There is an urgent need for more energy sources with the depletion of the Malampaya field. Unless the government acts with dispatch, the power situation does not look good as the import facilities for LNG to replace the indigenous gas must be operational by 2024. Fortunately, Philippine energy regulators have taken a technology-neutral stand on possible solutions to the country’s growing demand for energy by looking at all available options.

1. How Do You Solve a Problem Like Malampaya
13 February 2019
The Malampaya Deepwater Gas-to-Power project (“Malampaya”) located in Northwest Palawan,
employs deepwater technology to draw natural gas that fuels three gas-fired power plants and
provides 30% of Luzon's power generation requirements. Operating under Service Contract (“SC”)
No. 38, the project is a joint undertaking by the Department of Energy (“DOE”) and Shell Philippines
Exploration B.V. on behalf of joint venture partners Chevron Malampaya LLC and the Philippine
National Oil Corporation Exploration Corporation. Malampaya delivers through six (6) Gas Sales and
Purchase Agreements and fuels 2,700 MW of power stations as baseload plants and an additional
500+ MW operating as mid-merit and peaking plants. It produces an average of 380 million standard
cubic feet per day. Data from the DOE indicated that given the present production level and
continuous decrease in reservoir pressure, drop in supply is expected by 2022. Recoverable
reserves at the end of field life is 3.08 to 3.29 trillion cubic feet. SC 39 will expire in 2024 with no
certainty in an extension and while it may have enough gas, this may not be sufficient to last beyond
five years. This comes as domestic electricity consumption is likely to reach 50 million kilowatts in
2040. The Philippines in 2017 produced half its power from coal, a quarter from renewable energy
and 22% from natural gas. It is imperative then that the country urgently finds a replacement through
new petroleum discoveries once the Malampaya gas field is depleted.
Liquified Natural Gas
There are currently no sufficient remaining resources from the Malampaya field or other potential
upstream developments to justify new natural gas infrastructure development. The only reliable
source of new gas would be imported liquefied natural gas (“LNG”) ensuring supply security and
sustainability. As there are no existing infrastructure for importing LNG, the Philippines cannot
access the gas market for industrial, commercial, and transportation. In anticipation of the
Malampaya field depletion, the government is pursuing LNG projects and several foreign companies
in partnership with domestic entities have committed investments in LNG importation facilities.
Leading the pack is Energy World Corporation (“EWC”), which reported that the DOE has issued to
affiliate, Energy World Gas Operations Philippines, Inc. a permit to construct, own and operate an
LNG import terminal and re-gasification facility in Pagbilao Grande island in Quezon province. EWC
said the permit would enable the completion date for the first tank of the LNG hub to be aligned to
the commercial operation date of the associated 650 MW power plant and the National Grid
Corporation of the Philippines switchyard expansion, and the construction of the second tank. The
650 MW plant has been recognized as the anchor off-taker of the LNG project which consists of two
130,000 bcm LNG tanks, a dedicated jetty and marine infrastructure as well as re-gasification and
other ancillary facilities. Fitch Solutions earlier reported that the start up of LNG import terminal has
been delayed due to difficulty in obtaining access to existing local transmission infrastructure, most
of which is dominated by coal-fired power generators.
The state-owned Philippine National Oil Company (“PNOC”) is developing a USD 600 million facility
to be used to receive, store, re-gasify and distribute LNG. PNOC announced that it will start its
tendering process for its LNG import facility. PNOC will be assuming minority stake in the project –
as referenced on the joint venture rules set forth by the National Economic and Development
Authority, in which the company can assume equity of not more than 50-percent. The technology
preference will be a floating storage re-gasification unit and its capacity will be initially at 3.0 million
tons per annum. PNOC has requested the DOE to declare the project as an Energy Project of
National Significance under Executive Order (“EO”) No. 30.
Meanwhile, the Philippines has become a new front in China and Japan's infrastructure rivalry as
companies from both countries bid to build the country's first LNG terminal. Both Tokyo Gas and the
state-owned China National Offshore Oil Corp. (“CNOOC”) have partnered with domestic
companies.

2. FGEN LNG Corp, a wholly-owned unit of First Gen Corp. of the Lopez conglomerate, signed a Joint
Development Agreement with Tokyo Gas to build LNG terminals. The project will be located in
Batangas Province, where First Gen operates four (4) gas-fired power plants that have a total
capacity of 2,000 megawatts. The plan calls for building a terminal that will re-gasify and supply 3 to
5 million tons of LNG imports annually to the power facilities. The project is expected to cost more
than $700 million, with First Gen taking an 80% stake in the operating company. FGEN recently filed
with the DOEa notice to proceed with the constructionof its proposed Batangas LNG terminal project
in the First Gen Clean Energy Complex in Batangas City. The Japan Bank for International
Cooperation is likely to fund the Tokyo Gas project if it is approved. It would be the first Japanese-
built LNG terminal overseas, a core part of Japan's effort to boost infrastructure exports.
On the other hand, CNOOC,a pioneer of China's LNG industry having built its country's first terminal
in 2006, formed a consortium with Phoenix Petroleum Philippines and submitted a proposal for an
LNG facility on November 2018. Phoenix Petroleum recently announced that the DOE granted
Tanglawan Philippines LNG Inc. the notice to proceed to build the facility. Tanglawan plans to break
ground by 2019 and aims to start commercial operations by 2023. The CNOOC consortium is
thought to have the political edge since Phoenix Petroleum is owned by Dennis Uy who is perceived
to be close to President Rodrigo Duterte.
Petroleum Geopolitics in the South China Sea
Due to the geologic fact that most of the Philippines’ most prospective petroleum acreage lie in
Northwest Palawan and the disputed waters in the South China Sea, improving bilateral relations
with China remains key for the Philippines to improve its hydrocarbon reserves and production
growth outlook.
According to The Diplomat, China’s assertion of sovereignty over the disputed areas and entering
into joint oil and gas exploration with other claimant states in the latter’s exclusive economic zones
somewhat legitimizes China’s nine-dash line claim. China is adopting a carrot and stick approach in
addressing this diplomatic issue. On one hand, Vietnam was threatened with force over its unilateral
exploration activities in waters claimed by China. Conversely, offers of joint exploration with Brunei
and the Philippines, which opted for pragmatism and seem willing to skirt contentious sovereignty
issues, are framed as partnership with promises of technical support, capital, and wider investment.
Prof. Jay Batongbacal, a maritime law expert postulates that to make any joint exploration deal work,
the Philippines must overcome two major legal problems: 1) internationally, how to justify its
acceptance that China contingently shares the petroleum resources within its continental shelf after
an international arbitration award clearly declared that no plausible claim exists; and (2) domestically,
how to accommodate any petroleum development not under its sole jurisdiction, control, and
supervision but rather on a shared, co-equal basis with another state.
MOU Between the Philippines and China
In pursuit of an acceptable legal framework, the Philippines signed a Memorandum of Understanding
(“MOU”) with China against the backdrop of brewing energy security concerns, years of negligible
offshore exploration, declining upstream investment, and depleting resources in the Malampaya gas
field.
The MOU on oil and gas development in the West Philippine Sea signed during President Xi
Jinping’s visit to Manila, creates a body that will study how the two countries can pursue joint
exploration and development. The MOU does not mean the immediate conduct of joint exploration
or joint development of marine resources. However, it paves the way for the crafting of a program
on how such joint ventures can happen in the future.
Department of Foreign Affairs (“DFA”) Secretary Teodoro Locsin, Jr. described the MOU as a "non-
legally binding framework.” As to the geographic coverage of the framework, Locsin states that the

3. agreement is designed to "govern an area once that area has been agreed upon according to the
framework.”
Supreme Court Senior Associate Justice Antonio Carpio, the leading advocate of Philippine rights in
the West Philippine Sea, believes that the MOU allows only “cooperation in oil and gas activities”
and is not violative of the Constitution. Carpio also assumed that the service contracts to be entered
by CNOOC will exactly follow the model service contract of the DOE where the natural resources
covered by the contract belong to the Philippines and the contractor must comply with Philippine
laws, rules, and regulations. If such regulations are followed, CNOOC would be merely a
subcontractor of the Philippine service contractor or an equity holder of the Philippine service
contractor. “Clearly, under the signed MOU, there is compliance with the Philippine Constitution and
there is no waiver of Philippine sovereign rights under the arbitral ruling,” said Carpio.
The real test according to Carpio will be if the “cooperation agreements” to be finalized in twelve
months, will involve service contracts in which Philippine law will govern the oil and gas activities
with China. The answer lies with the working group and intergovernmental committee formed by the
MOU composed of officials from the DFA, Chinese Foreign Ministry, DOE, and Chinese Energy
Ministry, which will work out a program of cooperation that could lead to joint exploration.
Unlocking the Petroleum Potential of the Disputed Areas
Following these developments, the DOE has indicated that it is recommending to the DFA the lifting
of the force majeure imposed in 2014 on Service Contract72 in RectoBank (Reed Bank) in response
to the request of PXP Energy Corp./Forum Energy.
SC 72’s Sampaguita Gas Field holds substantial volume of potential gas reserves, according to PXP,
citing verified data from seismic surveys originally conducted in 2011. “The interpretation of these
surveys was carried out by Weatherford Petroleum Consultants in 2012. The report indicated the
Sampaguita Gas Field to contain contingent resources of 2.6 trillion cubic feet (TCF) of gas in place,”
the company said. “The 2D seismic data were reprocessed in 2013 and were subsequently
interpreted, aided by gravity-magnetics data by Fugro (2012) and Cosine Ltd. (2015). In 2015, Arex
Energy produced a report on the north bank area and estimated prospective resources to be 3.1
trillion cubic feet.”
PXP cautioned however, that the development of SC 72 must commence not later than 2027 as it
would take at least six years from start to first gas. The contractor is committed to spend at least $80
to $100 million to fully appraise the Sampaguita gas field and other identified prospects within its
contract area. The Philippines began exploring the area in 1970 and discovered natural gas in 1976.
U.K.-based Forum Energy acquired the concession in 2005 and became its operator. PXP holds a
78.98 percent interest in Forum Energy, which in turn has a 70 percent stake in SC 72.
In October 2018, PXP announced that Dennison Holdings, another company owned by Dennis Uy,
would subscribe to 340,000,000 PXP shares bringing its stake to 14.78% of PXP after the
transaction. PXP, which is also negotiating with CNOOC for another potential joint exploration in the
South China Sea, will use the proceeds from the share sale to fund its exploration activities and
other oil assets within the Philippines. Manuel V. Pangilinan, Chair of PXP remarked that the
company is "interested to participate" in Dennis Uy's Tanglawan LNG project with CNOOC.
The US Energy Information Administration (2013) estimates the region around the Spratly Islands
to have virtually no proved or probable oil reserves. Industry sources suggest less than 100 billion
cubic feet in currently economically-viable natural gas reserves exist in surrounding fields. However,
the Spratly Island territory may contain significant deposits of undiscovered hydrocarbons. US
Geological Survey assessments estimate anywhere between 0.8 and 5.4 (mean 2.5) billion barrels
of oil and between 7.6 and 55.1 (mean 25.5) trillion cubic feet of natural gas in undiscovered
resources.
Expiring Coal Operating Contracts

4. Compounding the Malampaya depletion are expiring coal operating contracts (“COC“) under
Presidential Decree No. 972 known as “Promulgating an Act to Promote an Accelerated Exploration,
Development, Exploitation, Production of Coal” (1976), that currently are producing and with existing
proven reserves lasting beyond expiration. The fifty-year term limit for contracts involving coal
exploration and production is enshrined in the Constitution.
The Philippine Conventional Energy Contracting Program (“PCECP”) for coal established under
DOEDepartment Circular (“DC”) No. 2017-09-0010 mandates the issuanceof new COCs over these
“open” areas upon expiration of the 50-year term.Under the current guidelines, the COCcontractors
will be required to prematurely cease production operations, relinquish the COC area to be qualified
for re-application and/or nomination, and hope that they will be awarded with new COCs over their
previously-held contract area. However, the COC contractors if they have to undergo the present
PCECP process, do not have the certainty of getting the COC awarded to them. This will result in
the premature cessation of continued profitable production operations.
Some COC contractors have existing proven reserves lasting beyond the expiration of their COCs,
and from a technical and economic perspective, they recognize the feasibility and the potential need
to continue and extend operations of their COCs beyond the 50-year term limit. The extended period
of operation on these COCs will allow continued coal production and maximum utilization of existing
production assets and facilities giving rise to uninterrupted revenue to both COC contractors and
government. Further, since the present COC contractors have a good understanding of the
geological conditions and mining processes involved in their operations, these proprietary
information will generate additional reserves and potential resources as determined from advance
exploration, a clear advantage over a new COC contractor.
The cessation in production operations will certainly result in premature mine abandonment and
rehabilitation as there will be no subsisting contract with the government that will allow COC
contractors to continue its operations. While the COC contractors are undergoing the process set by
present guidelines, they will be hesitant in allocating funds and resources for the care and
maintenance of idle facilities without commercial confidence that there will be an award of a new
contract over the same COC area.
Consequently, for areas with plan of developments that will exceed the 50-year term limit, aggressive
production strategies within the remaining term of the COC will need to be adopted to ensure the
recoupment of investment costs,as opposed to a deliberate and well-planned production operations
strategy to better manage coal reserves that would ultimately yield a fully optimized coal production.
More importantly, coal mines are major suppliers of downstream power facilities. Off-taking power
plants need stability of supply from coal mines. Off-takers will not enter into long-term fuel supply
agreements from COC contractors whose COCs are expiring. Also, in the absence of stable coal
supply agreements, project and loan financing of new power plants are difficult to obtain. Coal mines
are potential energy projects of national significance under EO 30 in light of the expected depletion
of the Malampaya natural gas field.
Nuclear Energy Option
Nuclear energy can also be a viable alternative power source as a substitute for Malampaya with
the proper legal and regulatory framework in place. In January of this year, the House of
Representatives has approved on third and final reading a bill that provides for a comprehensive
regulatory framework in harnessing the peaceful uses of nuclear energy.
Consolidating eight related administrative proposals, House Bill No. 8733 provides for the creation
of the Philippine Nuclear Regulatory Commission (“PNRC”) as an independent central nuclear
regulatory body. The measure aims among others to harness the peaceful and beneficial uses of
nuclear energy in power generation establishing a legal and regulatory framework for the regulation
and control of the peaceful uses of nuclear resources; manage radioactive waste; and establish a

5. legal and regulatory framework to prevent, detect, and respond to unauthorized activities involving
nuclear materials. PNRC will ensure consistency with the nation’s obligations under relevant
international instruments and modernize the nuclear civil liability and compensation regime in line
with internationally-accepted standards.
Among PNRC’s other functions are to: (a) issue regulations on financial capability of operators to
cover liability for nuclear damage; (b) inspect, assess, and monitor activities to ensure compliance;
(c) coordinate with other agencies on health and safety, environmental protection, security, and
transportation of nuclear and related dangerous goods; and (d) act as the national authority on
nuclear safety, security, and regulatory matters relative to the International Atomic Energy Agency.
PNRC will also establish a Nuclear WasteManagement Fund and set aside a portion of the payment
for the electricity generated from the nuclear energy use which shall only be utilized for the safe
disposal of nuclear waste, to include site research, transport, and final geological disposal.
PNRC shall be headed by a Commissioner,appointed by the President and shall be assistedby four
Deputy Commissioners andan Executive Director who will assistthem in the discharge of executive,
administrative and planning functions of the body. PNRC shall likewise have an Advisory Board
chaired by the Department of Science and Technology Secretary, with the Secretary of the
Department of Health as vice chair, and the Secretaries of the Departments of Energy, of
Environment and Natural Resources, of National Defense, of Trade and Industry, and of Agriculture
as members, as well as some five members from the academe or non-government organizations.
All powers, duties, records, files, and assets pertaining to nuclear and radioactive materials and
facilities of the Philippine Nuclear Research Institute shall be transferred to PNRC.
Geothermal Energy
Another viable alternative is putting on stream the untapped geothermal fields in the country.
Recently the Philippines has dropped down to number three in the global ranking of geothermal
energy producers. Based on the report of Climate Policy Initiative (2015), 45% of all renewable
energy projects in Asia are either marginally bankable or not bankable at all due in part, to the lengthy
process of securing required permits, licences and land access agreements. Another issue is grid
connectivity. The amount of effort required for all the different aspects of the process means it can
take years to achieve a bankable solution. Geothermal development’s high costs of field
development, coupled with the high risks associated with resource exploration and drilling, pose a
significant barrier to private sector financing.
Despite the ambitious deployment targets set by the DOE that recognize the potential of geothermal
to contribute to the energy mix, there is a need to balance the need to reduce private sector risks
and incentivize investment while minimizing costs to the public sector. Needless to say, streamlining
the permit process by government regulators will have an impact on geothermal development, as
shorter project periods would reduce uncertainty for policy and market dynamics when modeling
economic returns. Geothermal projects are characterized by significant upfront capital investment
for exploration, well drilling, and the installation of plant and equipment. But once the geothermal
projects are placed in commercial operation the fuel source is secure for the tens of years of
expected lifetime with a steady revenue stream.
Investment Opportunities and Challenges
Investment opportunities abound in the power sector as there is a need to supply the natural gas
requirement of the existing gas-fired plants when the Malampaya field shuts down. According to the
Philippine Energy Plan prepared by the DOE, the country will need 43,765 MW by 2040; 14,500 MW
will be for mid-merit and 4,000 MW for peaking. Renewable energy capacity is poised to increase
from its 2010 level of 5,000 MW to 2030 level of 15,000 MW and due to its intermittent nature, natural
gas-fired power plants can complement when these plants will not be running. Additional potential
demand for LNG will come from off-grid or missionary islands in replacement of existing diesel-fired
power plants. LNG will primarily be consumed in the power sector, but will soon cover non-power
applications such as in the industrial processes, transportation, commercial and residential sectors

6. More incentives should be given to upstream natural gas exploration so as to have a viable and
stable replacement to the Malampaya gas field and enhance the economic feasibility of marginal
deposits. While the backbone of the upstream natural gas industry is now in place, it was brought
about by a lack of a comprehensive regulatory framework to guide natural gas industry operations
in the Philippines. This gap was addressed through contractual agreements in service contracts and
ad hoc arrangements between the regulators and service contractors.
The Philippines does not have a separate Natural Gas Act that establishes administrative authority
and accountability for the gas sector in a single agency. Although the DOE has legislative authority
to promulgate regulations, broader issues regarding access and pricing have not gone beyond
expressions of policy intent. The DOE has addressed issues affecting Malampaya through
amendments or interpretation of service contracts. As a result, gas sector policy is largely driven by
upstream considerations according to issues on which the service contractors have sought
clarification as amendments to the original contract.
In reality, the present regulatory regime for gas exploration and development is seen to limit the
competitiveness of gas to replace oil products except for high cost products such as liquefied
petroleum gas and diesel in industry and even residential electricity. This may not necessarily apply
to other lower cost gas field developments than Malampaya, which has a deepwater occurrence.
Royalty and taxes account for about half of the gas price. Reducing these components will transfer
the benefits of developing natural gas directly from the government to the consumers through lower
electricity prices. Increased use of natural gas will, in turn, provide economic benefits through foreign
exchange savings from foregone oil importation and reduced environmental impact of the country’s
overall energy balance.
Conclusion
There is an urgent need for more energy sources with the depletion of the Malampaya field. Unless
the government acts with dispatch, the power situation does not look good as the import facilities for
LNG to replace the indigenous gas must be operational by 2024. Fortunately, Philippine energy
regulators have taken a technology-neutral stand on possible solutions to the country’s growing
demand for energy by looking at all available options. Investments in energy infrastructure will always
be driven by the combination of a strong energy supply imperative, increasingly liberalized energy
sector, ambitious capacity targets and a relatively stable off-take mechanism. Petroleum exploration
and development resources particularly in the Northwest Palawan basin and disputed areas of the
West Philippine Sea are fraught with technical operational complexities, cost enormous sums of
money, and certainly dictated by externalities arising from the country’s relation with China. The two
countries’ cooperation has taken a broader energy partnership narrative in light of the present
administration’s more conciliatory stance toward China.
Fernando “Ronnie” S. Penarroyo specializes in Energy and Resources Law, Project Finance and
Business Development.He may be contacted at fspenarroyo@gmail.com for any matters or inquiries
in relation to the Philippine resources industry. Feel free to follow Atty. Penarroyo on LinkedIn
(https://www.linkedin.com/in/fernando-s-penarroyo-2b8a7312/)
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