The Malampaya story

The ongoing Malampaya story, with main characters Udenna, Chevron, Shell and PNOC/DOE, evokes varied emotions ranging from distrust, anger, and bitterness, while enraged critics howl allegations of corruption, some labeling it as “lutong Macau,” and comparing it to the well-publicized Pharmally scandal.

Such reactions, if scrutinized deeper, seem to be mainly attributable to the presence of Dennis Uy, Udenna founder and CEO, and known to be among the biggest campaign donors of Duterte whilst campaigning for the presidency in 2016.

The Malampaya story has three (and possibly more as it develops) intriguing and interesting chapters. Let’s dissect the first chapter sans conspiracy theories and “malicious thoughts.”

Udenna-Chevron deal

Putting on a businessman’s hat, the sale of Chevron’s 45 percent participating stake in Malampaya to Udenna can simply be regarded as a transaction between an asset divesting seller and fully funded buyer.

Considering the magnitude of the transaction, both parties would likely have engaged professional financial advisers to come up with a package acceptable to both seller and buyer, including bankers, creditors, and financiers. The financial capability of Udenna, therefore, had passed muster.

Because Chevron is not the operator of the Malampaya facilities, the sale of its shares should be seen as a purely business transaction separate and immaterial to the operational side, which is solely the responsibility of Shell. Thus, Udenna’s apparent lack of experience in oil exploration and production is not a critical issue in its transaction with Chevron.

However, but more importantly, given the reported balance sheet of Udenna, we will now have a financially and technically weaker Malampaya consortium.

Why did government not exercise its option to match the offer for the Chevron share? The answer is simple: the government already gets 60 percent of Malampaya’s net cash flow, plus 10 percent of the consortium’s 40 percent share (through PNOC) or a total 64 percent. The government does not need to expose its position to added risks.

That said, the sale of the Chevron stake does not jeopardize the government’s 64 percent share in the Malampaya net cash flows. Considering also government’s pressing resource needs, it would be a prudent business decision not to pay out $565 million to acquire Chevron’s share.

On the other hand, Shell has its own good business reasons for not exercising the option to match the offer, and this should be one important gauge in favor of government’s decision not to buy Chevron’s share.

Thus, the sale of Chevron stake to Udenna is not, and should not be, seen as a controversial national interest issue. Udenna’s lack of technical qualifications is not a big deal in a transaction merely involving the transfer of cash flow entitlements between seller and buyer.

Given the above, the decision of government not to exercise its option would be considered most prudent, especially since the government’s share in Malampaya’s cash flow of 64 percent remains intact even without the need to invest $565 million to buy out Chevron’s share.

Udenna-Shell deal

Let’s tackle the second chapter of this story: the sale of Shell’s 45 percent stake to Udenna. This is an entirely different matter, and the issues and concerns raised to block the approval of the transaction by the DOE deserve a closer look.

Although Udenna and Shell have agreed on the sale of the latter’s stake, the transaction details are still under review and await approval by the DOE, largely because the deal will give Udenna 90 percent ownership of the consortium.

As soon as the documents that will spell out the nitty-gritty of the Udenna-Shell transaction lands on the table of DOE Secretary Alfonso Cusi, a meeting between the DOE and Shell representatives has to be organized. Frank and open discussions will give the DOE a better understanding of Shell’s intention to sell, and a clearer indication of what the oil company intends to do between now and the end of contract in 2024.

If during the discussions Shell remains firm on selling its stake and the transaction is approved, DOE will have to address several vital issues – foremost of which will pertain to national interest, as well as various other implications.

The DOE must conduct a comprehensive review of the many concerns, issues, and risks. Any DOE approval of the Shell sale must involve a number of strong conditions, “musts” that both Shell and Udenna or any other interested buyer, will have to comply with. Otherwise, it will be a “no-deal” for the DOE.

Several options are available on how to handle Shell’s intention to sell. One may not be able to satisfy all the critics, but if the process is well thought out, transparent, and comprehensive, Cusi may very well justify his department’s actions.

It looks like there will be conflicts and tensions in the second chapter of the Malampaya story as national interest will be a central theme and main issue, with the public watching carefully how the main characters will respond.

Chapter three still up in the air

The script for chapter three of the story covers what will happen when the agreement with the current consortium expires in 2024. By that time, ownership of all Malampaya assets goes to the government. These include the platform, pipeline that carries the gas to Batangas, and all the facilities related to natural gas production and delivery.

The scenario will develop and be largely dependent on how the different characters will act and respond as issues described in chapter two unfold. By the way, we have an inscrutable variable coming up too: the 2022 elections.

Abangan!

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