How not to mitigate the reduction in fiscal space – Manila Bulletin

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SUBSTANCE AND SPIRIT

Diwa C. Guinigundo

Malampaya dominates both Pharmally and Starpay in size and consequence. What is at stake here is not medical equipment or remittances. It is nothing less than the Malampaya Gas Field, a deep-water offshore gas condensate reservoir in northwest Palawan, discovered in 1989 and become operational in 2001. Short of skills and funding, the Philippine government contracted Shell Philippines Exploration BV (SPEX) to operate the facility and, with Chevron Malampaya LLC, established a joint venture through the Philippine National Oil Company Exploration Corporation (PNOC-EC).

Originally, Shell and Chevron each account for 45 percent, while PNOC-EC holds the remaining 10 percent.

We are getting serious benefits from Malampaya. With the discovery of offshore gas, we reduced oil imports and allowed a more stable and cleaner source of energy, supplying approximately 40% of Luzon’s needs. Malampaya is also expanding our fiscal space. Long-term revenues from the gas field were expected to be between $ 8 billion and $ 10 billion for the National Government (NG) over its lifetime, accounting for 60% of the upstream gas company’s share of NG royalties. in accordance with Presidential Decree 87 or the Oil and Gas Law. Shell receives 40 percent.

From 2001 to 2018, the government received revenues of over $ 10 billion, or some P311 billion based on the Senate Energy Committee (SCE) estimate. The Department of Energy (DOE) calculates an annual payment of 17 billion pesos to NG. The President is authorized to designate its use in the annual budget. The Malampaya funds financed infrastructure and cheap electricity.

But Malampaya is not inexhaustible.

The November 2020 SCE meeting revealed that natural gas production could be exhausted by 2026 or 2027, five to six years from today. Service contract 38, which is the license to operate the field, is expiring and Shell has announced that it will divest its 45% stake during the Senate hearing. Chevron sold its stake several months earlier for $ 565 million to Dennis Uy’s Udenna.

The Chairman of the Senate Energy Committee, Senator Sherwin Gatchalian, explained that “we have to make sure that whoever takes over Shell’s part has the technical capacity”. The issue was energy security, especially in light of reports that there may be “other potential sinks” in the region.

In May 2021, Udenna succeeded in securing a controlling stake by purchasing the remaining 45% owned by Shell, valued at $ 460 million per installment, $ 380 million initially and $ 80 million between 2022 and 2024 depending on the performance of asset and oil prices.

Gatchalian questioned the deal due to Udenna’s financial capacity. The acquisition of Shell would be financed by foreign loans. Worse yet, in the Senate report it was stated that the DOE “bent the rules” to approve the buyout. Udenna Malampaya had negative working capital and her debt was double her capital. While admitting that Udenna has insufficient capital, the DOE justified it because “the agreements between the lenders, the buyer and the seller are already beyond us.” The DOE is focusing more on the group’s ability to continue working, funding development and continuing exploration work.

The DOE should know that without sufficient capital, these three deliverables are impossible. Udenna brings nothing to the table, no exploration skills or experience, because by the DOE’s own admission, only the names of the shareholders will change. The offshore project workers would stay.

It is also unnecessary to distinguish between the different Udenna consortia. These entities come under the same Udenna group which is said to be heavily indebted. In the event of significant exposure, the obligations of the potential service provider may not be honored.

With the Malampaya project now supplying 26 percent of Luzon’s electricity needs, 3.7 million homes could be affected if the service contract fails to meet.

What is difficult to understand about the takeover of Shell is the failure of DOE and PNOC-EC to take appropriate action by matching Udenna Malampaya’s offer to Shell. It was explained that if PNOC-EC also wanted to increase NG’s operational stake, national banks would only lend 50 percent of the purchase price. The reason why the PNOC-EC board decided to waive its right despite the discounted sale and expected short payback period is known only to them.

Former PNOC chairman Eduardo Mañalac suggested that the government had effectively lost billions of pesos in profits by giving in to Udenna. By his own estimate, some 138 billion pesos have been lost. Without the takeover of Uy, NG could have received an additional 42 billion pesos simply by taking control of the Malampaya contract for the remaining three years. This amount could be higher due to the increase in oil prices.

Perhaps for all of these reasons, three people sued Energy Secretary Alfonso Cusi, President of Udenna Corporation Uy and 24 others for “questionable sale of shares in the Malampaya gas-electricity project”. Balgamel Domingo d’Iloilo, attorney Rodel Rodis and businesswoman Loida Nicolas Lewis, both based in the United States, claimed that Cusi and other officials conspired to give Uy “an unfair advantage in the buyout of a Chevron subsidiary that held a 45% stake in Malampaya.Gas to electricity conversion project.If proven, the culprits could be charged under RA 3019 or the Anti-Practices Act. Registry and corruption The complaint was lodged with the ombudsman’s office in the city of Iloilo on October 18.

The complainants argued that NG, through PNOC-EC, should have exercised its right to match Udenna’s offer. Obviously, the whole Malampaya project was very profitable. It remains to be determined why Chevron and Shell decided to pull out. NG’s inaction is wasting a good opportunity.

If someone doesn’t let go, the job of our finance and treasury department should be much easier. Malampaya could have mitigated the reduction in our fiscal space, especially in this time of pandemic.


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