[Premium] Philippines Stymies its own Quest for Gas

The Philippine government remains upbeat in its quest for the country’s next Malampaya gas discovery and another commercial oil find, following six unsolicited bids for the country’s underexplored basins. However, upstream companies say they have reason to hold back until the regulatory and legal framework is clearer, while there is also uncertainty over China's real intentions offshore.

The tenders came from the Filipino-led Toquero Group for four service areas straddling Sulu Sea basin and Constellation Energy for two areas in the Ragay Gulf, off Bicol Peninsula in Luzon. The Toquero Group is a consortium of local firms Sulubasin Oil and Gas, Sulu Gulf Oil, Seabed Crescent Energy and Offshore Celebes Energy.

Philippine energy undersecretary Donato Marcos said: “Most of the interested parties fervently pushing for applications for petroleum service contracts are ‘rookie’ local players, and are applying for underexplored areas.

“There are also companies that show interest to apply in Ragay Gulf, West Luzon and Philippine Rise areas, but have not yet submitted their applications.”

The Philippine Rise however has been visited by a Chinese expedition claiming it is performing scientific research, complicating bids for petroleum blocks there. 

On top of that, the government is also scheduling the auction of 14 other petroleum blocks to form part of the package of pre-determined areas (PDAs) under the reframed Philippine Conventional Energy Contracting Program (PCECP). The new structure replaces the Philippine Energy Contracting Round (PECR) structure that had been in place for the past 10 years.

The 14 pre-selected blocks cover nearly 74,000 km² with eight areas in shallow waters and six in deep water. The blocks cover three service areas in East Palawan, four areas in West Luzon, three areas in the Sulu Sea, two areas in Cotabato and one area each in Cagayan and Agusan-Davao basins.

Marcos emphasized that “most of the experienced companies expressing interest in investing are usually eyeing areas of relinquished or terminated petroleum service contracts with considerable amount of data,” hence, many of them are setting their sights on what the government may offer as pre-determined blocks.

“Most of the areas to be offered under the PDAs were the same blocks included in our previous PECRs 4 and 5,” Marcos told NGW. “There are now additional data that may whet the appetite of investors because of extended seismic surveys done on these blocks.”

Investment expectations

For the six unsolicited offers lodged with the energy department, total investments could run as high as $216mn, Marcos said. Each petroleum block entails a capital outlay of at least $36mn, covering the entire term of the seven-year work programs submitted by contractors.

For the 14 pre-determined oil and gas blocks, investment targets are set higher with shallow water blocks likely commanding up to $45mn each. Deeper waters are expected to require investments of up to $300mn, when seismic and drilling costs are added. For each block, at least two exploration wells and one appraisal well will be required, bringing the potential aggregate capital outlay to more than $2.1bn.

“Based on the drilling of the Hawkeye well (in Northern Palawan) in shallow waters, total cost of drilling per well was about $15mn, while drilling in deep water amounted to $100mn, as referenced by the deep water wells drilled by ExxonMobil in Sulu,” Marcos said. 

Investment hurdles

In March this year, commercial and oil gas finds at the Alegria field in Cebu Basin in the southern part of the country were declared, with recoverable reserves enough to feed a 60-MW gas-fired power plant.

But the government’s larger target – a gas find to rival the nearly-depleted Malampaya field – remains elusive for a variety of technical, legal and political reasons.

These woes have been deepened by the concerns of the lingering prohibition on petroleum exploration at the ‘nine-dash line’ claims of China that extend up to areas declared as within the Philippines’ exclusive economic zone (EEZ); a probable shift in government structure to federalism or the proposed Bangsamoro Basic Law in Mindanao; the ongoing arbitration proceedings on the $1.1bn Malampaya income tax case and the Supreme Court ruling on the Japan Petroleum Exploration (Japex) case, where a service contract was nullified because the signatory was the energy secretary and not the president of the Philippines.

The SC-sanctioned rule that the president should sign all petroleum service contracts has so far constrained the timely award of two service areas won in the 2014 Philippine Energy Contracting Round 5. Following the review of the service contracts by the Department of Finance (D0F), the contracts were passed along to the presidential palace in 2016, but have yet to be signed.

In fact, Marcos said, many interested companies are also waiting for the final outcome of the PECR-5 service contracts “before they will consider investing in the Philippines.”

The DoE’s Energy Resource Development Bureau (ERDB) is planning global roadshows – in Singapore and Australia in the second quarter and then in the US and Europe some time in the second half – despite energy secretary Alfonso Cusi’s earlier reluctance to proceed, “with all these unresolved issues that we might not be able to explain fully to investors yet.”

But even with the roadshows planned, his government still needs to “find a way to resolve the major issues first, especially the moratorium lifting on exploration at some blocks within the West Philippine Sea.”

He’s not about to concede in what he perceives will be “a long journey” into resolving the country’s diplomatic issues with China, stressing that “at least in my assessment, we can have this resolved during our term.”

Undersecretary Marcos, who is also the DoE’s representative to the Philippines-China Bilateral Consultation Mechanism (BCM), stated that both countries agreed to “undertake a deeper study on how this concern of exploration moratorium lifting can be best addressed mutually.”

On the existing service contracts – such as SC 72  in the Reed Bank in the Palawan Basin – “the understanding is that China can join exploration and development ventures through a farm-in agreement with the service contract holder, but Philippine laws and policies must prevail and be upheld in the project.”

Investors’ take

Rufino Bomasang, executive chairman of Otto Energy Philippines, a subsidiary of Australia’s Otto Energy, said in an interview that “the new contracting round is a welcome development for us investors because we don’t need to wait any more as to when the DoE will announce or schedule auction on its petroleum block offers.”

However, he said the new policy apparatus dangled by the DoE “is still not enough,” and added that the scale of unresolved concerns “still encumbers us when it comes to translating our interest into real investments.”

Bomasang, who previously served as president of the exploration arm of the state-run Philippine National Oil Company and a key adviser of the Petroleum Association of the Philippines, cited the Malampaya tax case as one “that puts us on the edge… even if the government is telling us that the existing tax regime under Presidential Decree 87  is upheld, we can’t simply put our investment chips there not knowing what the final decision of the court would be.”  

Bomasang said that if the government doesn’t reconsider the apparent contractual breach when it comes to something as big as the Malampaya project, there would be little confidence that the same thing could not also happen with any other investments.

According to DoE sources, Cusi has already tasked a team to draft a comprehensive position paper that he can present to president Rodrigo Duterte that would guide the government on its position before the arbitral tribunal.

Bomasang also lamented the “the lack of stronger action on the part of the government on exploring and developing its next viable petroleum find despite the well-anticipated production decline at the Malampaya.” As a result of this inertia, he said, the Philippines is lagging behind other countries in Asia in terms of stimulating investor appetite upstream.