Chevron’s sale of Malampaya stake to Udenna is ‘voidable contract’ –DOE

Published November 10, 2020, 11:37 AM

by Myrna M. Velasco

The $565 million sale of American energy giant Chevron Corporation for its 45-percent stake in Malampaya to businessman Dennis Uy’s Udenna Malampaya LLC is a “voidable contract,” the Department of Energy (DOE) has disclosed in a Senate hearing.

Energy Assistant Secretary Leonido J. Pulido III indicated that the parties in the Chevron-Udenna transaction concurred to the precept that their contract could be voided if the deal would not eventually secure the approval of the energy department.

The closing of the transaction within the level of Chevron and Udenna was firmed up on March 11, 2020; but before the final sale is consummated, energy officials stated that such must secure first the requisite government approval through the Department of Energy.

“The acquisition of the Chevron Malampaya shares is currently under evaluation by the DOE to determine the technical, financial and legal capacity of the transferee (which in this case is Udenna),” Pulido stressed.

Undersecretary Donato D. Marcos said the DOE is still evaluating the sale documents of Chevron to Udenna, including the financial as well as the technical capability of the Uy-led firm to be in gas field operations.

Pulido averred that based on the evaluation of the DOE’s legal department, the sale of Chevron’s interest in Malampaya is governed by a Circular of the agency as well as Presidential Decree 87 which requires the approval of the DOE on such transfer of shares in upstream petroleum ventures.

“Our legal services held that it would fall squarely within that Department Circular and we should require an evaluation of the technical, legal and financial capacity of the transferee, so the DOE may approve such transfer,” the energy official expounded.

He thus noted that was “the reason why we had to refer that to our legal, since a cogent argument was raised: that Udenna’s purchase of Chevron constituted no change in the corporate personality of the consortium or of Chevron as a member of the consortium (of Service Contract 38), considering that Udenna purchased the shares of the whole company.”

Incomplete sale or voidable contract?

When pressed by Senator Imee Marcos if the Udenna-Chevron deal is an “incomplete sale”, instead of it being classified as ‘voidable contract,” Pulido insisted that on the perception of the DOE, “it is a voidable sale, rather than an incomplete sale.”

The energy officials also sounded off that when their final evaluation will be rendered, there’s still a possibility that the divestment of the 45-percent Chevron equity in Malampaya could either fail or for it not to be approved by the government.

Senate Committee on Energy Chairman Sherwin T. Gatchalian, nevertheless, stipulated that Udenna and Chevron submitted a different opinion as to the required legal approval, with the two firms indicating that they are not covered by the mandate of Section 11 of Presidential Decree (PD) 87, or that statute requiring DOE approval on their transaction.

And when Gatchalian asked the DOE officials if they had pored over initial violation on the merger and acquisition (M&A) deal between Udenna and Chevron, Pulido emphasized that they had not seen any because the parties are bound by the joint operating agreement (JOA), which requires the concurrence of the consortium-members to the sale; and that must include Shell Philippines Exploration B.V. (SPEX) and Philippine National Oil Company-Exploration Corporation (PNOC-EC). And there was also approval rendered by the Philippine Competition Commission (PCC) to the transaction.

PSA violations

Gatchalian countered the energy officials’ stance, with him stressing that he does not believe there’s no violation in the sale and purchase agreement (SPA) because there had been no prior approval secured from the DOE on the transaction – specifically noting that while the sale happened in March; it was only in late October this year that the DOE had been officially provided with the documents on the Malampaya shares’ divestment.

He expounded “we now have a scenario that the new buyer can be disqualified as a service contractor, who can be disqualified because of its technical inadequacy. We are now on a bind. How do we rectify this issue?”

The lawmakers also quizzed the DOE on the source of financing that Udenna had utilized in purchasing the Malampaya equity of Chevron, and the DOE said the document on that will be submitted to the Senate as that is not bound by any confidentiality.

Udenna Malampaya LLC told the Senate that loans for the transaction were acquired from foreign banks  — Australia New Zealand (ANZ) Banking Group and the ING Bank.

Pulido stated that after receiving on October 28 the correspondence on the Chevron-Udenna sale and purchase agreement, the Financial Services unit of the department had just started evaluating the documents, “and it has not reached the level yet of the Executive Committee of the DOE.”

Gatchalian argued that the Udenna-Chevron transaction is already a done-deal, “and DOE is now just a footnote. DOE is just probably a footnote, trying to complete the transaction. I don’t agree that there’s no violation.”

Pulido insisted though that without the DOE’s approval, the sale is not considered final and concluded.

PNOC-EC takeover of Malampaya

Senator Panfilo Lacson similarly asked the DOE officials if state-run PNOC can exercise its right to acquire Chevron’s stake in Malampaya in case the sale with Udenna would fall through and if they will end up in a legal challenge that may reach even the Supreme Court.

PNOC President Reuben S. Lista said the government is currently studying the possibility of increasing its stake in Malampaya – and this is done along with its subsidiary, PNOC-Exploration Corporation, which currently holds the 10-percent minority stake in the Malampaya project.

However, PNOC-EC President and CEO Rozzano D. Briguez noted that their company may not be ready to take over gas field operations as large as that of Malampaya’s scale.

He said the company does not have extensive experience yet in deep water gas field operations; and what they had was just on smaller scale onshore venture through the San Antonio gas field in the past.

“Technically and financially, we are not yet ready to take over such magnitude of operations,” Briguez stressed, adding that it will take 10 more years for them to gain that experience and they must have actual involvement on at least two large scale gas field projects first, including their planned foray into Service Contract 57 in Northwest Palawan if that will eventually end up to be a commercial scale discovery.