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8/13/2019 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: secretariat@bantaykita.ph
Writer: FAIMA ALVAREZ CASILLOPublication design and layout: R. JORDAN P. SANOS
Send your comments, inquiries, write-ups, and contributions to:secretariat@bantaykita.ph/bantaykita@yahoo.com
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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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OIL AND GAS PRODUCTION IN THE PHILIPPINES: PUBLIC INTEREST ISSUES
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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OIL AND GAS PRODUCTION IN THE PHILIPPINES: PUBLIC INTEREST ISSUES
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
Wildcat wells drilled = 58
Total resources: 2,318 million bbl oil equivalent
Discovered = 942 million bbl o. e.
Undiscovered = 1,376 million bbl o. e.
Gas and condensate make up 72% and 13%,
respectively, of the total resources
Reed Bank
Area = 71,000 sq km., 100% offshore
Wildcat wells drilled = 4
Total resources:
Undiscovered = 440 million bbl oil equivalent
Gas makes up 92% of the total resources
Southwest PalawanArea = 44,000 sq km., 100% offshore
Wildcat wells drilled = 23
Total resources:
Undiscovered = 1,355 million bbl oil equivalent
Gas shares 60% of the total resources
East Palawan Basin
Area = 92,000 sq km., 100% offshore
Wildcat wells drilled = 4Total resources:
Undiscovered = 443 million bbl oil equivalent
Gas constitutes 28% of the total resources
Cagayan Basin
Area = 24,000 sq km., 80% onshoreWildcat wells drilled = none
Discovered = 0.4 million bbl oil equivalent
Undiscovered = 396 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:
Undiscovered = 902 million bbl oil equivalent
Gas has 100% share of the total resources
Bicol ShelfArea = 32,500 sq km., 60% offshore
Wildcat wells drilled = 6Total resources:
Undiscovered = 44 million bbl oil equivalent
Gas constitutes 100% of the total resources
Southeast Luzon
Area = 66,000 sq km., 55% onshore
Wildcat wells drilled = 26
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
Wildcat wells drilled = 10
Total resources:
Undiscovered = 5 million bbl oil equivalent
Gas makes up 72% of the total resources
Visayan Basin
Area = 46,500 sq km., 70% offshore
Wildcat wells drilled = 143
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
Area = 33,000 sq km., 60% offshore
Wildcat wells drilled = 3
Total resources:
Undiscovered = 196 million bbl oil
equivalent
Gas makes up 70% of the total resources
Cotabato Basin
Area = 14,000 sq km., 100% onshore
Wildcat wells drilled = 10Total resources: 158 million bbl oil equivalent
Discovered = 5 million bbl o. e.
Undiscovered = 152 million bbl o. e.
Gas constitutes up 45% of the total resources
Sulu Sea
Area = 115,000 sq km., 95% offshore
Wildcat wells drilled = 17Total resources:
Undiscovered = 203 million bbl oil equivalent
Gas makes up 36% of the total resources
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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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OIL AND GAS PRODUCTION IN THE PHILIPPINES: PUBLIC INTEREST ISSUES
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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Fatima Alvarez Castillo
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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____. DOE Circular No. 2003-05-005.
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ta%C3%B1-strait-rehab accessed Jan 15, 2012.
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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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