Resolving Malampaya issues

Definitely, the consortium that has operated the drilling and production of the Malampaya-Camago liquefied natural gas (LNG) fields off Palawan will need to renegotiate its terms of engagement with the Philippine government regarding its contract that expires in 2024.

As Energy Secretary Alfonso Cusi succinctly puts it, the offshore facilities that have enabled the country to enjoy indigenous petroleum to power 40 percent of the electricity needs of the Luzon grid has been fully paid for. The Malampaya-Camago consortium, operating under the terms set by the Philippine government for oil and gas speculators in the late ‘70s, has already been able to recover almost twice its $4.5-billion investment.

Shell Philippines Exploration B.V. (SPEX), on behalf of its consortium partners Chevron Malampaya LLC and PNOC Exploration Corp., reminds us that the Philippine government has already earned $11 billion in royalties from the project since the start of its commercial operations in 2001.

The Malampaya-Camago LNG has also saved the country $8 billion to power five environment-friendly power plants located in Batangas with a combined generation capacity of 3,200 megawatts.

The Filipino people will be eternally grateful for SPEX’s pioneering spirit to make possible the extraction of natural gas from a sea bed under 850 kilometers of water, which in the late 1990s was considered one of the deepest in the world, and sending the processed fuel across 500 kilometers of undersea pipeline to Batangas.

Changes in contract

Moving forward, it is imperative for government to have clear view of the remaining inventory of existing wells at end of current contract. Independent experts should validate data provided by Malampaya-Camago consortium. More importantly, new arrangements either with same group or another must have an unquestionable starting point.

While the current Malampaya-Camago consortium can call on an option to extend the contract by another 15 years, the terms and conditions should not be tied to the original deed. The revenue share of the government must be higher considering that the current consortium has fully recovered their investment and much more; an extension will simply be gravy.

If, however, the consortium and the government will not be able to arrive at a suitable agreement, DOE must plan and show readiness to explore several other available options.

Exploring options for best deal

From statements by several Department of Energy officials, an option would be for the government to operate the platform until the existing wells run dry, which is estimated to be within a five- to 10-year period depending on how much gas is pumped out.

This will definitely increase the government’s revenue stream during the years that the gas is being processed since the consortium’s share will then go directly to state coffers. But the field’s life will definitely be shorter if additional exploration is not pursued.

Another option would be to find another operator willing to take on the development of other wells that had been drilled before, which yielded positive results but had not yet been put into production.

What’s important is for the government to get the best deal for the country. As such, the study currently being conducted by PNOC-EC must be done with utmost care in consideration of new and less expensive technologies available in the market today for NG exploration in deep seas.

Review needed

Presidential Decree 87, or the Oil Exploration and Development Act of 1972, and its subsequent amendments will need to be further reviewed.

First consideration would be the Commission on Audit’s findings that the Malampaya consortium owes the government P146.7 billion in income taxes, something that is still being reviewed by the Supreme Court. SPEX had already won the case at the International Center for Settlement of Investment Disputes (ICSID).

The COA ruled last year that the tax assumption scheme that was allowed during the term of president Gloria Macapagal Arroyo effectively increased the share of the consortium’s earnings to 65.97 percent, while decreasing the government’s share to only 34.03 percent. COA called it an illegal tax exemption.

This tax assumption scheme appears to have contravened PD 876 and 1459, which allowed the DOE to enter into petroleum service contracts as long as the share of government, including all taxes, is not be less than 60 percent of the difference between the gross income and the sum of operating expenses.

Should the Supreme Court decide in favor of the consortium, this would only reinforce the ICSID ruling. It would be a different matter, though, should the High Court find merit in COA’s charges.

China’s claim

The other issue that needs to be considered is the state of oil and gas exploration in the country. Since 1972 when the government first declared its intention to promote exploration, development, and production of indigenous petroleum resources, only the Malampaya-Camago project had materialized to be of any significant worth.

Current offshore exploration is stalled by China’s territorial claims in the South China Sea. While the current administration has taken the easier way out by enticing China to go on joint exploration ventures instead in contested areas with promising prospect of fossil fuel reserves, discussions seem to have been moving too slowly, if at all.

The reason for the apparent cold shoulder, it seems, is the 60-40 sharing rule that our law dictates, where the Philippines keeps 60 percent of the net profits of the joint venture. Thus, for now, Malampaya may be our last big frontier, a reality that the DOE must carefully factor in when coming up with its decision.

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