oil and gas production in the philippines 091412

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OIL AND GAS

PRODUCTION INTHE PHILIPPINES:

PUBLIC INTEREST ISSUESFatima Alvarez Castillo


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OIL AND GAS PRODUCTION IN THE PHILIPPINES: PUBLIC INTEREST ISSUES

Bantay Kita Occassional Paper Series No. 2012-01

A study commissioned by

BANAY KIA/ACION FOR ECONOMIC REFORMS

March, 2012

BANAY KIA is a coalition of organization that advocates for transparency and

accountability in the extractive industries.

Office Address: Unit 1403 West rade Center, 132 West Avenue,

Quezon City, Philippines 1104elefax: (+632) 426-5632

Website: http://bantaykita.ph

Email: [email protected]

Writer: FAIMA ALVAREZ CASILLOPublication design and layout: R. JORDAN P. SANOS

Send your comments, inquiries, write-ups, and contributions to:[email protected]/[email protected]


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Bantay Kita Occassional Paper Series No. 2012-01

OIL AND GAS

PRODUCTION INTHE PHILIPPINES:PUBLIC INTEREST ISSUES

Fatima Alvarez Castillo


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CONTENTS

INTRODUCTION.............................................................4

THE PRODUCTION OF INDIGENOUS OIL AND GAS.............7

GOVERNANCE..............................................................13

THE MALAMPAYA GAS PROJECT.....................................19

TRANSPARENCY AND PUBLIC INTEREST ISSUES..............24

REFERENCES................................................................26

ACKNOWLEDGEMENTS.................................................30


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INTRODUCTIONOBJECTIVE AND SCOPE.

Tis paper is a scoping of public interest issues in Philippine oil and

gas production. It is a preliminary examination of these issues for the

use of Bantay Kita and other civil society organizations concerned

with the extractive industries.

he scoping was instructed by primary data from interviews with

key informants and secondary datafrom relevant laws, reports

from the Department of Energy (DOE), and other documents and

literature.

Te scoping has some data limitations. Attempts to access data on

exports and taxes paid by companies were unsuccessful. Tese were

considered confidential by government agencies. Disaggregated data on

the contribution of the industry to local employment was not available

from the Department of Labor and Employment.

Te scoping presents descriptions of the industry and its contribution

to domestic energy supply, the system governing the industry, some

examples of impacts on local communities, a brief feature on the

Malampaya gas project and a preliminary perusal of public interest

issues in the industry.

SIGNIFICANCE.

Indigenous petroleum and other non-renewable resources are built up

over centuries and form part of a nations wealth and can be a potentsource for economic advancement. Te exploitation and use of these

resources has both short-term and long-term effects on the social,

political and economic development of a country. Decisions on the

exploitation and use of such resources are matters of public interest for

present and future generations.


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ransparency and accountability in the governance of resource

extraction and use is necessary. Policy options have to target maximum

benefits and the full potential that these resources can bring. Revenues

earned from the extraction of these resources have to be managed and

allocated with the public interest in mind.

It is the governments mandate to ensure that such resources contribute

to the national economy and the public benefit over the short-termfor

the present generation, as well as over the long-termfor the benefit of

future generations.

It has been shown that the mere possession of abundant resources

and their exploitation does not automatically result in a countrysdevelopment. Te paradox known as the resource curse where

resource-rich countries exhibited slower growth than countries that

were not resource-rich has been demonstrated in Africa.

Despite large investments in oil, Between 1970 and 1993, countries

without oil saw their economies grow four times faster than those of

countries with oil.1

Effective resource governance requires that citizens are able

to hold their government representatives accountable for

decisions and policy choices. Accountability to an informed

public can mitigate the mismanagement of resource revenues.

A well-informed public with the capacity to act can engage

in constructive discussion about policy formulation and

government oversight of resource wealth. Trough public

scrutiny, officials can be held to account for abuses of power

for private gain.2

Governments do not always get their fair share of revenues. Te

Philippines is not unfamiliar with problems of corruption and

1____. October 31, 2007. The Resource Curse: Why Africas Oil Riches Dont Trickle Down to Africans fromhttp://knowledge.wharton.upenn.edu/article.cfm?articleid=1830 accessed February 20, 2012.2The Natural Resource Charter. The Natural Resource Charterfrom www.naturalresourcecharter.org accessedNovember 10, 2011.


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agreements that are disadvantageous to the country. When lack of

transparency and corruption are present, a government may fail to

gain and allocate revenues from resource extraction for development

objectives.

Te opaque behavior of corporations can make it difficult for the public

to access critical information such as the amount of resources depleted

by a company in a specific period and the amount of revenues earned.

Te two major players in the Philippine oil and gas industry, Chevron,

and Shell, have been identified as among the most opaque in the world.3

Developed countries have recognized the need for companies engaged

in resource extraction to practice transparency. In July 2010, theUnited States passed the Dodd-Frank Act. Among its many provisions

is a requirement for the disclosure of payments made by mineral,

oil and gas companies.4 Already in place is another international

transparency standard, the Extractive Industries ransparency

Initiative (EII). Te EII process entails the reconciliation of company

reports on payments made to governments with government reports

on receipts from these companies. o date, there are 13 countries that

comply with the EII process and 20 more countries which have filed

applications for EII membership.5

Trough research and its links with mining-affected communities,

civil society organizations in the Philippines have learned much

about the mining industry. However, there is as yet little knowledge

on the oil and gas industry, another vital extractive industry with

far-ranging and long-term effects on the economic well-being of

Filipinos. Tis scoping was commissioned as a preliminary effort to

inform civil society organizations on public interest issues in the oiland gas industry.

3Nick Mathiason found that three of the worlds biggest corporations, Chevron, Exxon and Shell have amongthe highest number of international subsidiaries incorporated in high secrecy jurisdictions which allow companyaccounts and ownership details to be kept from the public. In Mathiason, N. Piping Prots, published by PublishWhat You Pay Norway (PWYP Norway), 2010.4The US Securities and Exchange Commission is still nalizing the Implementing Rules of the Dodd-Frank Act.5EITI. EITI Countriesfrom http://eiti.org/countries accessed November 10, 2011.


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THE PRODUCTION OFINDIGENOUS OIL AND GASDISCOVERY OF RESERVES

In 1896, the Smith Bell Company undertook oil exploration, drilling

the oledo-1 well in Cebu. However, it was not until the 1970s when

large fields were opened by the government for exploration by the

private sector and a number of oil and gas fields were discovered.

From 1976 to 2000, several fields were discoveredthat of the

Australian firm, Nido, the Camago-1 field of Occidental Petroleum, theWest Limpacan field of Alcorn Philippines, and the smaller San Antonio

onshore field in northern Philippines of the Philippine National Oil

Company (PNOC). Te Galoc field was discovered in 1981. Te largest

of these discoveries was the Malampaya field which was also discovered

in 1990 by Occidental Petroleum but later sold to Shell.

Out of 99 countries with proven oil reserves, the Philippines ranks

number 65. Indonesia and Vietnam rank 28 and 44, respectively. 6

Proven oil reserves of the Philippines amounted to 138 million barrels in

January 2006.7Tis is much less than the billions of barrels in reserves

of its ASEAN (Association of Southeast Asian Nations) neighbors like

Vietnam, Indonesia and Malaysia.

Nevertheless, the development of its oil and gas reserves can reduce the

countrys dependence on imports. Te biggest reservoirs that have so far

been identified by the Department of Energy are in offshore Palawan,

the Sulu Sea and the Recto Bank.8

6 Central Intelligence Agency. The World Factbook: Oil-proved reserves from https://www.cia.gov/library/publications/the-world-factbook/rankorder/2178rank.html accessed March 5, 2012.7Encyclopedia of Earth. September 23, 2008. Energy Prole of Philippines from http://www.eoearth.org/article/Energy_prole_of_Philippinesaccessed March 4, 2011.8 According to respondents from the Department of Energy, the Recto Bank reserve is much bigger thanMalampaya. The Recto Bank reserve is adjacent to the Spratley Islands, that is claimed by China, Vietnam andthe Philippines.


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FIGURE 1. MAP OF RESERVE ESTIMATIONS FOR THE PHILIPPINES

Ilocos ShelfArea = 19,500 sq km., 60% offshoreWildcat well drilled = 1

Total resources:Undiscovered = 19 million bbl oil equivalent

Gas makes up 100% of the total resources

West Luzon

Area = 16,000 sq km., 95% offshore

Wildcat wells drilled = none

Undiscovered = 23 million bbl oil equivalent

Gas constitutes 100% of the total resources

Mindoro-Cuyo BasinArea = 58,000 sq km., 90% offshore

Wildcat wells drilled = 15

Total resources: 832 million bbl oil equivalent

Discovered = 25 million bbl o. e.

Undiscovered = 806 million bbl o. e.Gas makes up 7% of the total resources

Northwest PalawanArea = 36,000 sq km., 100% offshore


Total resources: 2,318 million bbl oil equivalent


Undiscovered = 1,376 million bbl o. e.

Gas and condensate make up 72% and 13%,

respectively, of the total resources

Reed Bank



Total resources:



Southwest PalawanArea = 44,000 sq km., 100% offshore


Total resources:

Undiscovered = 1,355 million bbl oil equivalent

Gas shares 60% of the total resources

East Palawan Basin


Wildcat wells drilled = 4Total resources:



Cagayan Basin

Area = 24,000 sq km., 80% onshoreWildcat wells drilled = none

Discovered = 0.4 million bbl oil equivalent


Gas constitutes 99% of the t otal resources

Central Luzon

Area = 16,500 sq km., 95% onshoreWildcat wells drilled = 17

Total resources:


Gas has 100% share of the total resources

Bicol ShelfArea = 32,500 sq km., 60% offshore




Southeast Luzon

Area = 66,000 sq km., 55% onshore


Total resources:

Undiscovered = 301 million bbl oil equivalentGas constitutes up 36% of the total resources

West Masbate-Iloilo BasinArea = 25,000 sq km., 60% offshore


Total resources:



Visayan Basin



Total resources: 1,260 million bbl oil equivalentDiscovered = 0.5 million bbl o. e.

Undiscovered = 1,259 million bbl o. e.

Gas has 28% share of the total resources

Agusan-Davao Basin



Total resources:

Undiscovered = 196 million bbl oil

equivalent


Cotabato Basin

Area = 14,000 sq km., 100% onshore

Wildcat wells drilled = 10Total resources: 158 million bbl oil equivalent


Undiscovered = 152 million bbl o. e.

Gas constitutes up 45% of the total resources

Sulu Sea






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FIGURE 2. OIL PRODUCTION AND CONSUMPTION IN THE PHILIPPINES, 1986-2006*

*January-September only

Source: EIA International Energy Annual; Short-term Energy Outlook

OIL AND GAS PRODUCTION.

Modest quantities of oil were produced in the early part of 1990s. But,

in 2002, there was a surge in domestic oil production as the Malampaya

field produced 1,763,431 barrels of oil i.e., four times the amount

produced in the previous year. In that year, Malampaya accounted for

87% of total domestic oil production. However, in the following year,

Malampaya shifted the bulk of its operations to gas production. Tis

caused the level of domestic oil production to drop to 0.07% of the

quantity produced in 2000. (Figure 3)

Te Galoc Petroleum Company discovered another field in 1981. But,

the presence of oil in commercial quantities was not determined

until the late 1990s. Te DOE approved Galocs development plan in

2006. From 2008 to 2010, Galoc became the biggest oil producer. In

2009, production by Galoc was 56.7% greater than Malamapayas peak

production in 2002. However, by mid-2011, another corporation,Philodrill, produced almost 3.5 times more than the Galoc field from its

Nido and Matinloc fields.9

Prior to 2002, gas production was limited to the smaller San Antonio

field in northern Philippines. However, with the operation of the

9DOE Portal. Petroleum Exploration Historyfrom www.doe.gov.ph/ER/oil.htm accessed February 17, 2012.

400

350

300

250

200

150

100

50

0

1986 1990 1994 1998 2002 2006

1996 to 2000

No oil production

Net imports

Consumption

Production

YEAR

ThousandBarrelsp

erDay


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Malampaya deepwater gas-to-power project, gas production in 2003,

shot up. Although production volume dipped in 2004 and 2006 due

to adjustments in production technology, it rose more or less steadily

throughout the decade. Te Libertad field in Cebu, operated by Forum

Gas made a small contribution to production.

FIGURE 3. DOMESTIC OIL PRODUCTION BY OIL FIELD

FIGURE 4. DOMESTIC OIL PRODUCTION, 2002-2010

0

500000

1000000

1500000

2000000

2500000

3000000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(Year)

(Barrelsofoil,

Bbl)

Malampaya

Galoc

Others

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(Barrelsofoil,

Bbl)

Oil

(Year)


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FIGURE 5. DOMESTIC GAS PRODUCTION, 2000-2010

CONTRIBUTION TO LOCAL ENERGY SUPPLY.

Prior to 2000 the countrys energy supply was largely sourced from

geothermal, biomass10, coal, hydro, indigenous oil and gas, and imported

coal and oil.

Indigenous sources of energy accounted for 49% of total energy supply

at the beginning of the decade. By 2010, indigenous sources of energy

rose to 57.5% of total energy supply. Increases in oil and gas production

within the decade were a major factor. Oil production volume in 2010

was 14 times greater than production volume in 2000. Gas production

in the same period doubled and coal production quadrupled.

In 2000, imported oil accounted for 41.3% of the countrys total energy

supply. By the end of the decade, the share of imported oil in Philippine

energy supply was 33.6%.

10Biomass is biological material, often plant matter, used to produce energy or electricity, usually by combustion.Examples are wood or solid waste.

0

20000

40000

60000

80000

100000

120000

140000

160000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(Millioncubicfeet)

Gas

(Year)


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FIGURE 6. CONTRIBUTION OF IMPORTED OIL TO ENERGY SUPPLY

FIGURE 7. ENERGY SUPPLY MIX, INDIGENOUS VS. IMPORTED, 2000-2010.

FIGURE 8. MIX OF ENERGY SOURCES AND SELF-SUFFICIENCY LEVELS, 2000 AND 2005

Source: Table 14.1a Supply mix bysource, 2000 to 2010.

NSCB, 2011 Philippine Statistical Yearbook

Source: Table 14.1a Supply mix by source, 2000 to 2010.

NSCB, 2011 Philippine Statistical Yearbook

YEAR

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(Inp

ercen

t)

Oil

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(Year)

(Inpercent)

Indigenous Energy

Imported Energy

Biomass

29.8%

Imported Oil

45.4%

Imported Coal

9.2%Local Oil

0.2%Local Coal

1.8%

Natural

Gas

0.4%

Hydro

5.3%

Geothermal

8.0%

Total: 251.73 MMBFOESelf-sufciency Level=45%

2000


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mandates the President to enter into agreements with foreign-owned

corporations for the large-scale exploration and development of mineral

and petroleum resources, based on their potential contributions to the

economic growth and general welfare of the country.

Te policy framework for the development of indigenous energy sources

is stated in the 1972 Presidential Decree (PD) 87 of President Marcos,

also known as the Oil Exploration and Development Act. Te major

objectives stated in the Act are: (a) to yield the maximum benefit to the

Filipino people as well as to government revenues for use in furtherance

of national economic development, and (b) to assure participating

foreign enterprises of just returns for providing the necessary services,

financing and technology and fully assuming all exploration risks.

Various executive and administrative orders during the time of

Presidents Corazon Aquino, Fidel Ramos and Gloria Arroyo continued

to address themselves to governance of the industry. Executive Order

(EO) 556, issued by President Arroyo in 2006, banned farm-in and

farm-out arrangements and instead strictly required public bidding

for the awarding of all contracts.14Tis EO invalidated a farm-in deal

between Philippine National Oil Company (PNOC) and Mitra Energy to

develop the Malampaya Oil Rim. While the bidding system is generally

considered to yield superior results, the current Secretary of the DOE

is seeking to amend EO 556, claiming that it has become a stumbling

block for PNOC Exploration Corporation. In its efforts to tap partners

for its projects.15

In 1992, RA 7638 created the Department of Energy (DOE). Te DOE was

given a two-fold mandate: (1) to develop competitiveness in the energy

sector and make it attractive to foreign investors and (2) to ensure thecompliance of such development with constitutional and legal provisions

on environmental protection and countrywide electrification.

14These arrangements are those negotiated between a license, contract or eld holder with another party thatmay have funds but not enough hectarage or who, for other reasons, may be interested in participating in anoperation.15Remo, Amy R. (Philippine Daily Inquirer) Feb. 27, 2012. DOE seeks easing of rules on govt oil explorationdealsfrom http://business.inquirer.net/46537/doe-seeks-easing-of-rules-on-gov%E2%80%99t-oil-exploration-deals accessed March 5, 2012.


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TABLE 1. LAWS AND REGULATIONS ON THE OIL AND GAS INDUSTRY

Law or Issuance Description

Presidential Decree 87 (1972),

The Oil Exploration and

Development Act of 1972

Provided the policy framework for the development of indigenous petroleum

and enhanced energy security as well as to encourage the participation of the

private sector.

Republic Act 7638 (1992),

Department of Energy Act of

1992

Created the Department of Energy and rationalized the organization and

functions of government agencies related to energy

Presidential Decree 1857 Amended PD 87 by offering more scal and contractual incentives to service

contractors with special reference to deepwater oil exploration

DOE Circular No. 2003-05-005 Established procedures for the Philippine contracting round in petroleum

prospective areas.

DOE Circular No. 2003-05-006 Provided guidelines on the nancial and technical capabilities required of a

viable petroleum exploration and production company.

Executive Order No. 66 Designated the Department of Energy as the lead agency in developing the

natural gas industry.

DOE Circular No. 2002-08-005 Set the interim rules and regulations governing the transmission, distribution

and supply of natural gas.

Philippine Environmental Policy

Act (Presidential Decree 1151),

1977

Required that the government and the private sector undertake environmental

impact assessments of their project activities

Philippine Environmental Code(P.D. 1152)

Detailed prescriptions on the management of air quality, water quality, landuse, natural resources and waste.

Environmental Impact Statement

System (P.D. 1586), 1986

Provided details on Environmental Impact Statement (EIS) System.

National Integrated Protected

Areas System Act of 1992

Provided for the establishment and management of national integrated

protected areas system, dening their scope and coverage. Section 14 of the

NIPAS Act species the survey of energy resources in protected areas solely

for data gathering. Any exploitation and utilization of energy resources found

within NIPAS areas shall be allowed only thru passage of law by Congress.

The Indigenous Peoples Rights

Act of 1997 (Republic Act 8371)

Established implementing mechanisms to protect and promote the rights of

indigenous cultural communities/indigenous peoples.

Source: Department of Energy


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CONTRACTING ROUNDS.

In 2003, the DOE launched the Philippine Energy Contracting

Round (PECR) system.16Te PECR altered the previous system where

contractors applied and negotiated for areas in which they wanted

to operate. Under the PECR, the DOE determined and offered areas

for exploration and development. Periodic contracting rounds were

subsequently undertaken in which the government offered prospective

areas for bidding from interested private contractors.

Te fourth and most recent PECR was launched in June 2011 with a

total offer area of over 100,000 square kilometers. On offer were 15

blocks with an average size of 6,700 kilometers. Te single largest area

that was offered was 8,400 kilometers in East Palawan.17

Te Resource Development Bureau of the DOE prepares the documents

for each PECR. It provides information on the prospects in each area

and publicly posts the announcements for a PECR. Bid submissions

are evaluated on the basis of their proposed work programs and the

legal, technical and financial qualifications of the bidder. Information

contained in bid submissions is confidential. Upon acceptance of a bid,

the DOE awards a Service Contract (SC) to the Contractor.

Service Contracts.18 Under the terms of a model Service Contract, the

Contractor assumes all the risks and obligations to explore the contract

area within a period of 7 years, with the possibility of a 3-year extension

if necessary.19 Following the determination that oil is present in

commercial quantities, the Contractor is granted the right to extract

the resource for a period of 25 years, with possible extension periods up

to a maximum of 50 years.

Te Contractor is allowed to deduct its operating costs for up to 70%

of gross revenues. Tese operating costs are inclusive of costs incurred

16Department Circular 2003-05-00517Petro Energy. October 16, 2011. PERC in DOEs 4thPECR Launching from http://petroenergy.com.ph/news/perc-participates-in-does-4th-pecr/accessed March 7, 2012.18Department of Energy website. Model Service Contractfrom http://www.doe.gov.ph/PECR2006/Petroleum%20PECR%202007/petro.htm accessed October 3, 2011.19Section 2.34. Exploration Period. Model Service Contract.


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within and outside the Philippines. Tey include, among others, surveys,

tests and studies; construction and maintenance of equipment and

facilities; administrative costs and home office overhead; transportation

and handling costs related to the sale of production; as well as 2/3 of

interest payments for the financing of the operation. Fortunately,

these recoverable costs do not include transportation of product and

processing and refining costs outside the country.20

Te sharing system adopted by the Philippine government is such that it is

entitled to 60% of net proceeds, i.e., after the recoverable operating costs

have been deducted. Te government has the option to receive its share in

kind or on cash. Te Contractor is entitled to retain 40% of the net proceeds.

PD 87 and the SC explicitly state that Contractors are not exempt from

and obliged to pay Philippine income taxes. However, the SC states that

the income tax liability of the Contractor is to be paid from the 60%

share of the government. Upon receipt of the government share the

DOE pays the Contractors income tax to the Bureau of Internal Revenue

(BIR). Te amount paid to the DOE is greater than that retained by the

Contractor. But after the DOE pays the 30% corporate income tax, it is

actually left with less than the Contractor.

Other privileges allowed to contractors are exemption from paying

tariffs and other taxes on the importation of equipment and materials

and the right to transfer part or all of rights under a Service Contract to

another party, provided the DOE is informed.

Te Service Contract also states that all information on operations

within a service area is confidential.

Finally, Service Contracts contain provisions that purport to bind a

Contractor to abide by Philippine laws on health, safety, environmental

protection and respect for indigenous peoplesrights. However, there

are some gaps in complying with these provisions and failures to comply

have led to opposition from some local communities and sectors.

20Section 2.52. Operating Costs, Service Contract.


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BOX 1. JAPEX

Tanon Strait is a protected marine biodiversity area. But in 2005, under Service Contract number 46, the Japan

Petroleum Exploration (JAPEX) began exploration activities in Tanon Strait, between Cebu and Bohol.

Local sherfolk, environmental and church groups objected to the operations of JAPEX asserting the lack

of local community and stakeholder consultations, the destruction of marine sanctuaries and the consequent

depletion of the shermens catch. A report from the Central Visayas Fisherfolk Development Center (FIDEC) to

the UN Special Rapporteur on the Right to Food, detailed the military harassment of protesters.

In the opinion of DOE respondents, community consent is not legally required. According to them the DOE has

conducted information and education activities among local shing communities where they explained that the

technology will not adversely affect them. In their opinion, the people are just stubborn.

In 2008, local shermen staged a protest action where they used their bancas to obstruct the operations of

JAPEX. JAPEX eventually paid some of the shermen for the damages for the loss of livelihood from reducedharvests. But FIDEC and another civil society organization PAMALAKAYA, have led a case against JAPEX and the

DOE to demand for the rehabilitation of the Strait.21

BOX 2. MORO ANCESTRAL DOMAIN

In August 2011, the MILF (Moro Islamic Liberation Front) formally presented a request to Dean Marvic Leonen,

head of the Government Peace Panel, to freeze all bidding and contracting for oil and gas exploration in areas

that are being claimed by the MILF as Moro ancestral domains. In the absence of clear government action their

request was reiterated in October 2011.22

Muhammad Ameen, head of the MILF secretariat was quoted as having said that freezing the bidding and

contracting in the Sulu Sea and Liguasan Marsh23would be an indication of the governments sincerity in the peace

negotiations. We do not want these explorations to complicate the peace process and more importantly result

in undue deprivation of our people for their rightful share in the natural wealth,..I hope the Aquino administration

would listen to our peoples pleas. 24

In January 2012, the DOE announced the 4thPECR. The MILF reminded the government of its request for the

freeze. At the time of the writing of this report, there has been no publicly reported response or action on the

MILF petition.25

21Pamalakaya Times. July 15, 2009. Fishers group ask Japex to set aside P20-billion for Taon Strait rehabfrom http://www.asianpeasant.org/content/

shers-group-ask-japex-set-aside-p-20-billion-ta%C3%B1-strait-rehabaccessed Jan 15, 2012.22Alcober, Neil A. (Manila Times). January 27, 2012. Stop Liguasan oil explorations, govt urged from http://www.manilatimes.net/index.php/news/nation/15855-stop-liguasan-oil-explorations-govt-urged accessed January 27, 2012.23DOE respondents said that Liguasan Marsh is not included in the 4thPECR because it is a nationally protected biodiversity area.24Zambo Times. October 6, 2011. MILF calls for freeze of oil, gas exploration in Moro areasfrom http://www.zambotimes.com/archives/38504-MILF-calls-for-freeze-of-oil,-gas-exploration-in-Moro-areas.htmlaccessed October 10, 2011.25Ibid.


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THE MALAMPAYA GAS PROJECTTe Malampaya Gas Project began commercial operations in 2001. It

is owned by a consortium composed of Shell (45%), Chevron (45%)

and the Philippine National Oil Corporation or PNOC (10%). With a

capitalization of $4.8 billion, it is the single largest and most significant

investment in the history of Philippine business.26

Te Malampaya/Camago deepwater gas-to-power project is the biggest

component of the Philippine Gas Project (PGP). About 2.5 trillion cubic

feet of gas reserves have been discovered in the gas field. Its resource

potential is projected to supply up to 400 million standard cubic feetof gas per day equivalent to 3,000 megawatts of baseload generating

capacity.27Aside from the production of gas, the project involved the

construction of a 504-kilometer sub-sea pipeline from the offshore

production site to an onshore gas plant which supplies three power

stations in Sta Rita & San Lorenzo (owned by First Gas of the Lopez

group) and Ilijan in Batangas (owned by NPC). At present, Malampaya

natural gas provides approximately 2,700 megawatts/day of energy or

40% of Luzons power requirements.

TERMS OF THE MALAMPAYA CONTRACT.

Te production sharing agreement between the government and

the Malampaya consortium provides for a 60%-40% sharing of net

proceeds from the sale of the product between the former and the

latter. Under Service Contract No. 38, the Consortium is authorized

to market the governments share of natural gas to NPC as well as to

additional buyers.28

Te terms of engagement between the Consortium (Seller of the gas)

and NPC and First Gas (the Buyers) are contained in the Gas Sale and

Purchase Agreements (GSPAs). Between December 1997 and April

1998, there were three GSPAs entered into by the Consortium on the26Administrative Order 381, President Ramos, February 17, 1998.27Executive Order 254, President Ramos, June 30, 1995.28Administrative Order 381, President Ramos, February 17, 1998.


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sale and purchase of the gas produced from the Camago-Malampaya

fields: one GSPA with NPC, and two with First Gas.

Te GSPA with NPC contains a fixed ake-or-Pay- Quantity (OPQ)

provision. NPC is obliged to pay for a given volume of natural gas tendered

for delivery by Shell whether the quantity is taken by NPC or not. However,

Administrative Order 381, states that quantities paid for but not taken

by NPC (referred to as annual deficiencies) be made available to NPC

without additional charge. Nevertheless, when a downturn in demand for

electricity occurs, NPC undertakes the risk of not recovering its costs on

time because it is forced to make advance payments.

Te OPQ creates a number of complications, which affect all parties.Te OPQ affects NPCs cash flow since it is constrained to pay for

quantities it is unable to take or market. But the agreement is such that

the Malampaya Consortium must receive these payments. Ironically,

the Malampaya Consortium created a $350 million Deferred Payment

Facility, as a line of credit for NPC to draw upon for OPQ payments that

are due the Consortium. In turn, the Philippine government committed

to earmark funds from the government share of net proceeds to repay

the funds drawn from the consortiums Deferred Payment Facility (DPF).

In addition, the government has committed not to seek purchase price

reductions for gas from the project. In contrast, the GSPAs with First Gas

require price reductions whenever a third party provides a lower price.

ypically, the Service Contract with the Malampaya Consortium also

authorizes its income taxes to be deducted from the 60% government

share. From 2003 to 2009, this amounted to PhP 53.140 billion.29As in

other SCs, the Malampaya Consortium is allowed to deduct up to 70%of its operating costs from its gross revenues. In has been estimated

by a Shell Philippines Exploration (SPEX) official that by 2006, all of

its investment in Malampaya would be recovered.30. Respondents from29Salaverria, Leila B. (Philippine Daily Inquirer). September 18, 2010. COA: Govt shortchanged by P53B inMalampaya project from http://newsinfo.inquirer.net/breakingnews/nation/view/20100918-293024/COA-Govt-shortchanged-by-P53-B-in-Malampaya-project November 30, 2011.30Flores, Alena Mae. (Manila Standard). March 29, 2006. Shell set to recover $2B Malampaya investment. http://www.accessmylibrary.com/article-1G1-143811106/shell-set-recover-2b.html accessed March 7, 2012.


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DOE estimated that full cost recovery will be achieved within the first

10 years of operation.

Te service contract for the project will expire in 2024. Te consortium

has applied to the DOE for a 15-year extension of the contract until 2039.

It plans to make an additional investment of $950 million.31Te DOE is

reportedly studying the application for extension although according to

a top DOE official, the continued operation of the Malampaya gas field

is a critical component in the countrys long-term program to ensure

energy security in the country.32

THE MALAMPAYA FUND.

Te Department of Energy and the Bureau of reasury maintain aspecial account termed Fund 151, for non-tax revenues from oil, gas,

geothermal and other energy projects. It is part of the yearly revenue

program submitted to Congress in support of the Budget Proposal.

It has been reported that by late 2011, Fund 151 had PhP 161.838

billion. Of this amount, PhP 151.12 billion was collected from the

Malampaya project.33

Te fund is meant for expenditure on energy development projects and

other purposes approved by the President. Te current administration

has so far charged PhP2.87 billion against the Fund:

a) PhP 2 billion to avert power shortages in off-grid areas by providing

for the fuel requirements of the NPC- Small Power Utilities Group;

b) PhP 450 million to support jeepney and tricycle drivers affected by

rising oil prices through the Pantawid Pasada program; and

c) PhP 423 million to purchase a cutter, the USS Hamilton, to strengthen

security around the perimeter of the Malampaya Project.34

31_____. Malampaya Consortium remits $1.134 billion to government. http://www.doe.gov.ph/news/2012-01-24-Malampaya%20Consortium.htm accessed March 7, 2012.32Remo, Amy R. (Philippine Daily Inquirer). October 4, 2011. DOE: Malampaya gas project remains crucial toensuring stable power in Luzonfrom http://newsinfo.inquirer.net/70417/doe-malampaya-gas-project-remains-crucial-to-ensuring-stable-power-in-luzonaccessed November 30, 2011.33Philippine Daily Inquirer. October 18, 2011. Legislator urges govt to use Malampaya funds to buy back Petronfrom http://business.inquirer.net/25621/legislator-urges-gov%E2%80%99t-to-use-malampaya-funds-to-buy-back-petron accessed November 30, 2011.34Department of Budget and Management. July 5, 2011. Budget Secretary Abad Claries nature of malampaya Fundfromhttp://www.gov.ph/2011/07/05/budget-secretary-abad-claries-nature-of-malampaya-fund/ accessed March 5, 2012.


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BOX 3. FUND EXPENDITURE UNDER THE ARROYO ADMINISTRATION

Under the Arroyo Administration, P 19.64 bill ion was disbursed from the Malampaya Fund to national government

agencies. However, only P250 million or 1.27 percent was used for an energy-related project: the electrication of

211 villages in 2006.

. In 2006, P1 billion for the Armed Forces Modernization Fund; 2) in 2008, P4 billion for the Department of

Agriculture; 3) in 2009, a total of P14.39 billion to various agencies, including: P7.07 billion for the Department of

Public Works and Highways; P2.14 billion for the Philippine National Police; P1.82 billion for DA; P1.4 billion for the

National Housing Authority; and P900 million for the Department of Agrarian Reform.6

In January 2012, the DOE proposed to the Joint Congressional Power

Commission to use part of the Malampaya Fund to pay for the stranded

debts of NPC. Te maturing debts of NPC stand at $1.7 billion.35

As of May 2011, the Fund balance was PhP 79.48 billion. However, the

Malampaya group reportedly turned over to President Aquino a check

for over a billion US Dollars in January 2012.36

Local Government Share. Local government units (LGUs) are entitled to

40% of the gross collection derived by the national government from the

taxes, royalties and fees from its share in any co-production, joint venture

or production-sharing agreement in the utilization and development of

the natural resource within their territorial jurisdiction.37

Respondents from civil society in Palawan claim that the Malampaya field

belongs to Palawan because it lies in the sea between Kalayaan Island, a

municipality of Palawan and the province main island. Kalayaan Island

is about 230 kilometers while Malampaya is 80 kilometers from the

main island of Palawan. Marcos presidential decree (1978) that created

this municipality states that the sea between Kalayaan and the mainisland belong to Palawan.38

35Anonuevo, Euan Paulo C. (The Manila Times). February 18, 2012. Malampaya proceeds eyed for Napocorfrom http://www.manilatimes.net/index.php/business/top-business-news/17404-malampaya-proceeds-eyed-for-napocor accessed February 28, 2012.36Bordadora, Norman. (Philippine Daily Inquirer). January 21, 2012. Govt gets $1.1-B share from Malampayaprojectfrom http://newsinfo.inquirer.net/131653/govt-gets-1-1-b-share-from-malampaya-project accessedFebruary 28, 2012.37Local Government Code of 1991, Section 290.38Kilusan Love Malampaya. (n.d) Executive Summary of Malampaya Gas Project Prole. Puerto Princesa City.


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During Pres. Corazon Aquinos administration, Palawan received P165M

from the national government as its share in revenues from the Nido

and other oil fields. But in 1992, the DOE stopped giving Palawan its

share from the West Linapacan field claiming that it was located outside

the maritime boundary of the province. In 1998, President Ramos,

through AO 381, ordered that the province be allotted $2 billion (25%)

annually for 20 years from the total government share of $8.1 billion.

Other arguments that affected the share of the province subsequently

arose. In June 1998, Secretary Francisco Viray of the DOE wrote

Palawan Governor Salvador Socrates requesting a deferment of 50%

of the share that was due the province. Te reason stated was that

the national government needed to augment its funds for payment ofNPCs OPQ obligations.39

In 2003, then-President Gloria Arroyo asserted that Malampaya was

outside Palawans boundary. At the same time, she declared that the

province be granted financial assistance drawn from the Malampaya

proceeds. Local politicians, Governor Joel Reyes, Representative Alvarez

and Representative Mitra, agreed to an interim agreement that the

assistance extended to the province be divided among the province and

the congressional districts of Alvarez and Mitra. No public consultations

were held and civil society groups in Palawan objected to the agreement

as a manipulative tool to secure the loyalty of local politicians for the

2004 presidential elections.40

Palawan has been claiming its 40% share of proceeds from Malampaya.

Tere is a pending petition before the Supreme Court on whether or not the

Camago-Malampaya gas fields are within the territorial waters of Palawan.

Finally, the Local Government Code (LGC) mandates local government

to spend its share on local development and livelihood projects. It

requires that a minimum of 80% of this amount be spent to reduce the

cost of electricity in communities.41

39Kilusan Love Malampaya. (n.d) Executive Summary of Malampaya Gas Project Prole. Puerto Princesa City.40Interview data with Kilusan Love Malampaya respondents.41LGC of 1991, Section 294


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In November 2011, the Commission on Audit (COA) recommended the

filing of graft charges against former Governor Joel Reyes and members

of the Provincial Bids and Awards Committee for irregularities in

the use of almost PhP 3 billion in Malamapaya funds. Questionable

transactions identified by the COA reports were those that appeared to

favor certain contractors and over 200 infrastructure projects including

day care centers that cost about PhP 30 million.42

TRANSPARENCY AND

PUBLIC INTEREST ISSUESTe decline in imported oil and increase in the contribution of indigenous

gas and oil to local energy supply is undoubtedly a positive development.

However, there is no indication that this has in any way had a positive

influence on the relatively high cost of energy in the country.

Te framework by which the industry is governed is itself a question

of public interest. Te package of incentives granted to the oil and

gas industry is considered to be among the most competitive in the

world. Te question arises as to whether or not these incentives are

as advantageous to the country as they are to private investors in the

industry.

Another question is whether or not 70% cost recovery is too generous. Or

if it is true that the Malampaya Consortium will recover its investment

within a 10-year period. Further research will bear out if this is or is not

an unusually short recovery period for such large investments.

Te industry is governed by a Law which expressly states that Contractors

are not exempt from Philippine income taxes. Te Service Contract

likewise asserts the same. However, the very same Service Contract

42Anda, Redempto D. (Philippine Daily Inquirer). November 9, 2011. COA: Sue ex-gov for Malampaya abusefrom http://newsinfo.inquirer.net/90737/coa-sue-ex-gov-for-malampaya-abuse accessed November 30, 2011.


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effectively cancels this out by making income taxes chargeable to the

government share. In effect, the 60-40 sharing scheme which makes it

appear that the share of the resource owner is larger than that of the

private contractor is deceptive.

After payment of the Contractors income tax, the amount left to the

government as its share is actually less than the 40% retained by the

Contractor.

Te reasoning behind the regulatory framework is faulty. It confuses

the roles of government as resource owner or equity partner with that

of the government as a taxing power.

Service Contract No. 38 was entered into after take-or-pay arrangements

were already being criticized by civil society organizations. Te presence

of this provision in the SC plus the guaranteed sale price even when

market conditions change, puts a severe strain on NPC and other

government resources. Considering these provisions, how can it be said

that the Contractor fully assumes market risks?

Te presence of a large Fund for which only Presidential approval

is necessary to effect disbursements is too open to the possibility of

corruption and rent-seeking from vested interests. Tis applies to the

proceeds of government at both the national and local levels. Mechanisms

to ensure that these gains are employed for the development of the

industry, as they are meant to, are lacking.

Lastly, avoidance and/or resolution of conflicts between local communities

and sectors and energy projects need to be addressed and provided for in

the regulatory regime of the industry.


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1987 Philippine Constitution


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ACKNOWLEDGEMENTS

Ms. Margarita (Maita) Gomez provided insights, data and guidance

during the research and writing of the report. Professor Oscar

Evangelista, Engineer Caesar Ventura and Dr. Jose Antonio Socrates

of Kilusan Love Malampaya shared in depth discussion on Malampaya

issues and provided copies of pertinent documents not easily accessed

from government agencies. Professor Edel Bober, Chairman of the

Petroleum Engineering Department of Palawan State University and

Mr. Jun Saturay of the UP National Institute of Geological Studies gave

a briefing on the technical aspects of oil and gas exploration.

Director Ismael Ocampo, Atty. Benju Gagni and Ms. Telma Cerdena of

the Department of Energy, as key informants. Dean Peter Lee U linked

the researcher to Ms. Zenaida Monsada of the Department of Energy

who sent general data on oil and gas exports.

Mr. Nomar Postre, Mr. Ding Calalang, Mr. Lawrence Go and Mr. Carlo

Manalansan assisted in the research and field work.


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ABOUT THE AUTHOR

FAIMA ALVAREZ CASILLO is a UP Centennial and Full Professor

of Political Science at the College of Arts & Sciences, University of the

Philippines Manila.


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