Philippine Mineral, Oil and Gas, and Coal Tenure Systems

Philippine Mineral, Oil and Gas, and Coal Tenure Systems

Philippine Mineral, Oil and Gas, and
Coal Tenure Systems

Resources Law Conference South East Asia
19 February 2009

Dennis A. Quintero

Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in
professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference
to an “office” means an office of any such law firm.


I. Introduction

• Minerals, petroleum, and coal are
owned by the State

• Revenue-sharing or Production-
Sharing Agreements between
government and contractors

©2009 Baker & McKenzie 2


I. Introduction
• Open to 100% foreign ownership:

(1) Large-scale minerals development through
Financial or Technical Assistance
Agreements (requires US$50 million for
development and construction) (“FTAA”);
(2) petroleum Service Contracts (“SC”);
(3) mining Exploration Permits (“EP”); and
(4) Mineral Processing Permits


I. Introduction
• Limited to Filipino citizens or corporations
at least 60% Filipino-owned:
(1) Mineral Agreements:
a. Mineral Production
Sharing Agreement (“MPSA”),
b. Co-Production Agreement
(“CPA”),
c. Joint Venture Agreement
(“JVA”)
(2) Coal Operating Contracts (“COC”)



Most Recent Developments
• Minerals Sector:
(1) Third Generation Model FTAA
(2) Amendments to the Mining Act
Implementing Rules and Regulations

• Oil and Gas/Coal Sector:
- latest model SCs and COCs formulated
during latest Philippine Energy Contracting
Round



II. Mineral Tenure Systems



A. Exploration Permit

• Exploration includes prospecting,
trenching, drilling, shaft sinking, and
tunneling

• Term: 2 years, renewable for similar periods;
maximum 6 years for metallic and 4 years for
non-metallic

• Submit a Declaration of Mining Feasibility
(“DMF”) to the government during EP term – to
qualify for MPSA or FTAA (to proceed to
extraction) ©2009 Baker & McKenzie 7



• Hectarage (per company):

- onshore, per province: 16,200 hectares
- onshore, entire Philippines: 32,400 hectares
- offshore: 81,000 hectares



• Relinquishment:
- first 2 years of EP term: at least 20% of EP
area
- rest of extended EP term: at least 10%

• Grounds for EP Cancellation by Government:
(1) violation of Mining Act, IRR, and EP
provisions
(2) adversity or breach of peace in EP area




• Accounting Treatment of Exploration Costs:
- Prior to drilling: charged to operations
- Costs for drilling, acquisition of property
rights: deferred as a non-current asset;
transferred to PPE if exploration results are
viable; otherwise written off



B. MPSA

• MPSA is one of three types of “Mineral
Agreements” between government and
contractor under Mining Act (requiring minimum
60% Filipino equity)

- other two being CPA and JVA
- among three types, only MPSAs, and no
CPA or JVA, have been entered into by
government


B. MPSA
• MPSA
- gives exclusive right to conduct mining within the
MPSA area
- MPSA holder to provide financing, technology,
management, and personnel

• CPA
- government to provide other inputs to operation
other than mineral resource

• JVA
- government and contractor set up a joint venture
corporation, with each holding equity interests


B. MPSA
• Term:
(1) Integrated MPSA
- Entered into prior to effectivity of DENR Admin. Order
2005-15
- term of 25 years, renewable for another 25 years
– contains an exploration phase (similar to EP), aside
from development/operating phase
– within the term of exploration period, MPSA holder to
submit DMF and Three-Year Development Work
Program
– development of mine must be completed within 36
months from approval of DMF by government


B. MPSA
• Term:
(2) MPSA Entered into Upon DAO 2005-15 Effectivity

- this type of MPSA originated from an EP that has
been converted into an MPSA, after DMF filing
- no longer includes an exploration phase; only
development and operating phases
- Upon DMF approval, this type of MPSA will have a
new term of 25 years



B. MPSA

• Term Renewal:
- after expiration of initial 25 year term, renewable for
another 25 years upon mutual agreement
- government may bid the project after initial 25-year
term, but original MPSA holder has right to match
highest bid
• MPSA can be converted into FTAA, subject to
DENR approval



B. MPSA
• Hectarage (for corporations):
- onshore, per province: 8,100 hectares
- onshore, entire Philippines: 16,200 hectares
- offshore, entire Philippines: 40,500 hectares



B. MPSA
• Relinquishment:
- area after final relinquishment must not be more
than 5,000 hectares for metallic minerals and 2,000
hectares for nonmetallic mineral
- the DENR may allow a contractor to hold a larger
mining area depending upon the nature of the
deposit and technical/financial capability of the
contractor



B. MPSA
• Fiscal Regime and Obligations to Local
Community/Indigenous Peoples (“IPs”)
- 2% excise tax payable to government based on
gross output (actual market value from each mine
without deducting mining, processing, refining,
transporting, handling, marketing and other
expenses) minimum royalty to IPs equivalent to 1%
of gross output
- minimum funding for Social Development and
Management Program (“SDMP”) equivalent to at
least 1% of direct mining and milling costs


B. MPSA
• MPSA obligations suspended on account of
Force Majeure
- force majeure determined by DENR
- force majeure includes dispute with NGOs
- action/inaction by government, rebellion
• Government can suspend MPSA if:
- contractor does not comply with Mining Act and/or
IRR
- contractor fails to timely pay taxes, fees, and
charges owing to the government


B. MPSA
• MPSA will terminate or be terminated if:
- term expires
- contractor withdraws from MPSA
due to non-viability of mining operations
- contractor violates MPSA’s terms and
conditions
- contractor fails to pay taxes, fees, charges owing to
the government for two straight years
- contractor makes false statement or omits facts



B. MPSA

• MPSA will terminate or be terminated if:
- contractor fails without just cause to commence
commercial production within agreed timetable
- contractor violates approved work program or
approved modification thereof



B. MPSA
• Arbitration
Tribunal of three arbitrators
- subject to Philippine Arbitration Act:
» an aggrieved party can petition a Philippine court to
direct that the arbitration proceed
» court can appoint third arbitrator if parties cannot
agree
» hearing to start within 5 to 15 days from
appointment of arbitrators
» written award must be made within 30 days after
hearings close, but extendible upon parties’ mutual
consent


C. FTAA

• Large-scale exploration, development, and
commercial utilization of mineral resources

• Contractor has exclusive rights to explore, mine,
process, refine, and dispose of minerals and
mineral products and by-products from FTAA
area



C. FTAA
• Supreme Court upheld Constitutionality of
Mining Act and FTAA in December 2004 ruling,
in rare reversal of court’s own decision issued in
January 2004

• Court upheld validity of up to 100% foreign
ownership of companies holding EPs, FTAAs,
and Mineral Processing Permits

• Oil and gas SCs likewise validated



C. FTAA

• Third Generation Model FTAA
Term:
- 25 years; renewable for an additional 25
years upon mutual agreement
- basis of renewal is identification of sufficient
mineral resource



C. FTAA
• FTAA Phases/Periods (25 years total initial term)

(1) Exploration: 2 years + 2 years extension
(2) Pre-feasibility Study: 2 years
(3) Feasibility Study: 2 years (submit DMF)
(4) Development and Construction: from DMF
approval and after environmental and local
government consents are obtained
(5) Operation: from date of declared date of
commercial operation until end of term



C. FTAA
• Hectarage
- onshore: 81,000 hectares
- offshore: 324,000 hectares
- or both combined

• Surface Areas
- may be acquired by government for the contractor
at latter’s expense



C. FTAA

• Relinquishment
- 25% of total area for first 2 years of exploration:
10% of remaining area during each year of
extended exploration period
- FTAA area after relinquishment not to exceed 5,000
hectares, unless size of deposit or operations
warrants larger area (increase in size subject to
DENR approval)



C. FTAA
• Government may suspend FTAA if:
(1) contractor fails to comply with any provision
of the FTAA, Mining Act, or IRR
(2) contractor fails to pay government taxes
and fees
• Contractor’s obligations suspended due to
Force Majeure
- definition of Force Majeure similar under
MPSA
- suspension due to Force Majeure subject to
MGB approval


C. FTAA
• FTAA term may be suspended due to temporary
non-feasibility (economic or technical) declared
by contractor, subject to DENR approval
• Government may terminate FTAA due to:
(1) material violation of FTAA
(2) contractor’s failure to pay taxes and fees for two
straight years
(3) intentional and material false statement
(4) contractor’s failure to establish a Mine Rehab Fund
(5) contractor’s failure to register FTAA and payment of
fees at MGB Regional Office after execution



C. FTAA

• Arbitration
- government and contractor to agree on rules of
arbitration (Philippine Arbitration Act,
UNCITRAL, or ICSID)
- in case of UNCITRAL or ICSID arbitration,
venue is SIAC or ICSID Centre as the case
may be



C. FTAA
• Fiscal Regime
- determine “Net Mining Revenue” and “Basic
Government Share”

Net Mining Revenue:
Gross Output from sale of mineral products
Less: Deductible Operating Expenses (cash basis)
Plus: Government Taxes, duties, and fees included as
part of deductible expenses
__________________
Net Mining Revenue



C. FTAA
• The required final government share is equivalent to at
least 50% of the Net Mining Revenue
• Basic Government Share, consists of the following:
(1) FTAA holder’s income tax;
(2) customs duties and fees on imported capital
equipment;
(3) value-added tax on imported goods and services;
(4) withholding tax on interest payments on foreign loans;
(5) withholding tax on dividends to foreign stockholders;
(6) documentary stamps taxes;
(7) capital gains tax;
(8) Excise tax on minerals;


C. FTAA
• Basic Government Share, consists of the following:
(9) royalties for mineral reservations and to
indigenous peoples, if applicable;
(10) local business tax;
(11) real property tax;
(12) community tax;
(13) occupation fees;
(14) registration and permit fees; and
(15) all other national and local government taxes,
royalties and fees as of the Effective Date of the
FTAA.



C. FTAA

• If the Basic Government Share is less than 50%
of the Net Mining Revenue, an "Additional
Government Share", to bring up the total
government share to 50% of Net Mining
Revenue, must be paid by the contractor
• Recovery Period:
- contractor can recover actual pre-operating expenses
- five years from start of commercial production or
NCF = Total Pre-op Expenses, whichever comes first
- only items (1) to (8) of Basic Government Share are
paid by contractor ©2009 Baker & McKenzie 35


C. FTAA
• Post-Recovery Period:
- items (1) to (15) of Basic Government Share are paid by
contractor + applicable Additional Government Share
• Sale of Minerals by contractor (basis of Gross Output)
- must be at market price
- arms-length
- marketing agreements/sales contracts subject to
DENR approval
• Stabilization Clause
- in case of change in law or regulation reducing or
prejudicing the rights of contractor under FTAA, government
and contractor undertake to negotiate amendments to FTAA so
that contractor will enjoy terms and conditions no less
favorable



Environment, Social Programs, IPs,
Local Government Consents

• Common to MPSA and FTAA
• Environment:
- Environmental Compliance Certificate
(“ECC”)
- Environmental Protection and Enhancement
Program (“EPEP”) = 10% of Total Project Cost
- AEPEP = 3-5% of direct mining and milling cost



• Environment:
- Contingent Liability Rehab Fund, consisting of
(1) Monitoring Trust Fund = at least PhP50,000
(2) Rehabilitation Cash Fund = 10% of EPEP cost or
PhP5 Million, whichever is lower
(3) Environmental Trust Fund = PhP50,000
(4) Mine Waste and Tailings Reserve Fund
(5) Final Mine Rehabilitation and Decommissioning
Fund = annual contributions starting from
commercial operations to cover full extent of work
necessary for mine closure



• Social Programs
- Social Development and Management Programs
= annual minimum of 1% of direct mining and
milling costs
• IPs
- prior consent required before DENR approves any
mining tenement
- IPs entitled to royalty of at least 1% of gross
output



• Local Government Consents:
- for exploration applications (under EP or FTAA):
proof of consultation and/or project presentation to the
concerned local government units is required;

- for projects in the development stage:
prior approval or endorsement in the form of a resolution or
certification by at least majority of the local government
councils concerned (barangay council, municipal or city
council, and provincial council) is required before the
contractor can proceed to development and/or utilization
activities.



Oil and Gas



Petroleum Service Contract

• Allows contractor to conduct “Petroleum
Operations”
- searching for petroleum, drilling and natural flow or
suction or the like, and incidental operations

• “Petroleum”:
- crude oil or mineral oil, natural gas or hydrocarbon
gas, condensate, casinghead petroleum spirit,
bitumen, asphalt, mineral gas, and all other similar
or naturally associated substances




• Term:
- exploration: 7 years with designated sub-
phases + 3 years extension + 1year
“additional” extension (to determine
commerciality)

- production: 25 years less the additional
extension of exploration period + [5+5+5
year renewals]


• Government/Contractor’s Share from Annual
Production:
Gross Proceeds 100
Less: Filipino Participation
Incentive Allowance (maximum is 7.5) 7.5
Less: Cost Recovery
(not to exceed 70% of Gross Proceeds) 70

Net Proceeds 22.50



Net Proceeds 22.50
Government Share (60% x 22.5) 13.50
(income tax will be paid out of this
government share)
Contractor’s Share (40% x 22.5) 9
Income Tax
(Contractor’s Share/70%) x 30%
(new income tax rate effective
1 January 2009) 3.86
Government Share, after deduction of
income tax:
(13.5 less 3.86) 9.64
National Government Share (60% x 9.64) 5.78
Local Government Share (40% x 9.64) 3.86



• Cost recovery:

- contractor will be reimbursed for all
operating expenses not exceeding 70% of
the gross proceeds from annual production
- if the operating expenses exceed 70% of
gross proceeds, excess recovered from the
operations of the succeeding year



• Filipino Participation Incentive Allowance
(“FPIA”):
Filipino Participation Incentive Allowance
30% and above 7.5%
27.5% but less than 30% 6.5%
25% but less than 27.5% 5.5%
22.5% but less than 25% 4.5%
20% but less than 22.5% 3.5%
17.5% but less than 20% 2.5%
15% but less than 17.5% 1.5%
Below 15% 0%



• FPIA
- maximum 7.5% also given by DOE if:

(1) Filipino participation is at least 15% + SC is in a
Deepwater Area (at least 85% of SC area in depths
beyond 200 meters); or

(2) Filipino participation is at least 15% +
well drilled is in water depths beyond 200
meters, even if outside Deepwater Area



• Abandonment costs
- contractor required to establish a sinking fund within one
year from commercial production
• Marketing of Petroleum
- contractor will market government’s share of petroleum, unless
government elects to receive its share in kind
• Stabilization
- in case of change in law or regulation, the Parties
Parties shall immediately meet and negotiate on an
equitable allocation of the benefits with the end in view of
retaining the commercial terms or gains by which this
Contract was agreed to by the Parties



• Insurance

- to cover, among others:
(1) damages to drilling installations
(2) third party liability
(3) liability for pollution and clean up
expenses
(4) expenses for killing blow-outs




• Government can cancel SC, in the absence of
justifiable cause, and after due notice, if
contractor fails to :
(1) fulfill its work obligations
(2) remit the government share within 60 days
from lifting or delivery date
(3) post required performance bond
(4) implement required safety measures
(5) submit required reports


• Performance Bond
- sufficient to cover minimum expenditure
commitments for exploration and development
- surety(ies) must be acceptable to DOE

• Consultation and Arbitration
- if dispute cannot be settled amicably, ICC
rules apply
- 3 arbitrators
- Venue is the Philippines, unless parties otherwise
agree



Coal



Coal Operating Contract

• Contractor operates COC area on behalf of
government

• Contractor provides services, technology and
financing for coal operation




• Term

- exploration: 2 years + 2 years

- development and production :
10 years + 10 years + [3+3+3+3 years]
(need environmental and indigenous
people’s consent, if COC is within ancestral
domain area)



• Revenue Sharing
Gross Income [i] 100.0
(net of commission and brokerage/delivery expenses)
Less: Cost recovery
(90% of gross proceeds or actual operating expenses[I
whichever is lower) 90.0
Net proceeds 10.0
Less: Operator’s fees and allowances
Basic operator’s fee (40% of net proceeds) 4.0
Special allowance[(30% of net proceeds) 3.0
___
Government share 3.0
DOE/National Government
Share (60% x 3): 1.8
Local government share ©2009 Baker & McKenzie 56
(40% x 3): 1.2



• Performance Bond
- amount depends on approved annual work
program
- surety(ies) must be acceptable to DOE

• Abandonment
- contractor has obligation to properly abandon and
rehabilitate all sites affected by the coal operation




• Contractor’s obligations suspended due to force
majeure

• DOE may cancel the COC, after due notice, if contractor
fails:
(1) to fulfill work obligations
(2) secure ECC within time required
(3) timely remit government share
(4) timely post performance bond
(5) meet DOE safety standards
(6) submit reporting requirements to DOE
(7) comply with Coal Act and applicable regulations



Matrix of
Mining Laws of ASEAN Countries

Based on data provided by individual member countries
of the ASEAN Federation of Mining Assocications and
supplemented by Quisumbing Torres/Baker & McKenzie
ASEAN offices as of 16 October 2008


PRINCIPAL MINING LEGISLATION

PHILIPPINES CAMBODIA LAO PDR MALAYSIA MYANMAR THAILAND VIETNAM

Mining Act Law on Mining Law Mineral Mines Law Minerals Act Mineral Law
(1995) Management (1997) Development (1994) (1967) (1996)
and Act (1994) amended by
Exploration the Law
of Mineral State Amending and
Resources Mineral Supplementing
(2001) Enactments a number of
Articles of
The Law on
Minerals
(2005)


AUTHORITY THAT ISSUES THE LICENSES/PERMITS OR ENTERS INTO MINERAL AGREEMENTS


Mines and Council for Department State Department Department Ministry
Geosciences Development of Promotion Governments of of Primary of Natural
Bureau and of Mines Industries Resources
Cambodia
and and and Environment
Department Management
(CDC) Mines in consultation
of
Ministry of of Domestic w/ provincial
Environment Industry, level Peoples’
and Foreign
and Natural Mines and Committees for
Investment
Resources Energy mineral
prospecting,
exploration
schemes and
mineral activity
permits


DURATION OF PROSPECTING LICENSES OR EXPLORATION LICENSES


2 years 2 years 2 years but Varies across 3 years, 3 years, re- 12 months rene-
renewable renewable may be States renewable newable for wable for
for up to for up to extended up Example: for 2 years a period not another
6 years 4 years to 2 years (1yr and longer, exceeding 12 months for
for for at a time) for 2 years,
if required 2 years prospecting
prospecting exploration prospecting renewable
for pros- (total of 5
and (2 years at a for another
exploration time) for 3 years 2 years for pecting and years for 2 years
prospecting renewable prospecting exploration prospecting renewable for
and for up to and explo- 2 years for
exploration to 4 years (2 10 to 15 ration exploration
years Years for
at a time) for exploration
exploration


DURATION OF MINING LICENSES OR MINERAL AGREEMENTS


25 years. 5 years. 30 years. Varies 25 years. 25 years Based on each
Renewable renewable renewable across renewable project’s
for another for another for another states 5 years (mineral feasibility
25 years 10 years 20 years at a time license) study report
(5 years at (10 years at Example:
on
(mineral at a time) at a time) A mining (mining mineral mining,
agreement) lease license)
shall be but
(mineral (mineral
granted for the shall not
license) license) maximum exceed
economic life 30 years and
of the mining
renewable for
operation but
shall not 20 years
Exceed an
Initial term of (mineral
21 years. license)
Renewal
shall not
exceed 21 years


FOREIGN OWNERSHIP LIMITATIONS


40% foreign None Joint None. Joint Venture Thai None.
Equity Venture (Subject to with the ownership (except for
Limit for between the fulfillment Government of shares at precious
MPSA government of applicable least minerals)
and domestic government 40% of
No and/or criteria)
total
foreign foreign
equity parties capital
limits for
holders of
Exploration
Permits,
FTAA
or Mineral
Processing
Permits


MINING RIGHTS TRANSFERS


Possible Possible Possible. Possible Indefinite Possible Possible
Provided
activities
have
progressed
past the
prospecting
stage


Fiscal and Taxation Policies

CORPORATE INCOME TAX


The higher
of 30%
or
2% Minimum
Corporate
20% 20% 27% 30% 30% 25%
Income Tax
(MCIT)
based on
gross
income


EXPORT TAX


No No No No Yes No Yes


KEY ENVIRONMENTAL REGULATIONS
PHILIPPINES CAMBODIA LAO PDR MALAYSIA VIETNAM

Environmental Work Environmental Environmental Impact Plan for Organizations
Program Impact Assessment rehabilitation And individuals
assessment permitted to
Environmental and study exploit
Environmental
Compliance minerals must
impact
Certificate Environmental pay
assessment
Management plan collateral for
Environmental Protection Environment
and Enhancement and
Program Mine site land restoration
restoration and to the Vietnam
Annual Rehabilitation Environment
Environmental Protection Protection
and Enhancement Fund
Program Financial
guarantees
Final Mine
Rehabilitation/
Decommissioning
Plan

Monitoring Trust Fund

Rehabilitation Cash Fund


SMALL SCALE MINING
PHILIPPINES LAO PDR VIETNAM CAMBODIA
Two types of small scale mining Only Lao citizens A small scale mining Artisan Mining License
permits: using their own permit shall be granted may be issued only to
sources of funds may only to Vietnamese persons of Khmer
(1) Small Scale Mining be artisanal miners organizations and/or nationality
Permits
individuals;
- granted to Philippine
Nationals (Filipino citizens or
priority given to
corporations at least organizations and/or
60% Filipino owned); and individuals
residing in the locality
(2) Small Scale Mining Contracts where minerals are
located
- granted under the
regulations to cooperatives
composed of Filipino small
scale miners


MINERAL EXPORT PERMIT
PHILIPPINES LAO PDR THAILAND VIETNAM

Required Required Required Generally, none.

Mineral Ore Export Permit The Ministry of Ministry of Mineral export license Certain minerals need to
issued by the Secretary of Industry-Handicraft grants meet quality standards
the Department of approvals for export of minerals before they can be
Environment and Natural
exported; quality is
Resources; needs proof
of payment of the
validated by accredited
required excise tax Laboratories

minerals coming from
mines identified by
the government for
domestic deep
processing cannot be
exported


Thank You!

Dennis A. Quintero

Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in
professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference
to an “office” means an office of any such law firm.

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