Oil explorers back retention of fiscal perks

MANILA, Philippines — Fiscal incentives are critical to promote the discovery and development of indigenous petroleum resources and to achieve energy security goals of the country, according to petroleum industry players.

Now is not the time to remove incentives in the upstream petroleum industry especially with the urgency of finding indigenous petroleum sources, Petroleum Association of the Philippines (PAP) chairman Rufino Bomasang said in his speech during the British Chamber of Commerce Joint Economic Forum yesterday.

Also, the country lacks active exploration activities “due to apparent policy instability,” he said.

“This is a very high risk industry which is different from all others, but of vital and strategic importance to national energy security. It definitely needs these incentives more than ever before,” Bomasang said.

Presidential Decree (PD) 87, which was issued by former president Ferdinand Marcos in 1972 to promote exploration activities, attracted investors in the country’s upstream sector which led to the discovery of the Malampaya deep-water gas to power project.

“Over 80 years of ‘hit and miss’ exploration drilling…commercial oil and gas discoveries happened only after the promulgation of PD 87 in 1972 with its stringent requirements and financial incentives,” Bomasang said.

PD 87 laid down very stringent standards and offered attractive financial incentives such as tax free importation of equipment and supplies, exemption from all taxes except income tax, income tax assumption (i.e. payment of income tax out of the government’s share), accelerated depreciation, free market determination of crude oil price, and easy repatriation of investments and profits.

However, under the proposed Package 2 of the tax reform program, all incentives to oil and gas contractors will be stripped off.

“On behalf of the Philippine Petroleum Association of the Upstream Industry, I therefore suggest that PD 87 be excluded altogether from Train II. Excluding it and hopefully a favorable resolution of the COA (Commission on Audit) case will definitely result in important strategic and economic benefits for the country,” Bomasang said.

The PAP official was referring to COA’s decision in 2009, which slapped a P53.14-billion tax deficiency on the Malampaya project operated by Shell Philippines Exploration B.V. (SPEX), Chevron Malampaya LLC and the Philippine National Oil Co. Exploration Corp. (PNOC-EC).

The Malampaya project is the country’s largest gas development to-date, which powers around 3,200 megawatts (MW) of power plants that provide power supply to the Luzon grid.

SPEX, the lead operator of Malampaya, sued the Philippine government by filing an arbitration case with the Singapore International Arbitration Center in Singapore in late 2015 and another with the International Center for the Settlement of Investment Dispute (ICSID) in July 2016.

More recently, in a resolution dated Jan. 24, 2018, COA denied petitions of the Department of Energy (DOE) and of the Malampaya consortium and maintained its position that the Malampaya consortium still owes the government the amount of P146.79 billion in underpayments to date.

The DOE, in turn, filed a petition before the Supreme Court (SC), challenging COA’s resolution.

“Major exploration companies have all adopted a ‘wait and see’ attitude and nobody is actively looking for indigenous oil or and/or for the next Malampaya because of apparent instability of government policies,” Bomasang said.

“With Malampaya gas projected to be depleted in a few years, we should already be looking for the next Malampaya,” he said.

Service Contract (SC) 38, the license that allows the exploration of the Malampaya gas field in northwest Palawan, will expire in 2024 but this can be extended subject to the approval of the DOE.

As SPEX awaits the resolution of the COA case before it applies for extension, the DOE has tasked PNOC Exploration Corp. (PNOC EC) to conduct a study on possible scenarios for the Malampaya project once its contract lapses.