Geothermal Sale

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The Philippine National Oil Company (PNOC) announced on November 21 that Red Vulcan Holdings was the top bidder for the government's remaining 60% share of the geothermal energy producer, PNOC-Energy Development Corporation (PNOC-EDC).

PNOC-EDC is considered to be the most sought-after company to be privatised by the government. With assets worth $1.76bn and a capacity of 1145 megawatts, it is the country's largest producer of geothermal energy. It accounts for more than 60% of the Philippines' total geothermal capacity of 1905 MW and makes the country one of the world's largest producers of geothermal energy, second only to the US. PNOC-EDC's production comes from its geothermal steamfield in Leyte, considered to be the largest wet steamfield on the planet, as well as Negros Oriental, Negros Occidental, Bicol and North Cotabato.

Red Vulcan Holdings, a consortium of Spalmare Holdings and Prime Terracota Holdings and led by First Gen Corporation, offered $1.36bn for the company. First Gen is owned by the Lopez family, one of the wealthiest families in the Philippines. The bid was almost $235m more than the second highest bidder, FDC Geo-Energy Holdings, which is comprised of Filinvest Development and US-based International Power Masinloc Holdings. Red Vulcan's bid was almost $315m over the $1.06bn floor price.

The department of finance had anticipated it would receive between $751m and $845m from the sale.

"This is the best time to sell the company since it is at the apex of its value with investors taking note not just of its value today but also its potential. [...] There is [an electricity] supply problem now but by 2009 it could be met," PNOC President Antonio Cailao told local media.

Cailao added, "Full privatisation of PNOC-EDC sets the stage for building more geothermal capacity [and it] bolsters the country's stature as a global geothermal power providing technical expertise where this green option is available."

Commenting on the sale, Francisco Sebastian, president and CEO of First Metro Investment told OBG, "Right now there is a worldwide shortage of power including the Philippines where the situation is getting tighter, which explains the interest in power assets."

The full privatisation is expected to improve the PNOC-EDC's financial position enabling it to develop several projects with an estimated further generation of 350 MW by 2015.

Projects include the optimisation of existing steamfields in Nasulo Negros Oriental and North Cotabato as well as exploring new ones in Dauin, Negros Oriental and three sites in Bicol. The most promising area is the Cabalian field in Southern Leyte, where 100MW to 150MW could be onstream by 2015.

Geothermal energy comes from volcanic hot springs and with 22 active volcanoes in the Philippines, as a result of the archipelago's geographic location on the Pacific Rim, also known as the Ring of Fire, magma comes close to the earth's surface, heating water which creates steam that can be used for power generation.

With oil prices just shy of $100 a barrel, alternative energy sources are viewed as potentially lucrative investments.

One of the motivating factors behind the government's decision to sell off one of its most coveted assets was to ensure quality as well as a reliable and affordable electric power supply by encouraging free and fair competition through privatisation under the mandate of the June 2001 Electric Power Reform Act. However, the primary factor was to enable the government to bridge a budgetary shortfall caused by low tax collection. The government expects to achieve a $1.5bn deficit or 0.9% of GDP by the end of this year.

While improving the country's fiscal performance would have added benefits including a possible credit ratings upgrade, the sale has been met with some opposition.

"The state may be giving up control of an entity with the mandate and capability to explore new energy resources. [...] in favour of increased revenues for the year," said Senator Mar Roxas. "The private sector's interest is in money, not particularity in national development."

Despite the objections, most industry analysts have said the PNOC-EDC privatisation is a step in the right direction and the government should limit itself to regulating the industry.

The Privatisation Committee officially announced the winning bid earlier this week after reviewing the technical documents submitted by Red Vulcan Holdings.

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