Despite fragmenting markets and the changing landscape for global gas commodity trading, the Department of Energy (DOE) indicated it may still opt for oil-linked pricing if Malampaya would yield new commercial gas discovery.

According to Energy Secretary Raphael P.M. Lotilla, the pricing prescription for any portended gas find is currently being re-assessed by the government being the owner of the resource – primarily if the targeted fresh round of production well drillings would eventually command additional gas lifting.

“We are reviewing these things, but as far as pricing of Malampaya gas is concerned, the formula has withstood the test of time and we can of course fall back on the old formula,” the energy chief said.

Under the initial 25-year cycle of Service Contract (SC) 38 for the Malampaya project, the pricing formula employed on gas extraction from the field had been anchored on cost swings of basket of crudes – including Dubai crude (an Asian oil market pricing benchmark) then Oman crude, plus gasoil and market-specific forward price differential covering various geographical markets; and it also factored in fluctuations in the US dollar-Philippine peso exchange rate.

To date, indigenous gas productions across Asian markets are still mainly oil-indexed – with some countries still enforcing old pricing formulas and metrics such as linking it to crude prices, including Dubai crude and Japan Crude Cocktail (JCC); while other markets follow the current track of liquefied natural gas (LNG) prices which are now latching onto various pricing parameters, such as those of Argus or Platts JKM (Japan Korea marker); which are often the reference for spot physical cargoes being shipped into the region.

Globally, the more extensively known benchmark is Henry Hub for the North American market; while the Dutch TTF (title transfer facility) is widely applied across European gas markets.

Under the work program submitted by the Malampaya consortium (as led by operator Prime Energy), it will be drilling 2-3 new production wells; and if that will result in fresh commercial gas discovery, new gas sale purchase agreements (GSPAs) will have to be sealed with prospective gas buyers.

This early, pricing on any new gas output from Malampaya emerges as the big question, hence, that has to be sorted by government, primarily by the energy department.

As conveyed by Energy Undersecretary Alessandro O. Sales, the residual gas that could still be lifted from Malampaya may still last until 2025-2027; while prospective new production could top 210 billion cubic feet (BCF) of gas.

But since data on the scale of recoverable reserves had been last updated in 2014, that has yet to be confirmed by extended seismic survey; then drilling of new wells within near-installation and near-field plays of Malampaya.

Lotilla, nevertheless, admitted that any new production would require long lead time; and there are also concomitant risks to petroleum exploration and production (E&P) investments that the Malampaya consortium will have to hurdle in executing their slated work program in the field.

“While new drilling activities will take a few years for additional gas flows from Service Contract 38, in the meantime, we will direct our efforts at making sure that LNG is imported to make up for the shortfall in Malampaya gas and ensure stability of power supply; and its availability at fair prices,” the energy secretary noted.

Sales added “our Malampaya gas goes directly to power generation -- making use of our indigenous gas ensures that portion of the supply; and it moderates the pricing because indigenous gas production as it is piped is always going to be cheaper than importing LNG.”