Revision of ‘cost recovery scheme’ set

Oil and gas exploration

Department of Energy (DOE) is sorting out policy changes that will prospectively modify the ‘cost recovery system’ in oil and gas exploration ventures in the country.

Energy Secretary Alfonso G. Cusi indicated that they are looking at the “gross split” system of regulation that Indonesia had enforced in 2017 – which essentially had scrapped the “cost recovery” mechanism for investments in the upstream oil and gas sector.

“We are gathering all the data and information. We learned from Indonesia that there are different combinations on how we can do it, so it could be the same that we can do in the Philippines, so we are studying that,” the energy chief said.

In the gross-split model of revenue sharing in Indonesia’s petroleum service contract (PSC), the split of gross revenues is equal or some sort of 50:50 sharing arrangement between the contractor and the government.

Via that set-up, the contractor still shoulders all capital and operating costs and these are still treated as ‘deductible costs” once commercial reserves are discovered and if production generates taxable revenues.

In line with this gross-split model of Indonesia, Cusi admitted that there are also discussions about transforming the 60:40 revenue sharing system of the Philippines – reckoned with how cost recovery shall eventually be treated in the industry’s fiscal regime.

For providing financing and technical as well as managerial expertise, existing Philippine policies allow the petroleum service contractor to a full recovery of capital and operating costs and a service fee equivalent to 40percent of the net proceeds.

In the proposed joint legal framework of exploration being discussed with China, there are maneuvers for a 50:50 production sharing scheme, but this is a matter yet to be acknowledged formally by relevant Philippine officials.

Cusi, until this time, maintains that the 60:40 royalty sharing formula is sustained – it being the mandate of Presidential Decree 87 or the Philippine Oil and Gas Law.

That has also been the pronouncement given by President Rodrigo Duterte when he sounded off invitations to foreign investors to explore in the country’s petroleum basins.

It is worth noting though that even the 60:40 production sharing scheme of the country was originally patterned after Indonesia’s – when the Philippines was precariously seeking for its first oil and gas commercial discoveries back in the 1970s.

The Philippine oil and gas industry is traversing a very critical transition, primarily because its major producing gas field is anticipated hitting production decline in 2022 and the sector’s fiscal regimes are also under policy shift assaults.