The Philippines petroleum sector is undergoing a major restructuring in line with the country's current political transition.
A democratically elected government led by President Fidel Ramos has worked successfully to overcome problems left from the notorious regime of former President Ferdinand Marcos.
Energy policy is key to the government's attempts to rebuild the Philippines economy. The Philippines Department of Energy (DOE) is keen to revive oil and gas activities in and around the islands and to liberalize the current heavily regulated regime.
A number of factors are lining up that are expected to turn up the heat throughout the Philippines oil and gas industry, including:
- DOE has set new energy targets for the Philippines that call for increasing the level of self-sufficiency in oil and gas production and electric power generation.
- The government plans to revive exploration and production onshore and offshore, with development of giant Malampaya/Camago gas fields, the jewel in the crown.
- DOE has set a deadline of 1997 to deregulate the Philippines' downstream sector, which is likely to trigger a fresh wave of activity among refiner/marketers.
POLITICAL REFORMS
Philippines political reform has set the stage for a resuscitation of the country,'s moribund energy sector.
"Government is generally viewed positively by Filipinos," said Reinier Willems, president of Pilipinas Shell Petroleum Corp. "However, the government still needs to do a lot of selling internationally to change images of the Philippines acquired over the past 20 years from reportage such as the CNN stories of Imelda Marcos' shoes."
Willems said Ramos' message is that Philippines is back in business. Ramos has made progress in calming insurgency by Communists, Muslim fundamentalists, and other groups, although there are still problems.
Ramos also is credited with cleaning up the country's police force and taking steps to reform Philippines judiciary and tax regime. However, the big remaining public concerns are insurgency, graft, and corruption.
"President Ramos has projected a realistic vision of where the Philippines can be in 2000," said Willems. "Under his command, the Philippines gross domestic product is rising. Laws are currently being developed to begin deregulating the oil industry in 199596. "
ENERGY PLAN
Flordeliza Andres, DOE assistant secretary, said that under Ramos the Philippines energy program has emerged as a rolling plan updated each year by congress.
Now Philippines is 31% self-sufficient in total energy consumed and this is expected to rise to at least 33% by 2000, excluding development of Malampaya/Camago gas fields, seen as key to Philippines intentions in gas production.
Andres said the department's most ambitious forecast was that the country could be 70% self-sufficient in energy by 2000, but the most realistic scenario, based on development of Malampaya/Camago, is 46% self-sufficiency by 2000.
DEMAND FORECAST
Shell foresees Philippines total energy demand rising at 6-7% a year, from 405,000 b/d of fuel oil equivalent in 1994 to 560,000 b/d of fuel oil equivalent in 1999.
Nonoil energy sources will be promoted to reduce dependence on oil from 70% of total energy demand this year to 58% in 1999.
"However, this hinges on the ability of National Power Corp. and independent power producers to complete various projects on time," Shell said.
"Despite the forecast reduction in oil dependence, oil demand is expected to attain an average annual growth of 3%, with liquefied petroleum gas and gasoline posting average annual increases of 11% and 6%."
Government has firm plans for a total 5,888,000 kw generating capacity, of which 2,075,000 kw is in place. Current construction work will add as much as 3,217,000 kw of new capacity, while another 596,000 kw is out for bid. Other projects are under discussion.
Andres noted the government has decided to mothball a 600,000 kw nuclear plant. To offset that somewhat, by 2000, Philippines intends to increase coal and geothermal shares of the energy mix pending firming of plans for gas production from Malampaya/Camago fields.
DOE estimates Malampaya reserves at 1.9-3.9 tcf of gas and 29-126 million bbl of oil and Camago reserves at 0.91.2 tcf of gas and 0-6 million bbl of oil.
"Malampaya/Camago is the single most important petroleum discovery in this country," said Andres. "All previous discoveries to date have been small oil fields. Our plan for gas is to encourage development and further discoveries."
Andres said the department expects energy demand to rise 8.6%/year to 2010, while GDP is predicted to rise at 7.4%/year.
"Any increase in self-sufficiency depends almost entirely on Malampaya/Camago development," said Andres. "If we can discover more oil, however, our figures will increase substantially."
Beyond 2000, energy self-sufficiency is expected to fall to 25% by 2010 from the current 46%, unless more hydrocarbon reserves can be found.
"During 2000-2010, unless we find more oil and gas, increasing energy demand will have to be met through imported coal," Andres said.
"(Importing) coal is better than oil from our strategic viewpoint, because it is more readily available in the region. We need only look to Australia and China for coal, whereas for oil we must import from the Middle East."
MALAMPAYA/CAMAGO
Malampaya and Camago gas/condensate/oil fields will be developed by a joint venture of Shell and Occidental Philippines Inc. The companies plan to transport gas via pipeline to landfall at Batangas, from where it will be marketed to new, large power plants and through a gas pipeline to end users in Manila.
"We have told government it must make space for 3 million kw of electricity generation by 2000 to justify development of Malampaya/Camago," said Willems.
"We have proved enough reserves to justify our plans. There will be no further drilling until we have an agreement with government for field development.
"Meanwhile, discussions over potential farm-outs of the project have been halted, because our priority is to get agreements with government before seeking further partners."
Shell estimates overall spending required for development of Malampaya and Camago fields and construction of related power plants at $4 billion. The company anticipates a heads of agreement next year, leading to detailed development agreements in 1996.
"We are optimistic for Malampaya development because of the high costs of electrical power in the Philippines," said Willems. "Government has set out to ensure that future projects will lower the average power price."
However, Shell is keen to arrange for plateau gas production of 400 MMcfd upon start-up from Malampaya/Camago to maximize project economics. This will require power plants to be completed in time for first gas and not phased in after initial production.
The major threat to development of Malampaya/Camago is the government's push to increase its coal fired electricity Generating capacity in a bid to cut dependence on imported oil.
"Government has said that up to 2000 it must plan without Malampaya gas," said Willems, "and so it has promoted coal fired projects. Last year it gave approval for a total 1 million kw of new coal fired capacity."
Shell has objected, telling government it might be better off building oil fired power plants that could be readily converted to gas as Malampaya production becomes available.
MALAMPAYA TLP
Ismael Ocampo, chief of DOE's oil and gas division, said development of Malampaya/Camago fields is likely to involve u;e of the world's first ten;ion leg platform (TLP) in a gas field.
Willems said Shell estimates Malampaya/Camago gas reserves at 2.53.5 tcf, while other prospects in the license area could add another 1 tcf to reserves.
Shell projects production from the fields of 400 MMcfd of gas, 30,000 b/d of condensate, and 30,000-40,000 b/d of oil.
Water depth in the field is 850 m. The water depth, combined with the need for a 450 km pipeline to shore, would make for expensive gas, Willems said.
A $2 billion field development is expected to involve a TLP sited midway between Malampaya and Camago reservoirs, which he 9 km apart. Gas and liquids would be produced from 10 subsea wellheads and pumped to the TLP for processing.
Gas would be moved via pipeline to shore, while oil and condensate would be held in a floating storage and offloading unit alongside the TLP prior to export by shuttle tanker.
Though a TLP is the preferred option for development, "platform choice is still an open question," Ocampo said. "The investment decision will be made in 1996, with the field scheduled to be on stream in 2000-2001."
Meanwhile, British Gas plc and local utility First Philippine Holdings Corp. have signed a 40-60 joint venture agreement to develop a market for Malampaya/Camago gas under a new company called First Gas Holdings.
British Gas said the venture plans to build an onshore gas transmission pipeline, a series of combined cycle power plants, and a distribution network to deliver natural gas to industrial and commercial customers. The projects would use gas from Malampaya and Camago fields. BG pegs investments in these projects at 1-1.3 billion ($1.5-1.95 billion) the next 6 years (OGJ, Oct. 10, p. 38).
BG Gas expressed interest in conducting exploration in Philippines as well. Chief Executive Officer Cedric Brown was quoted in the Manila press as saving the country is examining prospects in Manila Bay.
EXPLORATION DRIVE
"We believe the Philippines is underexplored," said Rufino Bomasang, undersecretary at Department of Energy, "and we have not drilled enough wells even in Palawan area to see our full potential for gas."
Bomasang said Malampaya/Camago development will encourage other companies to drill for gas in the Philippines.
"Many gas finds have been capped in the past," said Bomasang, "because the companies have been looking for oil.
" We now have companies seeking to drill wells in Philippine National Oil Co. (PNOC) onshore licenses. And one company is planning to drill in Manila Bay, which is undrilled because identified structures are thought to contain gas, which nobody so far has wanted."
LICENSE PERFORMS
Ocampo said recent changes to the Philippines' exploration licensing regime A,ere designed to provide the best and most stable terms in the region.
The new contract regime involves 6 month geophysical permits and I year exploration contracts extendable for drilling as many as two wells. License renewals allow a total 10 year exploration period, followed by a 40 year production and development license to exploit commercial finds.
Ocampo said typical onshore licenses covered 500-7,500 sq km, while an offshore license will typically cover 800-15,000 sq km.
"The most important new change is that exploration costs are (treated as) retroactive," said Ocampo, "so companies can recover past drilling costs on current drilling projects."
Bomasang said the licensing regime had been unchanged through 3 administrations since first being established in 1972.
"Any future changes to the licensing regime will be to the advantage of the contractors," said Bomasang. "We offer this because the Philippines does not have a track record of discovering reserves to compare with neighboring countries."
Most exploration licenses are currently held by Philippines companies, said Bomasang, but these are limited to 1 year terms.
"As they become open, we encourage foreign companies to take a look at them. We have not organized bidding rounds, because so far we have not had that many companies knocking at the door."
Bomasang noted exploratory drilling only started in the Philippines in 968 on Cebu Island, and no commercial discoveries were made until 1972. Now foreign companies are showing increasing interest.
Among foreign companies exploring or pursuing licenses, Bomasang listed: Occidental, Anderman/Smith Operating Co. and ARCO of the U.S.; Coplex Resources NL and Stirling Resources NL of Australia; and Dragon Oil plc of the U.K.
Bomasang said Norway's Den norske stats oljeselskap AS (Statoil) had expressed interest in farm-out agreements, while BG is expected to send a geologist in December to review Philippines prospects.
DRILLING PLANS
A total of 13 wells will be drilled in the Philippines in 1995, said Bomasang, and almost all will be wildcats. A total of 48 onshore and 136 offshore wells have been drilled to date, he said, while 48.7 million bbl of oil had been produced in the Philippines as of yearend 1993.
Among recent discoveries, Bomasang noted San Martin field with 700 bcf estimated gas reserves, Galoc field with 35 million bbl of oil, and Octon field with 15 million bbl of oil and 160 bcf of gas.
One recent wildcat, Oxy's 1 Bantac, offered tantalizing promise with a structure believed big enough to hold as much hydrocarbon potential as Malampaya.
However, Oxy plugged and abandoned the wildcat earlier this month after finding noncommercial oil. Philippines industry sources said the well found an estimated 50 million bbl of recoverable oil, a discovery that would be uneconomic in the prospect's 4,300 ft water depth.
Meanwhile, Mackay Consultants, Inverness, Scotland, said there are 15 active exploration contracts in the Philippines, with another 11 under negotiation.
The consultant said seven exploration and appraisal wells were drilled in 1992 and in 1993, while six are expected to be drilled this year. The consultant predicts seven E&A wells will be drilled in 1995 and another eight in 1996.
"Exploration of deepwater areas off the Philippines is set to become increasingly important in the next few years," said Mackay. "Areas off the seaboard have water depths in excess of 2,000 m."
Mackay said Alcorn (Production) Philippines Inc., operator of West Linapacan field, along with Oxy and Shell have been the dominant companies in Philippines exploration recently. Occidental recently surveyed West Culion block adjacent to the Malampaya find.
ARCO has returned to the Philippines after a gap of several years. Among other programs, ARCO is exploring a 12,000 sq km block in a program that may lead to spudding a wildcat in 1995, Mackay said.
Coplex has converted its Geophysical Survey and Exploration Contract (GSEC) 64 license to a service contract with a one well obligation. The company is planning a second well on its Cliff Head prospect in first quarter 1995, following a wildcat there in late 1993. Alternatively, Coplex may opt to drill a wildcat on its Southwest Palawan license, where Sombrero prospect in 295 ft of water has an initial target at 6,000 ft and a secondary target at 11,000 ft.
MANILA INDEPENDENT
A Manila independent operator plans to drill a wildcat in the gas prone Manila Bay frontier, near main centers of gas demand in Philippines.
In a work program submitted to DOE, Cophil Exploration Corp. disclosed plans to begin drilling in less than 25 m of water 30 km west of Manila during first quarter 1995.
It heads a group that acquired GSEC 72, then designated GSEC 73, earlier this year (see map, Feb. 7, p. 35).
Cophil is completing an initial public offering on the Philippine Stock Exchange. It will be owned 46% by the Philippine public, 18.9% by E.F. Durkee & Associates Inc. of Manila, 19.9% by Coplex and 15.2% by Pacrim Energy NL of Papua New Guinea.
GSEC 73 covers 247,000 acres and contains a large anticline mapped by seismic data acquired in 1984 by Petro-Canada for the Philippines government and by gravity and magnetic surveys. Interests are operator Cophil 27.5%, Coplex 22.5%, Pacrim 20%, Oriental Petroleum & Mineral Corp. 25%, and Petrofields Exploration & Development Co. Inc. 5%.
The group says the Manila Bay prospect is large enough to hold at least I tcf of recoverable natural gas, which if proven would add a wrinkle to the island nation's rapidly developing gas supply scene.
Cophil, meanwhile, hopes to spud its first appraisal well in Libertad gas field on northern Cebu the third week of December. The program was to have begun by last March but was delayed when parts of a truck mounted, Hycalog 3500 air and foam rig assembled for Cophil in the U.S. were damaged during loading in California.
Libertad was discovered in 1957 by Acoje Oil but abandoned as noncommercial. Cophil, having reentered and tested two Libertad wells, estimates reserves at 10-26 bcf and plans to develop the field to supply power generation plants.
PRODUCTION GROWTH
Apart from the exploratory campaign under way, recent discoveries have Philippines oil production poised to mark record levels this decade, according to a study by East-West Center (EWC), Honolulu.
Philippines oil production has fallen to 10, 800 b/d in 1993 from about 23, 300 b/d in 1979, bottoming at about 3,000 b/d in 1991. Cadlao, Matinloc, North Matinloc, Galoc, and Tara oil fields were shut in permanently in May 1991.
Only West Linapacan and Nido fields were producing oil in 1993, and Nido is quickly approaching its economic limit with output at 300 b/d last year, EWC contends.
The string of discoveries in the 1990s has boosted Philippines oil reserves by at least 450 million bbl, EWC estimates. Oil & Gas journal estimated Philippines proved reserves as of Jan. 1, 1994, at 279 million bbl. EWC pegs Philippines gas reserves at 4.3 tcf.
EWC predicts Philippines oil production will jump to 65,000-100,000 b/d in 1996 and 200,000-250,000 b/d in 1997-98. In line with DOE demand projections, that would bring domestic oil output to two thirds of domestic demand.
Added production is slated to go on line in West Linapacan, bringing field output to 50,000 b/d in 1995. In addition, Octon is scheduled to start up in late 1995 at 5,000 b/d.
The big leap in Philippines oil production, however, will come with start-up of Malampaya's early production system in 1996 at 20,006-50,000 b/d. EWC expects Malampaya output to ramp up to 150,000-200,000 b/d under the full production scheme by 1997-98.
DOWNSTREAM PLAYERS
In 1973 there were six players in the gasoline retail market: Shell with 18% market share, Caltex (Philippines) Inc. 28%, Mobil Philippines Inc. 14%, Gulf Resources Corp. 12%, Exxon Corp. 22%, and Getty Petroleum Corp. 6%.
Exxon pulled out in 1973, and about the same time PNOC government formed Petron Corp. That same year Gulf pulled out of the Philippines, with its network being absorbed by Petron.
In 1980 Getty pulled out, and a company called Blecor was formed to take over its assets, only to be acquired 2 years later by Shell. Finally. in 1983 Mobil left the Philippines, with Caltex acquiring its network.
Now three companies dominate the Philippines oil products market: Petron 45.1%, Shell 31.6% and Caltex 22.8%.
Petron is owned 40% by government, 40% by Saudi Aramco following a buy-in in 1993, and 20% by Filipino and foreign shareholders. Total asset base is estimated at 26.8 billion pesos ($1.07 billion).
Caltex (Philippines) Inc. is owned outright by Caltex Petroleum Corp. Caltex Philippines' total asset base is valued at 12.5 billion ($500 million).
Pilipinas Shell is owned 67.6% by Shell Petroleum Co. Ltd. and 32.4% by Filipino shareholders. The company's total asset base is valued at 23.4 billion pesos ($940 million).
PRICE CONTROLS
"The Philippines downstream oil industry has been regulated for the last 20 years to ensure continuity of oil supplies after the 1970s oil price shocks," Willems said.
"Gasoline prices and oil company margins are regulated by government. Companies have to approach government's Energy Regulatory Board (ERB) to request changes. These have sometimes taken a year and a half to get through."
Willems said poor profitability has characterized Philippines downstream operations in recent years. He said the industry was able to average a return on assets of only 5.8% in 1992, compared with 13% for automobile manufacturing in the same year.
"Last year the three oil companies petitioned ERB for a rate of return of 12%," said Willems. ""le have been granted an 8% return since August, and the government is still considering increasing this to 1217,.
"Products prices are low for the region. Government is now looking for a 2 year transition period during which the oil pricing mechanism will be related to crude oil and foreign exchange rates each month, instead of the current system where prices are set by politicians.
"This will educate people of the Philippines that prices can change, and by 1997 prices are expected to be set entirely by market forces."
Willems said anticipated deregulation has encouraged the three main players in the Philippines to plan major downstream investments. He predicts that during the next 3 years Shell will invest a total $980 million downstream, Petron $600 million, and Caltex $590 million.
Shell expects other majors to move into the Philippines market after deregulation and sees current signs of preparations. Petron is said to be more competitive since Aramco became a shareholder, and Mobil has resumed selling lubricants in the market.
Coastal Petroleum Inc., Bakersfield, Calif., has leased naval facilities in the Philippines that include an oil storage depot.
Also, press reports have said a group including Indonesia's Pertamina is studying feasibility of building a 120,000 b/d export refinery on one of the southern islands.
"We doubt whether such a project can compete with refineries already operating in Singapore," said Willems.
REFINERIES
Shell estimates the Philippines' refined products demand for 1993 at an average 278,000 b/d. This breaks out as: 6% LPG for domestic use, 14%, gasoline, 9% kerosine and aviation fuel, 40% diesel fuel, and 31% fuel oil for industrial use.
Products imports accounted for 65,000 b/d of 1993 oil products demand, with the remaining 213,000 bid produced from crude oil by domestic refineries. A surplus of 14,600 b/d was exported.
Current refining capacity in the Philippines is 260,000 b/d. Shell estimates products demand will reach 300,000 b/d bar yearend 1994 and rise to 402,000 b/d in 2000.
One fourth of Philippines products is imported because refineries cannot meet demand and products specifications are changing.
Unleaded gasoline currently accounts for 25% of the gasoline market, and Shell says it will increasingly replace leaded fuels with unleaded grades as the Philippines' aging car population can handle it.
Shell is currently commissioning a new 110,000 b/d throughput unit at its Tabangao refinery, which is said by Shell to represent the leading edge of refinery design. Investment for the new plant,is put at $670 million.
"If we don't build new refineries," said Bomasang, "by 1998 the Philippines will be short of petroleum products, despite the new Shell facilities."
Bomasang said that while Shell is expanding its refining capacity, Caltex and Petron have no definite plans for new grassroots capacity but are planning debottlenecking projects.
Caltex operates a 66,000 b/d capacity refinery, with cracking capacity, that started up in 1954. Investment plans are to include debottlenecking, modernization, and environmental measures.
Petron's refinery, built in 1961, has a throughput capacity of 155,000 b/d and cracking facilities. Investment plans are thought to include LPG and diesel yield enhancement. In addition, Petron is considering construction of a new Petron refinery.
Philippine Petroleum Corp., in which Shell has a 74% share with the remainder owned by investment trusts, also operates a 3,000 b/d capacity lubricants base oil refinery brought on stream in 1974.
Investment plans include a new bitumen blowing unit.
In August, Shell started up a new 60,000 metric tons/year lube oil blending plant at Pandacan, under a 480 million peso ($20 million) project. This replaced a 30,000 metric tons/year unit at the same site.
There is reported to be interest from Indonesia and Thailand in building refineries in the Philippines for export, and Bomasang said Petron is considering building an export refinery, prompted by major shareholder Aramco.
Bill Jones, general manager of Shell's Tabangao refinery, said expected growth in products demand coupled with deregulation would bring in more operators.
"We have presumed we will participate in market growth using available capacity supported by imports until we are ready to make our next investment," he said.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
Issue date: 12/12/94
