70:30 Malampaya royalty sharing dangled

By Myrna M. Velasco – September 26, 2021, 10:00 PM
from Manila Bulletin

A more generous 70:30 royalty sharing in favor of the government is coming forth as the tenor in negotiations on the proposed license extension for the Malampaya gas field project, which is due for turnover by yearend to buyer Malampaya Energy XP Pte Ltd of Davao businessman Dennis Uy.

The Malampaya gas production platform

According to a highly placed source privy to the matter, the proposed 70:30 royalty sharing scheme “will bestow higher benefits to the Philippine government if compared to the prevailing 60:40 sharing arrangement” as prescribed under the original terms of Service Contract (SC) 38 for the Malampaya field that will expire in 2024.

The source explained that “the 70:30 royalty sharing was explored because that will result in higher revenues to be cornered by the government, that is if the operations of the Malampaya field will continue for a number of years more.”

Royalty sharing for oil and gas upstream ventures between the government and the contractor is prescribed under Presidential Decree 87 or the Philippine Oil and Gas Law.

Apart from royalty sharing, the Department of Energy (DOE) imposed seven more conditions that the consortium-members of Malampaya shall comply with relating to the targeted license extension for Malampaya. These include 1)assessment of the remaining reserves in the gas field; 2) the banked gas; 3) the development opportunity or the work program that will be necessary in order for the DOE to evaluate the proposals of the consortium-members; 4) the decommissioning plan; 5) the asset disposal; 6) the price of the gas in the event of license extension; and 7) the corporate social responsibility (CSR) programs that shall be carried out by the consortium.

Malampaya Energy, a subsidiary of Uy’s Udenna Corporation, is targeting to finalize its $460 million acquisition of the 45-percent shareholdings of Shell Philippines Exploration B.V. (SPEX) in the Malampaya venture on or before December this year. That will also pave the way for Malampaya Energy to assume operatorship of the gasfield once the Shell equity divestment is completed.

The subsidiary firm of Udenna will already have controlling stake of 90-percent in the country’s sole commercial gas field – as it also purchased the 45% shareholdings of American firm Chevron Corporation in the gas field via a $565 million transaction that was consummated in March 2020. The remaining 10-percent is held by state-run Philippine National Oil Company-Exploration Corporation (PNOC-EC).

In line with that acquisition, the source noted that “the license extension is a priority matter that buyer Malampaya Energy has been working on with the DoE on assumption that the field still has reserves that could continually supply the country’s gas needs in the next 6-7 years.”

Part of the responsibility passed on to Udenna is to honor SC 38’s commitment to extract the ‘banked gas’ for state-run Philippine National Oil Company.

The license extension for Malampaya was first applied for by SPEX in 2010 during the initial years of the Aquino administration; then it affirmed its application through a formal correspondence to Energy Secretary Alfonso Cusi in 2018 and the company also re-filed an application in 2019; but all of these had not been acted upon by the DOE, thus, that reportedly triggered Chevron’s exit from the venture.

If the gas project license will be extended, Uy’s Malampaya Energy indicated that it will earmark capital spending of P10 billion for drilling of new wells that could then reinforce and lengthen the production life cycle of the gas field. It remains a guessing game though as to who will eventually come in as Udenna’s technical partner for its drilling activities at Malampaya.

As conveyed by Belinda Racela, executive of Malampaya Energy, “the situation is now urgent and requires new investment and the industry’s best exploration and development capabilities to drive growth from the currently depleting asset.”

She added “it’s clear that any further delay is hugely detrimental to Filipino consumers and the economic prospects of the nation,” with her stressing further that “we need to focus on augmenting Malampaya gas supply now to ensure fewer brownouts and safeguard long-term energy security.”

Based on preliminary studies and evaluations done by the DOE and the Malampaya consortium, the full depletion of the field may not happen until 2029-2030. Hence, there would still be great leeway for its gas-producing years to be stretched.

For the new operator of the Malampaya gas field, the DOE previously stated that the government will be requiring the consortium-members to continually pursue development in the areas within SC 38 – including those in Malampaya East, Iloc, Nido and the Linapacan plays.