[NGW Magazine] Philippines weighs LNG against coal

This article is featured in NGW Magazine Volume 2, Issue 15

With the Malampaya gas field down to its last five years of operation, the Philippines is looking for LNG as a replacement but could have to settle for coal instead.

The Philippine government is optimistic about LNG again – but it may just be talk with nothing ever materialising. The country first started considering building LNG receiving terminals several years ago over concerns of natural gas depletion from its Malampaya natural gas field in the South China Sea.

Estimates vary, but most experts claim that gas at Malampaya will be depleted by 2022 or 2023. Malampaya supplies three gas-fired power plants, providing 40% to 45% of power generation requirements for Luzon, the country’s main island, which includes the capital of Manila with a population of around 20mn.

Since exploring for and producing new gas in the geopolitically turbulent South China Sea is not an option given the complexities of overlapping claims between Beijing and Manila, LNG seems an obvious solution for the Philippines.

The Philippines has shortlisted six countries and will choose one as a partner for a planned $2bn LNG receiving and distribution facility, state-run energy firm Philippine National Oil Company (PNOC) said on July 20. The shortlisted countries are China, Japan, South Korea, Singapore, Indonesia and the United Arab Emirates.

The head of the PNOC team that is overseeing the project. Arwin Ardon. said the LNG facility “is a complete package with a storage facility, regasification, a power plant that is scalable up to 1,000 MW, and redistribution.” The power plant will initially have a capacity of 200 MW. The energy minister Alfonso Cusi said in June that the project could be completed by 2020 – a few years before the depletion of Malampaya’s gas reserves.

Second go around

This is not the Philippines first attempt at building an LNG receiving terminal. In fact, numerous other LNG proposals have been discussed but have never materialised. Moreover, talks for energy projects in the country often fall apart amid regulatory and financing hurdles, as well as companies trying to appease not only officials in Manila but provincial officials who often scare away international business with their under-the-table demands and rampant corruption.

However, in 2015 it appeared that this stalemate would be broken when reports out of Manila claimed that the country’s first LNG terminal was nearing completion.

Australian Stock Exchange listed Energy World Corp (EWC) was reportedly finishing an LNG import hub and LNG-fired combined-cycle gas turbine power station, with a capacity of 650 MW, in Quezon province, just south of Manila, to provide electricity to be sold through the wholesale electricity spot market to the Luzon grid.

The EWC plant was to receive LNG from EWC natural gas fields, including those in Indonesia, but would also have to procure supply on the spot market. However, in the ensuing two years EWC’s terminal has never been completed and has largely fallen off the radar of Philippine DOE officials and media in Manila.

While ECW could not be reached at its office in New South Wales for comment, the company’s Philippine LNG project is still listed on its corporate website as “under development.”

“EWC basically went out and bought old turbines and bolted together storage facilities to try to develop the project but ran out of money,” John Morris, CEO of Perth-based International Energy Consultants, told NGW.

Morris, who has done much consulting work in the Philippines energy and power sector, including analysis for a major Japanese utility on the potential to build, own and operate an LNG-receiving terminal and associated 2-GW power station in the Philippines, said ECW had only built half of a storage tank and a few turbines before construction stopped. He added that the Australian Stock Exchange stopped mentioning the project in its reports on ECW.

Contrarian casts doubt

Now that talk is gaining steam over the PNOC LNG project, Morris remains a contrarian. “The government has shortlisted six countries,” he said, “but it still won’t happen. Nobody will be willing to build the terminal unless there is a guarantee of payment. But, with no creditworthy off-takers to back the project, that won’t likely happen.”

He added that the only possible off taker that could back the project would be Manila Electric Company (Merelco), but the company just signed a contract to build 2 GW of coal-fired power plants. The other entity large enough would be the government, which cannot get involved owing to legal restrictions.

Morris said that a large-scale onshore LNG terminal would probably mean volumes of 2-3mn metric tons/yr, which equates to at least 2 GW of base load generation capacity. “That power generator would then need to find a large creditworthy off taker who would provide back-to-back revenue for a similar timeframe.”

Morris added: “Merelco wouldn’t know who their customers would be because the market now has more access and is becoming more competitive due to deregulation where customers can buy power from whoever they want.”

Merelco is the Philippine’s largest distributor of electrical power. It’s metro-Manila’s only electric power distributor and holds the power distribution franchise for 22 cities and 89 municipalities in the National Capital Region and metro area.

“On the flip side,” Morris said, “the terminal needs suppliers, but it’s too expensive compared to coal, though one could argue that it’s roughly the same price now.”

In light of the Philippines’ current energy mix, which still relies mostly on coal, Malampaya’s natural gas depletion appears to be a convenient way for the government to push its cleaner energy agenda.

“When Malampaya runs out of gas it will be taken over by coal. And there’s no law that they [the country] has to use gas. LNG is just another example of the government making noise,” Morris said. “The only way it would happen is if the government put a cap on new coal plants to be built, and then they would have to have incentives to use LNG.”

He added that it’s likely that between 4 and 5 GW in new power facilities will be added – over 3.5 GW is already under construction) in the Philippines, while around 80% will be coal. “There isn’t any more natural gas available and I think it is highly unlikely that any LNG will enter the system in the next decade or longer,” he said.

Tim Daiss