How not to mitigate the shrinking fiscal space

Published October 21, 2021, 12:05 AM

by Diwa C. Guinigundo


Diwa C. Guinigundo

Malampaya tops both Pharmally and Starpay in size and consequence. What is at stake here is not medical gears or cash remittances. It is no less than the Malampaya gas field, an offshore, deep-water gas condensate reservoir in northwest Palawan, discovered in 1989 and became operational in 2001. Short of skills and funding, the Philippine government tapped Shell Philippines Exploration B.V. (SPEX) to operate the facility, and with Chevron Malampaya LLC, established joint venture through the Philippine National Oil Company Exploration Corporation (PNOC-EC).

Originally, Shell and Chevron accounts for 45 percent each, while PNOC-EC holds the remaining 10 percent.

We derive serious benefits from Malampaya. With the discovery of offshore gas, we have reduced oil imports and allowed more stable and cleaner energy source, supplying around 40 percent of Luzon’s requirements. Malampaya also expands our fiscal space. Long-term revenue from the gas field was expected at around $8-$10 billion to the national government (NG) over its lifespan representing 60 percent royalty share of NG from the upstream gas venture pursuant to Presidential Decree 87 or the Oil and Gas Law. Shell receives 40 percent.

From 2001-2018, the government received revenues in excess of $10 billion, or some P311 billion based on the Senate Committee on Energy’s (SCE) estimate. The Department of Energy (DOE) computes an annual P17-billion remittance to NG. The President is authorized to designate its use in the annual budget. Malampaya funds have financed infrastructure and cheap electricity.

But Malampaya is not inexhaustible.

Last November 2020’s meeting of the SCE disclosed that the natural gas output could be depleted by 2026 or 2027, some five to six years from today. The service contract 38 which is the field’s operating license is expiring and Shell announced it was divesting its 45 percent interest during the Senate hearing. Chevron sold its stake several months earlier for $565 million to Dennis Uy’s Udenna.

Senate Committee on Energy Chairman Senator Sherwin Gatchalian explained that “we have to make sure that whoever takes over the portion of Shell would have the technical capability.” The issue was energy security especially in the light of some intelligence that there could be “other potential wells” in the area.

In May 2021,Udenna managed to gain controlling interest when it bought the other 45 percent held by Shell valued at $460 million in installment, $380 million initially and $80 million between 2022 and 2024 depending on the asset’s performance and oil prices.

Gatchalian questioned the deal because of Udenna’s financial capacity. The Shell acquisition would be funded by foreign loans. Worse, in the Senate report, it was submitted that the DOE “bent rules” to approve the buyout. Udenna Malampaya had negative working capital and its debt was twice its capital. While admitting Udenna has deficient capital, DOE justified it because “agreements between the funders, buyer and seller are already beyond us.” DOE’s focus is more on the group’s capacity to continue to work, fund the development, and continue exploration work.

DOE should know that without enough capital, these three deliverables are impossible. Udenna is not bringing anything to the table, not exploration skills or experience, because by DOE’s own admission, it would only be the names of the shareholders which will change. Workers in the offshore project would stay.

There is also no point in distinguishing between different Udenna consortia. Those entities are under the same Udenna group which is reportedly heavily indebted. With large exposure, the obligations of the prospective service contractor may not be honored.

With the Malampaya project now supplying 26 percent of the Luzon power needs, 3.7 million households could be affected should the service contract fail to deliver.

What is difficult to understand about the Shell buyout is the failure of DOE and PNOC-EC to take appropriate action by matching Udenna Malampaya’s offer to Shell. It was explained that while PNOC-EC was also keen on increasing NG’s operating stake, domestic banks would only lend 50 percent of the buying price. Why the Board of PNOC-EC decided to waive its right despite the discounted sale and the expected short payback period is known only to them.

PNOC’s own former president Eduardo Mañalac suggested the government effectively forfeited billions of pesos in profits by yielding to Udenna. By his own estimate, some P138 billion was foregone. Without Uy’s buyout, NG could have received an additional P42 billion just by taking control of the Malampaya contract for the remaining three years. This amount could be higher because of rising oil prices.

Perhaps for all these reasons, three people sued Energy Secretary Alfonso Cusi, Udenna Corporation Chairman Uy and 24 others for “questionable sale of shares in the Malampaya gas-to-power project.” Balgamel Domingo of Iloilo, lawyer Rodel Rodis and businesswoman Loida Nicolas Lewis, both US-based, claimed that Cusi and other officials conspired to give Uy “undue advantage in the buy-out of a Chevron subsidiary which held a 45 percent stake in the Malampaya gas-to-power project.” If proven true, the guilty parties could be charged under RA 3019 or the Anti-Graft and Corrupt Practices Act. The complaint was filed at the Office of the Ombudsman in Iloilo City last Oct. 18.

The complainants argued that NG through PNOC-EC should have exercised its right to match Udenna’s offer. Obviously, the whole Malampaya project was very profitable. Why Chevron and Shell decided to opt out should be determined. NG’s inaction is tantamount to squandering a good opportunity.

If somebody did not drop the ball, the job of our finance department and the treasury should be much easier. Malampaya could have mitigated our shrinking fiscal space especially in this time of the pandemic.