[NGW Magazine] Philippines E&P hopes return

Now that China and the Philippines appear to have agreed to co-operate offshore, the upstream industry is cautiously considering investing in exploration in the hope of finding the next Malampaya.

Investors in the Philippine oil and gas upstream sector were spooked by a government-enforced moratorium on areas straddling the territorial claims of various countries – but with the joint exploration deal that the country is now cementing with China, some companies are willing to give it another shot.

Business tycoon Manuel V Pangilinan said that two companies – PXP Energy and Forum Energy where is he chairman of the board – are seeing “encouraging progress” in the continuing negotiations between the Philippines and Chinese government to pursue joint ventures for oil and gas finds along the so-called “conflict areas” in the South China Sea, or as Manila prefers to call it, the West Philippine Sea. 

“We’re not a party to the discussions but from what we gathered, it’s a positive development,” he stressed. The Pangilinan-led conglomerate in the Philippines is affiliated with Hong Kong-listed firm First Pacific Holdings, which is owned by the Salim Group of Indonesia. First Pacific’s businesses and projects in the Philippines embrace telecommunications, water and power utilities among others.

There have been five petroleum service contracts (PSCs) handicapped by the exploration prohibition declared by the Department of Foreign Affairs (DFA) in 2013: Service Contracts (SC) 54 and 58 in Northwest Palawan basin under the operatorship of Australian firm Nido Petroleum; SC 72 of Forum Energy at the Recto Bank off West Palawan; SC 75 of PXP Energy in Northwest Palawan; and SC 59 in offshore Southwest Palawan which has the state-run Philippine National Oil Company-Exploration Corporation (PNOC-EC) as the operator.

The PXP Energy subsidiary of the Pangilinan-controlled conglomerate has registered a string of financial losses since 2013 because of its abruptly disturbed operations, but with the recent developments under the Rodrigo Duterte administration, the company is anticipating that it can finally move forward with the next sub-phases of exploration work program – which will cover the collection of additional seismic data and eventually lead to exploration wells being drilled. “We have to send a survey ship to the area to do the final validation and establish the basin position for the ecology where we would like to drill and find potential sites for the two exploration wells,” Pangilinan said. With current reserves estimate of 5.4bn barrels of oil and 55.1 trillion ft³ of gas, according to the Energy Information Administration in 2013, the Recto (Reed) Bank prospect of Forum Energy could be “the next Malampaya” that the Philippines has been longing for. 

Rodrigo Duterte (right) and Chinese premier Li Keqiang (Credit: AP)

Pangilinan nevertheless qualified his remarks, saying: “we need to do the drilling because we really don’t know what’s in there. We also need to collect additional seismic data to validate the potential of recoverable reserves.” 

Another company hoping for a solution to the disputed territories is Filipino firm PetroEnergy Resources Corporation. This deadlock has so much dampened the company’s appetite that it is not even inclined to look at the new petroleum block offers of the Department of Energy (DoE) on its forthcoming contracting round. 

“We are waiting for developments how the government will resolve the moratorium issue – we have been affected by that through our participation in SC 75,” PetroEnergy vice president Francisco G Delfin said. And when asked if there was any revived interest in securing new petroleum blocks, he said there was none at the moment.

In the case of China International Mining Petroleum Company (CIMP), the service contractor of the new commercially-declared onshore Alegria oil field in Cebu, company assistant country manager Edgar Benedict Cutiongco noted that having a Chinese principal will keep them free from the South China Sea diplomatic skirmish. Instead, this company’s main concern will be the eventual court decision on the Malampaya tax case – because, he says, this may subsequently “change the royalty sharing regime for commercial oil production in the Philippines.” 

Hold or fold?

For these investors who have already funnelled cash into their respective production sharing contracts, they are still debating whether it is prudent to hold on to them or walk away.

For the Recto Bank in particular, Forum Energy held discussions with China National Offshore Oil Corporation (Cnooc) in 2012 for joint exploration and commercial development venture, but negotiations snagged following the previous administration’s move to bring the territorial dispute case to international arbitration proceedings. But with the two governments now on “friendlier terms”, Forum Energy indicated that it has reopened communications with Cnooc about the possible continuation of joint venture discussions. 

“At the end of the day, the government has to decide what we can agree on – although, we are very careful with our discussions because it’s a sensitive subject matter for the country and our intention is not in any way to affect the standing of sovereignty in the Philippines – we don’t want to be accused of compromising that obviously,” Pangilinan has said.

He added: “We ourselves are saying that at some point if the sovereignty issue of the Philippines is compromised by any reason, then we will not proceed.” 

Until that point, the company said its discussions remain confined to Cnooc, Pangilinan emphasising that “unless we are told to talk to another party, then that’s the only time that we will.” That could refer to PetroChina, which is a subsidiary of China National Petroleum Corporation; or to Sinopec, the China Petroleum and Chemical Group.

On the 60:40 royalty sharing arrangement that Duterte had floated before Chinese investors at the Association of Southeast Asia Nations Summit in Singapore last April, Pangilinan stipulated that such was “based on the Malampaya formula,” and was consistent with the provisions of the Philippine Oil and Gas Law.

He said that when the Philippines opened discussions with Cnooc in 2012, that was the starting point for discussions. But in the end, the final ratio will be determined by the government because there are indications that the government might want a share better than the 60%. 

And as to the proposed legal tenet of the joint exploration, the company disclosed that it has engaged two law firms, one local and the other international, to help it to craft a legal structure that could assert the sovereignty claims of the Philippine government in a way that was also acceptable to the Chinese government.

Joint exploration 

In the past five years, during the terms of two governments, the enforcement of a moratorium on seismic surveys and drilling for petroleum reserves in ‘conflict areas’ in the South China Sea had alarmed a number of investors, both local and foreign, in the Philippine’s upstream petroleum industry. 

But change has been promised – and that is already an “emerging covenant” that the DoE has been holding out to investors in the sector. The moratorium on petroleum drilling, as noted by the Philippine’s energy secretary Alfonso G Cusi, will now move from the bombast of international friction into “talking things over at the negotiating table so we can create an acceptable legal framework to allow joint exploration ventures for both Filipino and Chinese companies.” 

Ending that dispute will thus serve as a powerful symbol that the ‘clashing waves’ of claims at the South China Sea can be calmed, although the energy chief is non-committal on how long it will take to reach a favourable outcome. “We don’t know exactly when that will be, but we have aired this same sentiment with the DFA, that we want this resolved sooner, rather than later. 

Cusi further said that addressing this concern “will be highly critical” as the country prepares for another petroleum bid round this year via its modified Philippine Conventional Energy Contracting Program (PCECP). The first international roadshow for the 14 pre-determined blocks is slated for Singapore August this year, and the energy secretary is already guessing that the ‘joint exploration proposal’ will be a major question that may be raised by investors.

“We are really hoping that we can give them (investors) a definite answer, that’s why I am constantly raising this with Secretary Cayetano,” he stressed, referring to the Philippine foreign affairs minister. The Philippines and China first sat down last year to discuss South China Sea issues - that was parallel to the establishment of the Bilateral Consultation Mechanism (BCM) in Guiyang, China in May 2017. Cayetano said that was rooted on the need of the parties to have a “frank, cordial exchange of views on issues of concern on the South China Sea.”

The follow-through meeting for the BCM was in Manila in February this year, and as imparted by Philippine DoE Undersecretary Donato D Marcos, it was the introductory phase for the “joint exploration for petroleum” to be tackled in the agenda.

“The first meeting we had under the BCM in which the DoE participated was in Manila. We discussed the possibility for joint exploration, but there had been no agreement on the commercial terms.  And the Secretary’s instruction to me was: we should assert our rights within our exclusive economic zone,” Marcos said, as the Philippine energy department’s representative in the BCM meetings.

As an initial point of discussion, the deputy energy minister stressed that if the drilling moratorium will clear up, “it must only cover the existing service contracts, such as SC 72 and the other contracts,” qualifying that “this will not cover yet the areas that we will award in the future.”

Gunning for a breakthrough 

The Philippines and China – being the main actors in this dissonant ‘diplomatic play’ - will meet again in China second half of this year.

There is nothing definite on the table yet how the parties can sensibly and mutually agree on the terms of the “proposed joint exploration” – and mutually acceptable commercial terms or royalty sharing arrangements are even harder to predict at this point. Besides, the parties seem avoiding also the ‘sensitive issue’ of sovereignty in the course of these business negotiations. 

The acid test, Cusi pointed out, will be the crafting of a legal framework that will lead the parties into undertaking joint exploration: hence, “what we have agreed first is to compose a panel to work on a framework on how to move forward.” He qualified “the proposed framework is still a very complex issue, but hopefully within the year, we can make a conclusion on how we can move forward because we would like to harness the petroleum potential of these areas.” Marcos at least signified that in the forthcoming meeting in China, “we are hoping to gain a breakthrough,” although he asserted that at this point, “our own proposal has yet to be firmed up – the DFA is leading the discussions. At the DOE, we can only give our inputs.”

As far as the Philippines is concerned, the Duterte administration has changed its negotiating stance with China almost overnight: it is not just considering now the clearly-demarcated territories of the country, but is also legally weighing the ‘nine-dash line claims’ lodged by China.

Senator Sherwin T Gatchalian, who chairs the Senate Committee on Energy, gave the view that once the commercial terms of the joint exploration are discussed, the parties cannot really escape “touching on the sovereignty concern, because it has to be agreed as to which country’s laws shall be followed.” The fundamental point he said was that whoever the partner was, any royalty split had to comply with the constitution.”

Cusi said that this degree of collaboration is no longer new for Philippines and China; or with another interested country, Vietnam – because there is already a precursor accord that “we can reference back to, the Joint Marine Seismic Undertaking (JMSU).” That was a three-year agreement sealed by three state-owned companies in March 2005, prescriptively for joint pre-exploration activity at around 143,000 km² of service area within the South China Sea.

However, as that deal was declared “unconstitutional” by the Philippine Senate (in 2008), the Philippine energy chief noted that they will carefully scrutinise the legal flaws, “so we can avoid the same mistakes if we have to craft that legal framework for joint exploration. What I am just trying to say here is: it is possible that parties can discuss and agree on collaboration.”

In a separate interview, China’s ambassador to the Philippines Zhao Jianhua said that “both sides are still discussing the possibilities of having joint development (for oil and gas)… we are in the initial stage, nothing is finalised yet.” On the suspended petroleum exploration at conflict areas, he indicated that “this is one of the issues that we are talking with relevant agencies in the Philippines.” 

Nevertheless, the Chinese envoy insisted: “Our position is clear: we are in favour of joint development and we are not in favour of unilateral development of oil and gas in disputed areas.” In Zhao’s view, resolving this tricky matter will require “a government-to-government understanding. And if we have that common understanding, then that will be followed by some sort of commercial development – but we maintain our position that it should be joint development.” 

Myrna Velasco