Oil and Gas in the Capitals

	Vol. 231 No. 2
JEFF MOORE, CONTRIBUTING EDITOR, ASIA-PACIFIC

What the experts have to say about the Philippine upstream sector

E&P in the Philippines is picking up. In past columns I’ve mentioned drilling activities there by Nido Petroleum and, more recently, by ExxonMobil. What’s the big deal in the Philippines? I interviewed a few knowledgeable people, and here’s what they told me.

Lack of past interest. Why were so few drilling here in the past? Says Jocot de Dios, the former undersecretary of the Philippine Department of Energy and current Nido CEO, “I found myself explaining the lack of drilling activity in the Philippines whenever I would go on the road.” First, he says, “The Philippines is a developing country, and exploration is expensive, especially in the deep water, which the Philippines has a lot of. The Gulf of Thailand, for example, is a lot shallower than the Palawan Basin, and has abundant gas reserves within easy reach of explorers.”

Second, he says, “Countries like Malaysia, Indonesia, Thailand and Vietnam—they have SOEs [state-owned enterprises] aggressively leading the charge and spending heavily on drilling activity. PNOC [the Philippine National Oil Company], while involved in E&P, has also been at the forefront of other activities such as geothermal energy. The Philippines is the second largest geothermal producer in the world. And downstream, PNOC was until recently a major partner in downstream player Petron. As such, exploration activity has had to compete with these other activities.”

Third, for many years, domestic law was perceived as hostile to mining, and by default, drilling. “When the 1995 Mining Act was challenged regarding foreign mining,” says de Dios, “a lot of these large companies felt uncomfortable going there to drill for oil even if the upstream oil sector was not affected.” There had always been friction regarding foreign investment in mining operations, but it got worse in January 2004 when the Supreme Court declared foreign mining illegal.

Likely sensing the folly of its actions, the Supreme Court reversed this later the same year. “So after that was cleared, the apprehension and doubt lifted,” says de Dios. “We went on road that very year and into 2005 to gather foreign interest in the E&P sector, and activity has picked up tremendously.”

Current situation. Now, the Philippines is reaping rewards of its 2004–2005 marketing campaign. There’s no mass surge of drilling, but E&P activities are increasing. After 2004, a host of companies went to the Philippines in search of gas and oil, including Sinopec, Petronas, Pearl, Nido, BHP, Japex and Mitra. Says Philippine Ambassador to the US Willy C. Gaa, “As of early 2009, the Philippines has 28 service contracts.”

A Shell-led consortium in 2001 began operations 3,000 m below sea level at the Malampaya Deep Water Gas-to-Power Project. It’s 80 km northwest of Palawan island and has an estimated 2.7 Tcf of gas and 85 million bbl of condensate. Nido Petroleum is drilling in the Palawan Basin and producing some 20,000 bbl of oil a day at Galoc Field—an old Occidental area Nido refurbished in 2007. Based on thousands of kilometers of seismic surveying, Nido believes Palawan might hold 11 billion bbl of oil. Exxon’s big project is the Dabakan-1 well in the SC-56 contract area in the Sulu Sea. It might hold 750 million bbl of oil. Dabakan-1 is not only the well drilled in the deepest water in the Philippines (1,800 m), but also the longest well (5,000 m).

Wood Mackenzie’s Andrew Fang is cautious, however. “Prior to the ExxonMobil well,” he says, “activity in the Philippines was pretty marginal. There was an uptick in licensing in 2008 with eight blocks awarded. However, they were all taken by small companies, with little or no operating history in a number of cases. The fact that almost all these blocks are in deep water, requiring significant technical expertise and strong financials to conduct exploration, suggests little will happen.”

However, Fang also says that, if Exxon strikes it big, it will be significant for the Philippines. “Depending on the result, this could be the first significant discovery since the Malampaya-Camago Field was discovered in 1992. This will definitely spark interest from other IOCs for blocks in the Sulu Sea.”

De Dios adds, “Not a lot of wells have been drilled in the Philippines. However, the success rate has been extraordinary. But these are in small fields. What you are looking for to make a company are the deepwater elephants. That’s what the Exxons are out there for. Nido also has an impressive inventory of deepwater targets.”

What is the investment environment? Says de Dios, “The Philippines has the best fiscal regime around in the area. It has a lot to offer.” Fang agrees: “The fiscal terms for Philippines service contracts are the most attractive and straightforward in Southeast Asia. The government has intentionally set them this way to attract foreign investors to the oil and gas industry. Due to the small number of foreign companies operating in the Philippines, it is relatively easy to acquire a large amount of exploration acreage, either through direct negotiation with the Department of Energy or farming into existing blocks.”

Ambassador Gaa points to improved business processes such as increased transparency and ease of administration. For example, the government created a special government division, the CIQ group (customs, immigration and quarantine) to serve as a “one-stop shop” to service Exxon’s administrative needs. It consists of the Department of Energy, the Customs Bureau, the Immigration Bureau and the National Quarantine Office. Exxon uses it to process people and materials in and out of the Philippines, circumventing otherwise cumbersome government bureaucracies.

Where does the oil and gas go? “As a generalization,” says Fang, “any oil found is likely to be sold to Philippine refineries; gas is likely to be piped to one of the larger islands. However, with the majority of gas demand located in Luzon, any gas discovered in the Sulu Sea is probably too far away to be economically developed, and commercialization options will be limited. There are two refineries in Luzon, so its quite possible oil will be sent there.”

Gaa explains that because of shortfalls in energy production, 63% of the Philippines’ energy comes from outside. “Oil consumption for 2007 stood at an average of 340,000 bpd, fractionally up from 2006,” he says. “Natural gas consumption, practically all of which is fed directly to domestic power generation plants, stood at 100% of production, at 88.2 Bcf for 2006.”

What’s to come? Says Ambassador Gaa, “To reduce energy costs, the government needs to reduce dependence on imports; the objective is to reach 60% energy independence by 2010.” This includes other resources such as solar and wind. “As of December 2008,” Gaa continues, “the Philippines’ energy self-sufficiency level increased to 58.6% compared with 57.7% in 2007. The Philippine government hopes to achieve this goal by becoming more aggressive in our exploration and development efforts in oil, coal and natural gas.” Because of government policy and ease of investment, then, E&P in the Philippines will likely continue for the next several years, barring both Nido and Exxon roll snake eyes. WO