Malampaya operations in peril as critical issues plague project

MANILA, Philippines – The Malampaya deep water gas-to-power project faces the prospects of non-renewal, even of getting shut down, with ongoing critical challenges plaguing the upstream oil and gas industry, a ranking Malampaya consortium official told a Senate panel yesterday.

In a Senate hearing yesterday, Shell Philippines Exploration B.V. (SPEX) managing director Sebastian Quiniones presented a list of challenges being faced not only by the Malampaya consortium but the whole industry.

He said these hurdles include the tax dispute with Commission on Audit (COA), the new effluent standards from the Department of Environment and Natural Resources (DENR), and the legality of service contracts (SCs).

“We’re waiting for positive resolution of that very long list,” Quiniones said. “Obviously, [we will face issues] one at a time. This COA (issue) is right in front of us. We have to hurdle one, having a new fiscal regime that is not tax assumed will not make it worthwhile…There’s this water effluent, all of those need to be resolved.”

SPEX is part of the Malampaya consortium with a 45 percent stake, Chevron Malampaya LLC has another 45 percent and PNOC Exploration Corp. owns the remaining 10 percent.

Malampaya’s tax dispute has ballooned to around P151 billion as of June 2016, COA-DOE supervising auditor Flovitas Felipe told the Senate panel.

Originally, the total amount uncollected from the consortium stood at P53.14 billion, based on COA findings in 2009, which was upheld in an April 6, 2015 decision. As of end-2015, the uncollected payment was around P130 billion.

Quinones said the consortium had sought support and direction from DOE Secretary Alfonso Cusi, who had ordered a review of the case.

“The Malampaya consortium has always complied with all laws and regulations and we have, since inception, followed the law. So from our perspective, we’re fully compliant with the law,” the SPEX official said.

The Philippine unit of Royal Dutch Shell has filed two arbitration cases over its P53.14-billion tax dispute from the Malampaya deep water gas-to-power project - one with Singapore International Arbitration Center in Singapore in late 2015 and another with International Center for the Settlement of Investment Dispute (ICSID) in July this year.

However, the Cusi told the Senate panel the new administration has yet to decide whether to adopt previous administration’s position on the COA decision as the agency is still studying the case.

“I need to look at documents, I cannot just rely on the stand of previous [administration]. There are a lot of industries linked to this case. so we have to be careful in forming our stand,” he said.

Earlier, the DOE chief said they are studying options on how to resolve the Malampaya tax dispute after COA wrote him to ask for the new administration’s position on the case.

Another concern the whole upstream oil and gas industry is facing is the new Water Quality Guidelines and General Effluent Standards issued by the DENR as administrative order (AO) 2016-08 in May this year.

Quinones said the standards are only found here and there are no technologies available yet to comply with the new standards.

“Another issue we have is on effluent water standards. Companies like Shell will comply with the laws, but if we cannot comply we will shut down operations. If it becomes executory, we have been told that these new effluent standards must be complied. However, there’s no available technology yet that can allow us to satisfy the rules, so Malampaya will shut down,” he said.

The industry, through the Petroleum Association of the Philippines (PAP), has asked the DOE as the supervising agency on the status of the DENR AO.

“We’re working with the DOE. When we met with Secretary Cusi, that’s one item that, as an industry, was raised. It’s not only us, it’s everybody else. And it’s only in the Philippines (we have these standards),” said Quinones, who is also president of PAP.

“We’re waiting for our instructions from our supervisor, the DOE. Until the DOE tells us otherwise, that it’s an implementable law, we (Malampaya consortium) go on,” he said.

Another industry concern is the legality of SCs after the Supreme Court declared SC 46 between the government and Japan Petroleum Exploration Co. Ltd. (JAPEX) as unconstitutional, Quinones said.

In 2015, the High Court ruled the oil exploration in Tañon Strait as covered by SC 46 has violated the 1987 Constitution as it should be signed by the President, authorized by a general law or reported to Congress; Republic Act 7586 or the National Integrated Protected Areas System (NIPAS) Act of 1992; and Presidential Decree No. 1586, which established an environmental impact statement system.

When asked whether the Malampaya consortium will file for an extension for the project, Quinones said they are “waiting for positive resolution of that very long list…all of those need to be resolved.”

The license for SC 38 that allows the exploration of the Malampaya gas field in northwest Palawan will expire in 2024 but this can be applied for extension with the DOE.

“Government needs to decide in terms of policy, where we’re going, whether to import scenario or continue with exploration and production of locally indigenous fuels. That’s a key policy decision the government must take,” Quinones said.