Philippines ties energy policy to Malampaya gas prices

Oct. 22, 2001
As the Philippines inaugurated its first commercial natural gas field last week, President Gloria Marcapagal-Arroyo unveiled an energy strategy centered on natural gas.

As the Philippines inaugurated its first commercial natural gas field last week, President Gloria Marcapagal-Arroyo unveiled an energy strategy centered on natural gas.

She said the plan will largely depend on new price negotiations with producers. Shell Philippines Exploration BV (SPX) operates the $2 billion Malampaya deepwater project, which started up earlier this month (OGJ, Oct. 15, 2001, Newsletter, p. 8).

The field is 50 km northwest of Palawan Island and 600 km southwest of Manila. Discovered in 1992, it has reserves of more than 3 tcf of gas and 120 million bbl of condensate.

Malampaya gas ultimately will fuel three onshore power plants. Its operation will cut 52% from the nation's annual fuel import bill, officials have estimated.

Meanwhile, on the eve of the project's official inauguration, Shell said it plans to begin tests on an exploration well that it hopes will provide better data on the 50 million bbl of oil reserves in the field.

Deregulation on tap

Marcapagal-Arroyo announced that all onshore gas projects will be deregulated, and the country's power station network will be partially privatized soon with the condition that new investors convert from burning oil to gas. She also announced that next year the government would start a program to convert all public transportation to compressed natural gas.

However, the president said those policies depend on price negotiations with existing and new producers. Shell has 45% of Malampaya, Texaco Philippines BV 45%, and the Philippines National Oil Co. 10%.

In an event last week at Batangas, where Malampaya gas is landed for treatment, Marcapagal-Arroyo told Royal Dutch/Shell Group Chairman Philip Watts, "The cheaper the gas is, the more you will be able to sell."

However, Shell's scope is limited, as most of Malampaya production for its estimated 20-year life is committed. Contracts are in place for 400 MMcfd, leaving 100 MMcfd available for sale.

The program set out by the president, therefore, can be achieved only if Shell discovers more associated gas in the Malampaya oil rim project and if other, smaller offshore projects are developed in the future. Shell is also well-placed to take advantage of any deregulation of the onshore industry. It has advanced plans to build a 100 km pipeline from Batangas to Manila, the Batman pipeline, to supply a power station that currently uses diesel.

Price concerns

Watts said, "Predicting prices is a fool's game. What we want is less volatility and more sustainable stability for the customer."

The Philippines president said that the possible opening up of the land-based gas industry had already attracted the interest of companies from Europe, Japan, Malaysia, and from within the Philippines that had already expressed an interest in becoming involved in the Batman pipeline, which eventually would be extended farther south to Bataan.

She said, "This will provide a direct impact to the consumer through lower electricity prices and reduce our future energy costs under a competitive generation of power.

"We would say to our friends at Shell that any drop in revenues from lower gas prices would be offset by higher gas sales volume."

Gas prospects

Marcapagal-Arroyo said seven small gas discoveries in the Philippines have the potential to be developed, with the first two to be developed likely to be the Libertad prospect in Cebu and the Sultan Sabangawis prospect in Maguinanao.

However, she said that to maintain the growth of the nation's natural gas industry, the country would consider importing LNG.

"Malampaya's success, however, makes us hopeful that there are still many things that are under our waters. This event underscores the importance of an unparalleled industrial investment in a nation that is waging its war against poverty."

Separately, Shell said the production platform, which began operations last month, would operate with only a day shift once satellite control systems are commissioned next year. Currently, a Philippines staff has the day shift, and a staff of mainly expatriate Shell employees has the night shift.

Project details

Malampaya was discovered on Block SC38 in 1992. Production from a subsea manifold in 850 m of water is transported to the production platform in 43 m of water.

The platform is a concrete gravity structure built at Subic Bay and mated to a steel topsides built in Singapore. At 11,500 tonnes, the topsides deck was the heaviest structure installed using the "float-over" technique (OGJ, Apr. 30, 2001, p. 78).

The Malampaya topsides separates gas and condensate. The condensate is temporarily stored in the concrete gravity structure caisson shells and is transferred to tankers via a catenary anchor leg mooring buoy.

The dry gas is moved via a 504 km, 24 in. pipeline to the onshore gas terminal at Batangas on Luzon Island. After treatment, the gas will fuel three power stations that are nearing completion.

The offshore facilities and pipelines cost $2 billion. The rest of the $4.5 billion investment involves construction of three power plants. Korea Electric Power Co. is building a 1,200 Mw gas-fired power plant at Ilijan, and First Gas Power Corp. is constructing a 1,000 Mw plant at Santa Rita, both in Batangas. Manila Electric Co. will have a 500 Mw plant in the Calabarzon region.

The project is estimated to generate $10 billion in revenues for the Philippines government over the next 20 years and cut the country's dependence on fuel imports, mainly high-sulfur coal and fuel oil, by 20-30%.

It also will cut $670 million/year from the nation's energy import bill of $2.5 billion/year, as well as bring in $420 million/year until 2021 in royalty payments.

Exploration effort

Shell hopes that success with its Malampaya exploration well will lead to development of the field's oil reserves.

Shell said the extended test, if successful, will lead to a further $600 million investment to bring the oil ashore via development with a floating production, storage, and offloading vessel.

The targeted area in the complex Malampaya reservoir underlies the gas producing zone in a thin layer, into which a 1,000 m horizontal well will be drilled. The well, M10, was suspended several months ago to allow completion of the five Malampaya gas producers. It is being drilled 5 km west of the gas wells in an oil rim that has an estimated 200 million bbl of OOIP.

The hole will be tested for 105 days. Shell expects a 25,000 b/d flow, which will go into the Stena Nautica dynamically positioned tanker.

The well is being drilled by the Atwood Falcon, owned by Atwood Oceanics, which was used to drill the existing gas wells and has been under contract to Shell for the past 3 years.

Shell said another well would be needed to bring the reservoir into production.

David Greer, SPX managing director, said the oil is high in hydrogen sulfide and would require treatment on an FPSO before being exported by tanker. Associated gas would be tied into the Malampaya gas production platform and then exported through the 504 km pipeline from Malampaya to Batangas.

Shell has 45% of the project. Greer revealed that Shell is in advanced talks with its partners, Texaco Inc. 45% and Philippines National Oil Co. 10%, and with potential customers to build the Batman pipeline.

The line would take Malampaya gas from the shore terminal at Batangas to Manila, where it could be used in the Sucat power station. The proposed Batman pipeline would allow Shell to bring Malampaya to its full production rate of 500 MMcfd. A proposed 1,000 Mw gas-fired power station would replace an existing smaller oil-fired unit, with Shell's Intergen subsidiary likely to hold a substantial interest.