To sell or not to sell


ALL eyes are now on the Department of Energy (DOE) that would either approve or disapprove the sale of the entire stake of Malampaya gas operator Shell Philippines Exploration B.V. (SPEX) to a subsidiary of Davao-based businessman Dennis Uy’s Udenna Corporation (UC).

The DOE is expected to come out with a decision, a crucial one at that, since transaction will affect the future of the gas field’s operation and the continuous supply of energy in the country.

The Malampaya Deep Water Gas-to-Power Project, located 50 km offshore Northwest Palawan.

DOE Assistant Secretary Gerardo Erguiza Jr. said an ongoing review on the controversial deal—worth as much as $460 million—is being conducted by various units of the DOE. The review is expected to end soon, he said.

These units will then submit their report to the bureau heads, which, in turn, will make their respective recommendations and submit these to the agency’s senior officials before these are turned over to DOE Secretary Alfonso Cusi for final approval.

Under ‘meticulous’ study

ERGUIZA said a “substantial portion of the review” has been done. “It’s undergoing the process now. All groups involved are moving and are doing their best, studying it very meticulously.”

There is no target date as to when the DOE would be ready to release its decision.

“For us, we want to complete it as soon as possible,” said Erguiza.

Gatchalian: “I think it’s really quite premature and unethical for Malampaya Energy to negotiate with the government. It’s too presumptuous in fact.” Cusi: “As they say, damned if you do, damned if you don’t.”

Shell Petroleum N.V. sold last May its 100-percent shareholding in SPEX, owner of a 45-percent operating interest in Service Contract (SC) 38, the contract that covers the Malampaya gas field, to Malampaya Energy XP Pte. Ltd.

The deal is still subject to DOE’s review and approval in accordance with Presidential Decree 87, or the Oil Exploration and Development Act of 1972. “The agreement in this deal states that the DOE review is a precondition, unlike in the Chevron-Udenna, which did not provide a similar precondition,” he explained.

Once this deal succeeds, the group of Uy will have 90-percent ownership in the Malampaya gas field as Udenna unit UC38 Llc. already acquired Chevron’s 45-percent stake in Malampaya.

It is not only the DOE’s green light that needs to be secured by the seller and the buyer. Philippine National Oil Company-Exploration Corp. (PNOC-EC), a member of the Malampaya consortium that holds 10-percent interest in the gas project, also needs to express its consent.

The joint operating agreement signed by the members of the Malampaya consortium governs the transfer of participating interest in SC 38, thus the sale of any or all participating interest should be consented to by the consortium.

“Our approval is useless if it’s not approved by PNOC. It has to be a parallel approval because PNOC is the partner of SPEX. The review is independent from ours. Our perspective is from the regulators’ side,” added the DOE official.

Stringent controls

PNOC-EC posted on its website that the sale of the shares of SPEX in the Malampaya has not reached its final stage.  “The statements of our detractors saying that this is a done deal is entirely false and at the same time, it belittles the efforts of our board of directors and officers who have put numerous options on the table, making sure that there is sufficient evaluation to make certain the best choice emerges, not just for the company, but most importantly, for the energy security of this country and the Filipino people.”

Both agencies claimed to have put in place stringent control measures so they can come up with a sound business decision.

Precious resource

THE Malampaya gas project has become the country’s most significant oil and gas upstream development, supplying 19.16 percent of the country’s supply of electricity for 2020, and providing a crucial source of income for the government with a total net national government share amounting to P261,681,610,752.59 since it began commercial operations in 2002 until 2019.

However, gas is fast depleting and, worse, SC 38 will expire in 2024. The asset will only be able to service 6 percent of Luzon by 2024 unless immediate actions are taken to arrest its quick decline and prevent its eventual depletion by 2027.

UC, according to its president Raymundo Martin Escalona, will focus on an urgently needed rejuvenation program to stem the decline of Malampaya after a seven-year hiatus in exploration activities.

These do not only include increasing recovery from the Malampaya production area but also proven economic volumes in other prospects within the SC 38 area.

“At the core of the program is a planned drilling campaign within the SC 38 license area to add energy reserves and extend the life of the asset,” said Escalona.

The intention is good but the process by which the deals were handled by the DOE is being questioned.

Pulling a fast one?

SENATOR Sherwin Gatchalian sounded the alarm over the possibility of the government entering into a midnight deal to extend SC 38. He noted the speed in the current negotiations when Malampaya Energy entered the picture while SPEX was never given assurance by the DOE since 2016 if they would be extended or not.

DOE officials earlier told the Senate Committee on Energy chaired by Gatchalian that serious negotiations started in the middle of this year along with the creation of a negotiating team.

Also, Gatchalian shared concerns raised by some senators over sealing the sale of SPEX’s stake in the gas field project, especially with Malampaya Energy already negotiating with the government. One of the conditions being discussed in the negotiations is the possible 70-30 royalty sharing in favor of the government.

Under SC 38, 70 percent of the gross proceeds from the sale of natural gas would go to the contractor to recover the investment cost. The remaining 30 percent is shared by the government and the consortium on a 60-40 basis, respectively.

“I think it’s really quite premature and unethical for Malampaya Energy to negotiate with the government. It’s too presumptuous in fact. We already laid down that DC 2007 should be applied to the transfer,” Gatchalian said, referring to Department Circular 2007-04-003, which sets the guidelines and procedures for the transfer of rights and obligations in petroleum service contracts as underpinned by Presidential Decree 87 or the Philippine Oil and Gas Law.

Gatchalian has also questioned the DOE on the “insufficient foundation for legal basis” in the Chevron-Udenna deal in Malampaya, adding that the deal is “defective and invalid.”

Senator Nancy Binay also questioned the DOE’s approval of the transfer of Chevron’s shares to UC Malampaya, which was later renamed UC 38, when the company only submitted unaudited and incomplete documents.

In the midst of controversy, graft charges were filed before the Office of the Ombudsman against Cusi, Uy and officials of Chevron Philippines and SPEX. Also, more groups are urging government to rescind the Chevron-UC 38 deal and to scrap the SPEX-Malampaya Energy deal. They also want PNOC-EC to take over SC 38.

“If government does not take full control and management of SC 38, the Filipino people deprived of about P42 billion net profits from Malampaya. Further, full government control will greatly enhance the country’s energy security,” said the Association of Filipinos for the Advancement of Geoscience (AFAG).

Possible rebidding

CAN the deals be undone? If not, what is the best option left?

“That’s what we’re studying. We’re studying…very carefully if this can be undone but definitely there’s a basis to, if possible, undo the transaction to protect the Filipino people,” Gatchalian said.

If it can’t be undone, the next best thing to do is to rebid SC 38. Gatchalian said government must bid out the gas facility’s operations once the contract expires, regardless if there will be a new operator prior to the expiration of the contract.

“Once the contract comes to an end then everything will revert to government. The Filipino people will enjoy all the revenues and profit coming out of Malampaya. On the other side of that, government will be operating the gas field.

“This is a decision that government needs to make and analyze because government by itself has a lot of constraints in terms of operation. But the basic principle here is if ever government decides to get an operator, it has to bid it out. That’s the only way for us to get the best price, get the best operator and get the best option,” said the lawmaker.

But UC said no one could repeal these deals. “Let us be clear that there is no law requiring approval of transfer of shares of companies that have interest in Malampaya,” UC spokesman Atty. Raymond Zorrilla said in a news statement. “Therefore, no party has the legal ability to rescind the Chevron and Shell transactions.”

He defended these deals, saying the transfers of Chevron and Shell shares underwent strict bidding processes and due diligence by both multinational oil and gas players. Zorrilla also said the share sales were above board and legal and had to pass thorough scrutiny by Philippine regulators, international lenders, and the said private multinationals involved.

Will the DOE approve or disapprove the SPEX-Malampaya Energy deal? Will it extend SC 38 knowing that all eyes are on the agency’s next move?

Cusi’s reply: “As they say, damned if you do, damned if you don’t.” The energy chief said this as he let out a long and deep sigh during the committee hearings.

Images courtesy of Anupong Nantha |, Shell and Roy Domingo

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