DOE drafts new rules for service contract sinking funds

MANILA, Philippines - The Department of Energy (DOE) is looking to require exploration firms to allot funds that will cover costs when service contracts (SC) are abandoned, a DOE official said.

The “sinking funds” will make sure petroleum firms are prepared to properly dismantle equipment and protect the environment after their commercial operations, DOE Undersecretary Jose Layug Jr. said.

“The DOE is considering a circular on abandonment on petroleum SCs. It needs to be clear what is their obligation when after 25 years, they abandon the project,” Layug said.

Under a draft circular, petroleum firms should maintain a “sinking fund” in an interest-bearing escrow account within one year from commercial production.

Layug said it would be charged as an operating expense that is cost-recoverable.

The amount would depend on a cost per unit or cost per production basis, Layug said.

To date, there are 27 SCs in the Philippines involving Shell Philippines Exploration B.V. and Nido Petroleum. However, only the Malampaya and Galoc oil fields are in regular production. The SCs are valid for 25 years.

Layug said that when projects are abandoned, the funds can be used by the government or the company to remove or operate the facilities.

“It is an advance planning to ensure that appropriate parties are held accountable to protect the environment and make sure we are prepared financially and technically when there is an abandonment of a SC,” Layug said.

Companies that hold SC are required by the DOE to submit an overall development program, including the explanation for the abandonment of the project.

“Certainly any amount should be sufficient to pay for necessary costs to remove whatever needs to be removed after the operations,” Layug said.

The circular, which will apply to new and existing SC holders, is expected to be finalized late this year, Layug said.

In July last year, the DOE launched Philippine Energy Contracting Round 4, offering 15 new petroleum exploration areas nationwide that will require around $7.5 billion in investments. The DOE received 20 bids for 11 areas.

The government is pursuing energy independence and sustainability through the development of indigenous energy resources like coal, petroleum and natural gas.