years in the public sector. He rose from project officer to corporate planning division chief at the Development Academy of the Philippines, then became a director for community development of the former Ministry of Human Settlements. He also served in various capacities under the Aquino and Ramos administrations – distinctively earning good marks for turning in a profit for the ailing Food Terminal complex as its chief operating officer in the early 90s.

Today, Martinez is gung-ho on the prospects of Eastern Petroleum Corporation, which zoomed to the Top 1,000 in five years. In an interview with Philippine Business, he explains that with the new realities of the economic and business environment, new oil players – with 14% share in 2002 and gunning for 20% in two years time – are in a better position to compete.

In terms of market share, how would Eastern Petroleum rank among the new oil players?
We have 60 new oil companies in the deregulated environment. Eastern will be ranked number five among the new players – after Coastal, Total, Unioil, and Flying V – in that order. I think Eastern will be fifth in terms of reach and sales because we have landed in the top one thousand companies in five years. This year, we’ll have a big jump.

You currently have 40 retail stations and aim to have 200 by 2005. How do you plan to reach this?
The 200 retail stations are being financed by internally generated funds from investors because most of these are dealer-owned. In two and a half years, we are prepared to do that because the depots we have now are fully operational in two areas: Metro Manila and General Santos. The third is in Bacolod in Visayas. Retail outlets will follow in these areas.

Are there too many players in Metro Manila already?
Not only that, but the costs involved are no longer enticing. It falls below our viability criteria.

We are limiting our exposure in Metro Manila simply because start-up cost is too much and the economics does not add up. For one, there is very high rental rate. It’s not as attractive as far as investment is concerned.

How committed are you in coming up with more environment-friendly petroleum products, which you have been distinguished for?
This, precisely, was the reason why we entered the market. It is a corporate commitment. We were the first to sell unleaded gasoline, and we forged the introduction of unleaded ahead as scheduled together with the “big three” players. We were also ahead in introducing compliance to the 2003 reduction of aromatics and benzene as mandated by the Clean Air Act. We implemented this two months ahead of schedule. This is the core of our business mission. We believe that where technology is available, we must go ahead because you cannot compromise the health of the people. I think Filipinos deserve the best available technology and the best produced petroleum available in the world.

A primary reason for deregulation was for new players to gain more leverage in the industry. Has this been realized?
Firstly, our consumers are really hungry for new faces and new products. Secondly, the new players were investing aggressively. From the records of the Department of Energy, between P14 billion to P16 billion has been infused in the oil industry. And now, this investment is bearing fruit in terms of the shares captured by the new petroleum players, the biggest being in the LPG market – which went as high as 25%. Stations of the new players combined have reached 500 as against 3,000 of the big three.

I believe there will be steady growth in the market share of new players. By the year 2005, 20% of the total market will be in the hands of the new players. We keep on investing because of the stringent environmental laws that have been passed, especially the Clean Air Act.

By 2004, the sulfur content of diesel will be reduced further. This means that if the three refiners will not reinvest and reconfigure their refineries, we will end up in the same boat – as importers of finished products. They will lose their competitive advantage except that they were there ahead – their networks are there. In the economics of importation – we will be on equal footing. Maybe now they are bringing larger cargo size, but we are almost there.

So the big three should invest a large amount of money to comply with these environmental laws?
They have given it a second thought, since there are available refiners outside the country (like they have excess in Singapore and in some other places) as the region has excess capacity of refineries. Because their refineries are old, they are no longer as efficient – that is the problem. In this kind of situation, the ones who are not tied up with the huge asset will have the advantage.

Will it be an advantage for small players who are importing?
That will be the trend. It will be an advantage in a sense that we won’t be tied up with huge assets to maintain. If you have a factory, it doesn’t mean that you are not going to maintain it. You still have to secure it, you still have to have people run it. If it is running below capacity, there’s a problem because you cannot maximize its usage anymore. The petroleum industry is logistically an efficiency game. Deregulation has forced all the players to be as efficient as possible. Given the price sensitivity of Filipino consumers and since it has been established that the products are almost of the same quality, there’s not much difference anymore except for those perpetuators of not-so-good products. We are policing our own grounds precisely for that purpose. If this is the case, the price differentiation will become the attraction for consumers, and of course the service, the attractiveness of the service and the convenience. In Metro Manila, where it is convenient, this is the case. But in the province, price is a big factor.

The usual criticism is that deregulation isn’t working because the big three oil companies usually increase oil prices at relatively the same time and amount, while the smaller players follow what the big three have initiated. Given this, would you say that deregulation has really worked?
In a period where there is a significant increase in the price of crude oil, there is no other way for all the players in the industry but to hike prices because they almost have identical acquisition costs. What is to be emphasized though is that if there had been no deregulation, oil prices would have been higher. Under the regulated regime, there was a fixed formula on recovery of capital or what you call return-on-rate base (RORB). The oil companies can recover just like other utility firms up to 12% RORB. Now, any decision on a price hike or rollback was dependent on that formula either not being reached or not more than that.

Comparing the income of the big three before the deregulation and the regulated period, you can distinguish that they earned more during the regulated regime. There was no real competition then. All they had to do was abide by the Energy Regulatory Board’s formula. But at the end of the day, as all other business entities, a regulated entity – as the problem of Meralco – they live within or even a little bit below. But after deregulation, they make do with two to three percent RORB or even lower.

Every player has to recover costs. We cannot continuously sustain huge losses, so if there is an opportunity for cost recovery, we will pass it on. In the same manner, if we have lower costs then we are always first to move by discounting even without announcement. Discounting is happening in huge accounts. In order to grab the market, why will you announce: “Hey I’m giving much more?” Then, it will be telegraphed to the competition.

Would you say that it is an indication that deregulation has worked because the big three have lower income than during the regulated phase?
Yes. It is an indicator that the consumers are getting more value for their money because of the efficiencies and not only because of price. Because of deregulation, you notice, that these stations have been upgraded. Now you have airconditioned comfort rooms, you have convenience stores. All types of attractions are being placed – clean and attractive. That’s something! We didn’t have these when there were only three players.

When do you think would the small players have a significant effect in the pricing of oil products?
Right now there is a significant effect in the pricing. In December of last year, when we declared a rollback, they were forced to follow. In three or four occasions, the new players were the initiators of price rollbacks. As you can see, the undeclared rollbacks in terms of discounts are now being felt. Of course, the oil majors are not resting; they will not put their guard down. They have to protect their market. They have to offer a better price than that being given. This is why the market is the best determinant of value, contrary to what some have tried to invoke as consumer advocates. At the end of the day, it is the market that is the sole determinant of market forces.

Oil prices have been rolled back five times since the start of the US-Iraq War. Where do you think oil prices are headed for the rest of the year?
I am positive that it will be stable to lower. Stable in the sense that the current price of $22 to $23 per barrel would be there to stay. But I am hopeful that it will go down to as low as $20 to $21 because before the end of the year, Iraq’s production will be normalized. Their oil wells have not been damaged and starting next year, they may add on to their production.

Their future is better under the US administration at the moment and better for them to go back to the market because they have the world’s second largest crude oil reserves. It would be better for everybody, including particularly the Iraqis who have been deprived. I was there in the Oil for Food Program and I had the opportunity to visit Baghdad two years ago.

Is the worst case scenario over?
I believe it’s over, even if OPEC is threatening to cut production. I don’t think they can muster the compliance because everybody needs money.

Venezuela needs money. It is only Saudi Arabia, on account of their production and huge reserves of dollars who can make a sacrifice. So it’s good for us. A price stability regime is something that we can look forward to, especially if our peso will also be stable. That is good for the business community because you have predictability. What is bad is in the last three years, we’ve had so many roller coaster rides.

I must emphasize that fuel, petroleum-based in particular, is no longer a significant commodity as it was 20 years ago. In power generation – partly due to the discovery of natural gas – petroleum-based power plants are down to 11% of the total energy mix. Because of that, prices even of electricity are no longer dependent on the pricing of petroleum. So this is very significant.

Also, efficiencies in the transport sector, particularly in deliveries, have again lowered fuel as a cost component. So it’s not right to say that every time there is a price hike, the prices of other goods must go up. That is an unfortunate misconception because up to now, some people are perpetuating it to increase their profit. Oil is 25% of transportation’s cost component, one of the biggest component. But so is labor, which is also 20-25%. But in the case of petroleum, when we increase by 10% sometimes we want to pass on a 10% price hike. But if they want a 10% increase on the 25%, that’s only two to three percent fare hike from their gross. That’s because it’s the cost component that we’re talking about.

When we have a forum with the transport sector, they readily admit we are right. However, we are not declaring that we cannot raise the fare hike on the basis of spare parts or the price of goods in the market that the drivers are consuming.

We have to index it to inflation – at three percent, we’re down to a single-digit inflation. So you can’t argue that you have to have a fare hike because the inflation is three to five percent. It’s not good for the economy – with a fare hike then the labor group will respond by another hike in the minimum wage.

At the end of the day what we need is productivity. We are down to rank 40+ from our 33rd ranking four years ago. But our productivity is really down, we’re not improving. The yardstick to all these prices is that we have to be more efficient, more productive. The fact is we have the cheapest fuel in the entire world (benchmarked with all other currencies) — the absolute value of what we’re paying as compared to Europe, US, North America, Latin America, except for the oil exporters. Mexico may be higher because they are exporting, same with Indonesia and Malaysia who are subsidizing.

Now people will tell me the Philippines is not as rich as Malaysia, Indonesia and Hong Kong. But how come Vietnam and Cambodia have higher prices than us? In the world market, you don’t distinguish your country’s per capita income. The price per barrel - whether it is the Americans or Filipinos buying it — is the same. It’s the same US$22/23 depending on the end game of the day. You don’t distinguish. But how come Hong Kong Singapore and Thailand have a better economy despite the higher price of petroleum? Again, it is productivity. The unleaded of HK is P80 per liter, P35 for diesel per liter – same as Europe. In the US it’s something like P25-P30. That’s why everybody who has been there, would say it is better in the Philippines. We have very cheap fuel.

As CEO of Eastern, how do you manage people?
I’m hands-on. First, Eastern is not that big. We are in the top 1000 but I don’t consider myself big. To be in the top 1,000, all you need is sales of P500 million. Because it’s a small organization, we are very lean and that gives us the flexibility to move and have fast decision making day by day. I trust a lot also – a combination of delegated authority at the same time being on top of the situation. I see to it that I know everything that is happening.

What are the guiding principles that you have – both personally and career-wise?
I have a passion for excellence. To me it is a personal commitment that you should always excel in the field because everyday you are facing fiercer competitors. You have to offer the best possible in terms of pricing, quality, and service – those must be the guiding tenets of our business organization and must give the best possible, given the circumstances.

Another thing is that we try to grow as fast as we can, knowing that we just started. We also want to grow outside of this country, if that is possible, because I cannot accept that there is no single Filipino company in the Fortune 500. Why? How come? I admire San Miguel and Jollibee, world class Filipino organizations, for getting recognition for our race of being a benchmark against the world’s best.