Energy multinationals’ exodus blunts PH quest for another Malampaya

Published September 24, 2020, 10:31 AM

by Myrna M. Velasco

American energy giant Chevron Corporation packed its bags out of the country early this year after finalizing the sale of its 45% stake in Malampaya to Filipino businessman Dennis Uy.

Previous to this, data from the Petroleum Association of the Philippines showed an exodus of  deep-pocketed investors from the country’s upstream oil and gas sector– the likes of ExxonMobil, BHP Billiton, Occidental Petroleum and Japan Petroleum Exploration Company Ltd. (JAPEX).

Now, it is the turn of Royal Dutch Shell PLC to divest its 45% majority stake in the Malampaya field.

SPEX Managing Director Don Paulino said the sale is “part of an ongoing rationalization to simplify and increase the resilience of (Shell’s) business.” And as the divestment process advances, the company is ensuring “a smooth transition of the asset to a credible buyer who would be well-placed to optimize the value from Malampaya.”

IMPLICATIONS

Industry officials are quick to analyze the implications of this exodus to the country’s energy security.

First, Shell Philippines Exploration B.V. (SPEX) is the technically-equipped operator of the Malampaya field. The two current partners – Udenna Corporation and state-run Philippine National Oil Company-Exploration Corporation (PNOC-EC) don’t have full measure experience and expertise in running a gas producing field.

Second, as the Service Contract (SC) 38 of the Malampaya field expires in 2024, there is no definitive replacement yet on fuel provision for the country’s 3,211 megawatts of gas-fired power plants – since even the targeted investments in liquefied natural gas (LNG) import terminals have been stalling at implementation because of the Covid-19 quarantine measures.

Gas plants are highly necessary in ensuring reliable power supply for the country – as while battery storage systems have yet to reach commercial scale rollout, these are the flexible capacities needed to plug the intermittency of variable renewables so Filipino consumers could be spared from rotating brownouts.

Energy Secretary Alfonso G. Cusi admitted the Philippines would undoubtedly need investors with deep pockets and vast technical expertise to push for the discovery of its next Malampaya field.

However, what the country had seen in the last 10 years was the incessantly declining interest of investors in the upstream petroleum sector – and the only major investment it cornered in 2014-2015 was the additional $1.0 billion injected by the Malampaya consortium to boost the field’s gas production.

Even the Department of Energy’s E&P tendering processes – first through the Philippine Energy Contracting Round (PECR) and subsequently the Philippine Conventional Energy Contracting Program (PCECP), yielded lackluster results compared to what ASEAN neighbors have been attracting as capital flow.

Of the tender-submissions in the PCECP bidding last year, only one foreign investor -Israeli firm Ratio Petroleum – had advanced interest.

“The country’s petroleum prospectivity is low compared with our Southeast Asian neighbors, who are oil producers,” Cusi said, emphasizing that “this could be one of the reasons for the decline in petroleum exploration activities in the country.”

DOE data would show that only 23 wells had been drilled in various petroleum basins in the country over the past 10 years – or a number that redounds to just 2-3 wells drilling per year.  In fact, the Philippines even lagged behind Myanmar which was able to drill 29 wells in the past decade; while Vietnam had 43 wells; and the more mature markets of Malaysia logging in 81 well-drillings; Thailand with 594 wells and Indonesia with 903 wells.

According to the energy chief, the low prospectivity is aggravating the frustration of many companies “who do not have the assurance that the expenses incurred, which are in millions of dollars, cannot be recovered in case of negative results in their exploration and drilling activities.”

Presidential Decree 87 is the enabling law that prescribes the fiscal incentives for oil and gas exploration ventures, but the DOE said some of its provisions already require re-writing. The 60:40 production sharing arrangement won’t be replaced, but he qualified that options are explored on how to make the cost recovery scheme more enticing to the service contractors.

The country is primarily examining Indonesia’s experience on this sphere – fundamentally the “gross split revenues” that this Southeast Asian neighbor had just institutionalized in 2017. Cusi said proposals of modifying the cost recovery scheme “might make sense given the very low prospectivity and the very high-risk nature of investing in our petroleum blocks.”

(Photo credit: https://www.doe.gov.ph/pep)

Policy weaknesses

“There are still crucial policy fixes that we need to work on if we want to achieve success in our petroleum contracting,” Cusi admitted. DOE will also need to improve its seismic data gathering, presentation and interpretation if it has to whet investors’ appetite.

At least three critical policies had been in the to-do list of the energy department: one is amendment to an Executive Order to reinstate farm-in and farm-out deals in petroleum service contracts; while the two others delve with the long-awaited lifting of the moratorium on petroleum exploration at the conflict areas within the West Philippine Sea; and a resolution of the Supreme Court on a case relating to the income tax claims lodged by the Commission on Audit against the Malampaya consortium.

Executive Order 556 was issued in 2006 – during the reign of former President Gloria Macapagal Arroyo – and that was a Presidential fiat then requiring the conduct of bidding if a state-owned company like the PNOC-EC intends to tap a partner or if it will be unloading interests (shareholdings) on its petroleum service contracts.

That’s a deviation from the conventional industry practice of farm-in and farm-out of interests in service contracts. As a remedy, President Rodrigo Duterte issued Executive No. 80 last year to retool that edict, but the government has yet to tangibly reignite the interest of investors – primarily that of China National Offshore Oil Corporation (CNOOC) and Spanish oil firm Repsol S.A. on targeted investment tie-ups with PNOC-EC for petroleum explorations at northwest and southwest Palawan basins.

On ending the exploration prohibition at West Philippine Sea, Cusi is counting on a positive decision from the Department of Foreign Affairs and the imprimatur of President Rodrigo Duterte on the plea of PXP Energy Corporation for the moratorium to be finally lifted.

Once that is decided, PXP Energy, which is chaired by Filipino businessman Manuel V. Pangilinan, can already commence drilling activities at Service Contract 72 – a petroleum block straddling Recto Bank offshore west of Palawan. It has an estimated resource potential that could match the commercial-scale gas discovery at Malampaya.

 
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