Law makers in the Philippines are seeking to refocus the Philippine National Oil Company’s (PNOC’s) investment mandate towards exploration and production ventures. The move is part of an effort to revive the Southeast Asian nation’s ailing upstream sector and attract new investment as its energy security situation continues to deteriorate.
The pending legislative measure is also likely linked to a proposed exploration joint venture between PNOC and China National Offshore Oil Corporation (CNOOC) in the South China Sea. With few investors lining up to explore its untapped basins, the Philippines is leaning towards Chinese investment.
According to Senator Sherwin Gatchalian, chair of the Philippine Senate Committee on Energy and author of the proposed bill, PNOC’s resources have been spread too thinly in the past. Although PNOC’s investments in geothermal have been successful, its moves into other sectors, such as alternative fuels and renewable energy, have been less remarkable, he noted.
As a result, the lawmaker believes that the investment activities of the state-backed company need to be primarily recalibrated towards upstream oil and gas exploration. This will be crucial if the Philippines is to improve its energy security, he said.
The Philippines currently relies on the Shell-operated Malampaya field for much of its gas demand. But output at the aging field is expected to start slowing from 2022 ahead of Shell’s contract expiry in 2024.
“My view on the energy transition, we will need natural gas and we have to explore every possible area here in our country to find our own source of natural gas,” Gatchalian stressed.
He added that PNOC is in the best position to lead the way in search of the Philippines’ next commercial oil and gas fields. He also suggested that PNOC would need to partner with “deep-pocketed multi-national investors that will aid the country in its exploration and production investment.”
Still, “if the government is serious about revamping PNOC, they should start by staffing up the company with the appropriate expertise and have it run by competent professional oil and gas managers,” an industry executive told Energy Voice.
Positively, “Sherwin is trying to address actual policy issues on energy security rather than having any sort of personal profit agenda, as unlikely and rare as that seems amongst Philippine legislators. I know his staff has been puzzling over the energy situation for at least two years now and he has an entire section of his staff dedicated to the specific sector,” a Philippines-based political analyst told Energy Voice.
“As for the likelihood of the bill passing – I would say pretty low. It’s an election year, plus the pandemic, so legislative bandwidth is even lower than usual, and then something that could be easily painted to the public as selling out to China by opponents, would seem like something legislators would be wary to engage in,” cautioned the analyst.
UPSTREAM INVESTMENT AND UNREALISED FRONTIER POTENTIAL
It remains to be seen if the country can attract international investment for its upstream. Except for China’s CNOOC, there has been little interest from international oil companies (IOCs) in recent years.
“The Philippines is an area that has typically been the poor man of exploration in Southeast Asia. There have been one or two highlights, but generally any mention of the Philippines and people prefer to walk away,” an Asia-focused explorer told Energy Voice.
Indeed, the Philippines’ undiscovered conventional hydrocarbon potential is widely regarded among the lowest in the Asia Pacific region.
Even when global oil prices were at more than $100 per barrel, there was little interest in exploration in the Philippines, with the exception of a few small players. Data from the Philippines’ Department of Energy shows only five exploration wells were drilled in the country between 2007 and 2017.
Still, some experts believe the country holds unlocked potential.
“The Philippines remains an attractive destination for exploration, not only because of its generous fiscal and contract terms, but also its petroleum geology. However, not many explorers around the world know this,” a Philippines-based oil and gas expert told Energy Voice.
“What is better known were the many failures in the past being passed on from generation to generation. This could be mainly due to the lack of appropriate promotional effort by our government. The prospectivity of the Philippines, to my mind, is as attractive as our Southeast Asian neighbours, especially those basins around Palawan, Mindoro and North/Northeast Borneo, which have similar petroleum geology to most of Southeast Asia. Similarly, new concepts for the other basins exist. I know of numerous large to giant structures that remain undrilled in these areas,” added the expert.
To attract more upstream exploration investment the government needs to invest in a new comprehensive technical assessment of all the basins, followed by a concerted promotional effort worldwide of the opportunities, similar to the campaign done in the mid-80’s, the last of its kind. Technology has advanced since that time, but the Department of Energy has not modernised, or used modern technology and concepts, to upgrade the understanding of the petroleum potential within its basins, said the expert.
In addition, the government would need to remove the uncertainties surrounding the interpretation of current petroleum laws, especially in relation to taxation. Permitting processes, which have substantially slowed down the pace of exploration and development activities, also need to be streamlined.
Significantly, many of the prospective areas for oil and gas remain in disputed waters, and the associated geopolitical risks will deter most investors. The exceptions are Chinese national oil companies (NOC), such as CNOOC, which will support recent dialogue between Manila and Beijing to jointly explore territory that is contested between the two nations.
Last October, PNOC said that it aimed to start an exploration venture with CNOOC in the South China Sea later this year at its Service Contract 57. The contracts covers the Calamian oil and gas prospect, near the Shell-operated Malampaya gas field, in non-contested waters.
PNOC believes the prospect could hold around 2 trillion cubic feet of gas and the company hopes to start drilling by the fourth quarter this year.
Still, any progress on joint development will be slow, especially given the political and legal hurdles that will have to be overcome. It is easy to set up a joint development zone, however it is much more difficult to negotiate the terms, especially the financial ones.
Beijing and Manilla had been locked in a bitter dispute over the waters off the Philippine archipelago’s west coast for years. This started to change after President Rodrigo Duterte came to power in the Philippines in 2016.
Since then, the Philippines has leaned more towards China. Manila has scant financial resources, so they have an interest in finding investment partners that are not fussy and can help them extract significant rents from potential offshore resources.
Ultimately, the power-hungry Philippines cannot bank on an upstream revival, with past exploration having been largely lackluster. Therefore, liquefied natural gas (LNG) import schemes will be crucial to help meet the country’s rising gas demand, particularly as production will almost certainly wane by the late 2020s.
Of course, if joint Chinese-Philippine exploration eventually comes to pass, and is successful, perhaps there is hope yet for an upstream renaissance.