Overview  of  Global  and  National  (Philippines)Energy  Outlook  

Atty. Fernando S. Penarroyo    Asian  Ins(tute  of  Technology    Design  and  Delivery  of  a  Professional  Development  Course  on  Effec9ve  Nego9a9on  and  Strategic  Management  for  Gas,  Oil  and  Coal  Industries    Manila,  Philippines  22  January  2015    

Puno  &  Peñarroyo  Law  Of@ices  

Contents  

• Recent  Global  Trends  •  Energy  Resources  Industry  Philippine  Update        -­‐  oil,  natural  gas,  coal,  renewables,  power  • Developments  in  the  Philippine  Resources  Industry  • Development  Constraints  • Conclusion  

RECENT  TRENDS  IN  THE  RESOURCES  INDUSTY  

Recent  Trends  in  the  Resources  Industry  China  •  Despite  a  slowing  economy,  China  remains  Asia’s  largest  and  one  of  its  fastest-­‐growing  economies.    

•  China’s  rapid  economic  growth  has  posi(oned  it  as  the  world’s  second  largest  economy  and  it  is  likely  to  overtake  the  US  around  2021  to  become  the  world’s  largest  economy  (The  Economist,  2014)  

•  The  “old”  China  of  low-­‐cost  labor,  low-­‐value-­‐intensive  industries  and  a  coastal-­‐based  export  economy  is  fading  away  

•  China’s  goal  is  to  shiT  away  from  an  investment-­‐led  model  of  growth  to  a  more  stable  model  driven  by  domes(c  consump(on,  advanced  technology  and  environmental  efficiency.  

Recent  Trends  in  the  Resources  Industry  China  •  China  has  recently  become  the  world’s  largest  importer  of  oil  but  its  per  capita  oil  consump(on  lags  behind  the  levels  of  the  developed  world.  

•  As  China’s  consump(on  of  oil  ballooned,  it’s  state-­‐owned  oil  and  gas  enterprises  have  developed  into  global  players    in  tapping  unconven(onal  resources  by  collabora(ng  with  other  interna(onal  firms.  

•  China’s  climb  in  the  global  value  chain  assures  steady  rise  in  demand  for  mineral  products  and  advanced  mining  technologies.  

Recent  Trends  in  the  Resources  Industry  China  •  Chinese  companies  are  also  increasingly  becoming  one  of  the  industry’s  leading  sources  of  capital.    Chinese  acquisi(ons  make  headlines  and  Chinese  companies  are  some  of  the  more  ac(ve  deal  makers  in  the  industry.  

•  In  addi(on  to  direct  equity  acquisi(ons,  Chinese  companies  are  also  inves(ng  in  resources  development  and  construc(on  and  suppor(ng  infrastructure.  

•  According  to  the  China  Mining  Associa(on,  up  to  80%  of  China’s  overseas  mining  investments  since  2005  has  failed.  

Recent  Trends  in  the  Resources  Industry  Petroleum  new  fron1ers  •  Tight  oil    -­‐  hydraulic  fracturing  (US)    hZp://youtu.be/VY34PQUiwOQ  • Arc(c  offshore  • Presalt  deepwater    (Brazil)  • Oil  shale  –  shale  contains  kerogen  that  has  to  be  mined  and  then  reheated  to  separate  oil  from  shale  (US)  

• Oil  sands  –  loose  sand  or  sandstone  saturated  with  bitumen  that  are  exploited  through  open  pit  mines  (Alberta,  Canada)  

Recent  Trends  in  the  Resources  Industry  Unconven1onal  gas  resources  •  Shale  gas  –  natural  gas  contained  in  low  permeability  shale  forma(ons;  gas  that  has  remained  trapped  in,  or  close  to,  its  source  rock  

• Coalbed  methane  –  coal  seam  gas,  natural  gas  contained  in  coal  beds  

•  Tight  gas  –  low  permeability  gas  reservoirs  that  cannot  be  produced  economically  without  the  use  of  technologies  to  s(mulate  flow  of  the  gas  towards  the  well,  such  as  hydraulic  fracturing  

GRAPHIC  OF  HYDRAULIC  FRACTURING  

Recent  Trends  in  the  Resources  Industry  World  Energy  Outlook  (IEA,  2013)  •  China  dominates  the  picture  within  Asia,  before  India  takes  over  from  2020  as  the  principal  engine  of  growth.  

•  China  is  about  to  become  the  largest  oil-­‐impor(ng  country  and  India  becomes  the  largest  importer  of  coal  by  the  early  2020s.  The  United  States  moves  steadily  towards  mee(ng  all  of  its  energy  needs  from  domes(c  resources  by  2035.  

•  Unconven(onal  gas  accounts  for  nearly  half  of  the  increase  in  global  gas  produc(on  to  2035,  with  most  of  the  increase  coming  from  China,  the  United  States  and  Australia.  

Recent  Trends  in  the  Resources  Industry  World  Energy  Outlook  (IEA,  2013)  •  The  role  of  OPEC  countries  in  quenching  the  world’s  thirst  for  oil  is  reduced  temporarily  over  the  next  ten  years  by  rising  output  from  the  United  States,  from  oil  sands  in  Canada,  from  deep-­‐water  produc(on  in  Brazil  and  from  natural  gas  liquids  from  all  over  the  world.  But,  by  the  mid-­‐2020s,  non-­‐OPEC  produc(on  starts  to  fall  back  and  countries  in  the  Middle  East  provide  most  of  the  increase  in  global  supply.  Overall,  na(onal  oil  companies  and  their  host  governments  control  some  80%  of  the  world’s  proven-­‐plus-­‐probable  oil  reserves.  

Recent  Trends  in  the  Resources  Industry  World  Energy  Outlook  (IEA,  2014)  •  By  2040,  the  world’s  energy  supply  mix  divides  into  four  almost-­‐equal  parts:  oil,  gas,  coal  and  low-­‐carbon  sources.    

• While  coal  is  abundant  and  its  supply  secure,  its  future  use  is  constrained  by  measures  to  tackle  pollu(on  and  reduce  CO2  emissions.    

•  Fossil-­‐fuel  subsidies  totalled  $550  billion  in  2013  –  more  than  four-­‐(mes  those  to  renewable  energy  –  and  are  holding  back  investment  in  efficiency  and  renewables.    

•  Policies  concerning  nuclear  power  will  remain  an  essen(al  feature  of  na(onal  energy  strategies,  even  in  countries  which  are  commiZed  to  phasing  out  the  technology  and  that  must  provide  for  alterna(ves.    

Recent  Trends  in  the  Resources  Industry  BP  Sta1s1cal  Review  of  World  Energy  2014  •  Driven  by  massive  investment  in  shale  and  other  ‘(ght’  forma(ons,  the  US  saw  the  world’s  largest  increase  in  oil  produc(on  last  year,  offselng  the  numerous  disrup(ons  seen  elsewhere  and  keeping  prices  stable.    

•  Coal  was  the  fastest-­‐growing  fossil  fuel,  with  China  and  India  combined  accoun(ng  for  88%  of  global  growth,  while  natural  gas  consump(on  growth  decelerated  and  grew  at  a  below-­‐average  rate.  As  was  the  case  for  total  energy,  gas  consump(on  growth  was  below  average  in  all  regions  except  North  America,  which  con(nues  to  enjoy  the  cheapest  prices  among  interna(onal  markets.  

Recent  Trends  in  the  Resources  Industry  Resource  Governance  Index    • Measures  the  quality  of  governance  in  the  oil,  gas  and  mining  sector  of  58  countries.    

•  Revenue  Watch  Ins(tute  calls  on  governments:        -­‐  Disclose  contracts  with  extrac(ve  companies        -­‐  Ensure  regulatory  agencies  publish  (mely,  comprehensive  reports  on  opera(ons        -­‐  Control  corrup(on,  improve  rule  of  law  and  guarantee  respect  for  civil  and  poli(cal  rights        -­‐  Accelerate  the  adop(on  of  interna(onal  repor(ng  standards  for  gov’t  and  companies  •  Philippines  ranks  23  

Emerging  Challenges  

Oil  and  Gas  Report,  Ernst  and  Young  (2013)  •  Access  to  finance  and  capital  market  constraints  -­‐  Developments  are  becoming  increasingly  challenging,  complex  and  expensive.  The  risks  associated  with  raising  capital  are  likely  to  intensify.  

•  Increasingly  (ght  local  content  requirements  -­‐  It  would  have  implica(ons  including  labor  costs  and  the  ability  to  deliver  projects  on  challenging  (me  schedules.  

•  Catastrophic  environmental  events  -­‐  Should  these  become  increasingly  common  or  inextricably  linked  to  CO2  emissions,  then  the  argument  for  immediate  ac(on  to  reduce  CO2  emissions  will  become  not  just  about  affordability,  but  necessity.  

Top  Five  Factors  Affecting  the  Oil  Price  in  2015    

•  China’s  economy  -­‐  China  is  the  second  largest  consumer  of  oil  in  the  world  and  surpassed  the  United  States  as  the  largest  importer  of  liquid  fuels  in  late  2013.    

•  American  shale  -­‐  By  the  end  of  2014,  the  U.S.  was  producing  more  than  9  million  bopd,  an  80  percent  increase  from  2007.  Big  ques(on  is  how  affected  U.S.  drillers  will  be  by  sub-­‐$60  WTI.    

•  Elas(city  of  demand  -­‐  The  cure  for  low  prices  is  low  prices.    

•  OPEC’s  next  move  –  OPEC  or,  more  accurately,  Saudi  Arabia  –  has  stood  firm  in  its  insistence  not  to  cut  produc(on  quotas.    

•  Geopoli(cal  flashpoints  -­‐  History  has  demonstrated  that  geopoli(cal  crises  are  some  of  the  most  powerful  short-­‐term  movers  of  oil  prices.  

RESOURCES  INDUSTRY  PHILIPPINES  UPDATE  

LOCATION

COMMISSIONING YEAR

2013-2015 2016-2020 2021-2025 2026-2030

LUZON 20 800 65 - VISAYAS 30 150 - 60 MINDANAO - 230 90 20

Total 50 1,180 155 80

TOTAL Geothermal Capacity Addition (2013-2030): 1,465 MW

Targeted Geothermal Capacity Addition (in MW), by Grid

Power  Generation  Mix  2011 2012

Developments  in  the  Philippine    Resources  Industry  • West  Philippine  Sea  conflict  •  Benham  Rise  •  Framework  Agreement  of  Bangsamoro  •  Extrac(ve  Industries  Transparency  Ini(a(ve  •  Resource  Na(onalism    

China’s  Nine-­‐Dashed  Lines  

Benham  Rise  –  The  New  Frontier  

Proposed  Bangsamoro  Core  Territory  

DRY WELL, P&A DRY WELL w/ oil shows, P&A

DRY WELL w/ gas shows, P&A DRY WELL w/ oil & gas shows, P&A OIL SEEP

Developments  in  the  Philippine    Resources  Industry  Extrac1ve  Industries  Transparency  Ini1a1ve  (EITI)  •  EITI  is  a  global  standard  for  transparency  in  the  extrac(ves  sector  that  involves  the  reconcilia(on  of  company  payments  with  government  receipts  by  an  independent  administrator  and  disclosure  of  that  informa(on  to  the  public  

•  EITI  is  a  voluntary,  mul(-­‐stakeholder  ini(a(ve  launched  in  2002,  in  response  to  Publish  What  You  Pay  (PWYP)  campaign;  

•  The  process  is  managed  by  government,  company  and  civil  society  stakeholders.  Civil  society  must  be  involved  in  the  process;  

Developments  in  the  Philippine    Resources  Industry  Extrac1ve  Industries  Transparency  Ini1a1ve  (EITI)  •  The  Philippine  and  Bri(sh  Governments,  along  with  NGO  Bantay  Kita,  are  embarking  on  a  partnership  that  will  push  the  Philippine  agenda  on  strengthening  transparency  and  accountability  in  extrac(ve  industries.  

•  The  collabora(on  will  help  the  Philippine  Government  fulfill  its  ini(a(ve  as  a  candidate  country  to  the  EITI  by  working  together  with  Bantay  Kita  in  the  PH-­‐EITI  mul(-­‐stakeholder  group  with  support  from  the  Bri(sh  Government.    

 

Developments  in  the  Philippine    Resources  Industry  Extrac1ve  Industries  Transparency  Ini1a1ve  (EITI)  •  Aquino  III  recently  announced  its  commitment  to  join  the  EITI  through  EO  79.  The  Philippines  was  accepted  as  an  EITI  candidate  country  at  the  EITI’s  global  mee(ng  in  Sydney  on  22  May.  

•  MOU  was  signed  on  14  June  2013  between  the  Philippine  Government  and  Bantay  Kita,  which  formalizes  the  agreement  between  the  par(es  to  carry  out  ac(vi(es  that  will  reinforce  the  country’s  work  plan  to  increase  accountability  and  transparency  in  sectors  such  as  mining  and  oil  and  gas.    

•  Bantay  Kita  has  undertaken  a  separate  agreement  with  the  Bri(sh  Embassy  that  will  provide  funding  for  these  ac(vi(es  through  the  Bri(sh  Government’s  Prosperity  Programme.  

Developments  in  the  Philippine  Resources  Industry  Resource  Na1onalism  •  Governments  are  now  looking  at  different  strategies  to  extract  a  greater  share  of  the  value  from  mining  opera(ons.  

•  Strategies  include  increasing  taxes  and  royal(es  to  restric(ng  foreign  ownerships.  

•  Requiring  in-­‐country  processing  or  beneficia(on  prior  to  export  is  another  form.  

•  Encouraging  in-­‐country  processing  can  also  be  achieved  indirectly  by  imposing  export  restric(ons  and  increasing  export  levies  on  unrefined  ores.  

•  Con(nued  resource  na(onalism  from  governments  makes  the  countries  less  aZrac(ve  for  mining  investment.  

Development  Constraints  •  Full  foreign  ownership  •  Availability  of  geo-­‐scien(fic  informa(on  and  

professionals  •  Area  status  and  clearance,  conflict  with  other  

land  use,  surface/land  ownership  •  Procedural  efficiency  and  clarity  between  

government  agencies  •  Environmental  issues  -­‐  Judicial  interven(on    •  Tax  issues  •  Cheap  shale  gas  in  the  US  and  its  wide  use  for  

power  genera(on  -­‐  coal  producers  to  export  more  to  Asia  at  cheaper  prices.  

Conclusion  •  Philippine  government  will  con(nue  to  ensure  

energy  security  by  op(mizing  the  use  of  indigenous  energy  by  investment  promo(ons  and  iden(fica(on  and  implementa(on  of  sector  reforms    

•  BUT:  Regulatory  framework  should  be  long  term,  transparent,  predictable  and  independently  administered  

•  Need  to  address  environmental  and  social  acceptability  issues  by  harmonizing  the  permilng  process  and  intensifying  efforts  to  increase  the  level  of  awareness  for  indigenous  energy    

Overview  of  Global  and  National  (Philippines)Energy  Outlook  Atty. Fernando S. Penarroyo Asian  Ins(tute  of  Technology  

About  the  Lecturer  • BS  Geo,  Bachelor  of  Laws  (UP),  Master  of  Laws  (Univ.  of  Melbourne)  

• Managing  Partner,  Puno  and  Penarroyo  Law  (www.punopenalaw.com)  

•  Trustee  and  Secretary,  Philippine  Mineral  Explora(on  Associa(on  

•  Trustee,  Na(onal  Geothermal  Associa(on  of  the  Philippines  

• Director,  Interna(onal  Geothermal  Associa(on  • Professorial  Lecturer,  De  La  Salle-­‐FEU  MBA-­‐Law  Program,  UP  Na(onal  Ins(tute  of  Geological  Sciences  

• hZp://www.philippine-­‐resources.com/