Regaining Investor Confidence in the Philippine Upstream Petroleum Industry

Benjamin S. Austria, PhD

Executive Director, Petroleum Association of the Philippines
email: benjamin.austria@up.edu.ph

Abstract

Energy and minerals are essential components for socioeconomic welfare and development. The exploration and development of these earth resources serves to break ground in technology and contributes to advances in geosciences and vice versa, i. e., modern technology and advances in geosciences contributing to progress and commercial successes in earth resource exploration, development and utilization. Hence, even before globalization became a widespread concept, mineral and energy resource development served to promote the sharing of geoscientific knowledge and the transfer of technology.

The current escalation of crude oil and petroleum product prices has renewed public awareness of the impact of energy prices on everyone’s well-being and the value of having indigenous sources of energy, specially petroleum. However, in contrast to other business and economic activities, the nascent upstream petroleum industry in the Philippines is characterized by a number of unique features such as:

• Government being the main beneficiary of exploration success

• The Philippines being severely under-explored

• High risk

• Capital and technology intensive

• Global competition for limited exploration funds

These features have to be considered in formulating relevant policies and regulations in order to attract investors and encourage petroleum exploration and development in the Philippines.

The Philippines had been a "hot spot" in international petroleum exploration in the late 1980’s and early 1980’s with the discovery of the Camago-Malampaya and the W. Linapacan fields in offshore NW Palawan. However, the absence of further significant discoveries and uncertainties in the legal and policy framework governing the upstream petroleum industry contribute to the dampening of interest in the industry and a downturn in petroleum exploration in the Philippines. The Supreme Court decision, made early this year, on the unconstitutionality of certain provisions of the Financial and Technical Assiistance Agreement entered under the 1995 Mining Act has been perceived by some investors and explorationists as posing a serious threat to the validity of the Petroleum Production Sharing Contract (PSC) system. There are also other developments that adversely impact investor confidence:

• Concern about the stability of contracts.
  
  

• Pending legislation that threaten ability of upstream petroleum Contractors to operate:
  
  

1. Draft legislation harmonizing incentives propose to repeal Section 12 of Presidential Decree 87. This is the Section that defines the rights of the Petroleum Service Contractor thereby effectively destroying the Production Sharing Contract System in the Philippines.

2. Draft legislation on the Downstream Natural Gas Industry has provisions that would severely restrict the ability of the Contractor to market natural gas discovered in their Contract Areas.

The following steps will contribute significantly in revitalizing the upstream industry:

• Reduce concerns over contractual issues
  
  

• Reaffirm the validity of the Petroleum Production Sharing Contract system

• Timely processing of permit and contract applications by agencies/offices involved
  
  

• Ensure that new legislation do not curtail ability of Contractor to operate
  
  

  • Delete inclusion of Section 12 of PD 87 among the relevant laws to be repealed by House Bill 1533 (Act to harmonize incentives)

  • Allow the Petroleum Contractor to sell natural gas to electric power generation facilities and to large end users in legislation involving the downstream natural gas industry
    
    

• Enact legislation to provide for the following:
  
  

  • Cross-cost recovery between PSC’s (i.e., removal of ‘ring-fencing’)

  • Institutionalization of the Filipino Participation Incentive Allowance

  • Declaration that petroleum is a strategic commodity under the Indigenous People’s Resources Act