The emergence of new hydrocarbons fields has helped the Philippine energy sector make up for declining output starting in the mid-1990s. While primary energy demand continues to outstrip diminishing domestic production, output from relatively recently exploited reserves such as the Galoc oil field and the Malampaya natural gas field are offsetting maturing blocks as the sector looks to implement a strategy of efficiency, diversification and further exploration and development.

POTENTIAL: In spite of its current modest production levels, the Philippines has substantial untapped potential, which is estimated by the Department of Energy (DoE) at 8.6bn barrels of oil equivalent (boe) including 3.27bn barrels of oil, 28.5trn cu feet of gas and 164m barrels of condensate. In terms of the overall primary energy mix, the Philippines remains highly dependent upon fossil fuels despite recent diversification efforts. Of the country’s 30.2m tonnes of oil equivalent (toe) consumption in 2012, oil and coal were by far the largest contributors at 13m and 9.4m toe, respectively, followed by natural gas with 3.1m toe, hydropower (2.5m toe) and other renewables (2.3m toe) according to the BP Statistical Review of World Energy 2013.

PRIMARY PRODUCTION: The Philippines currently has four active oil fields that produced a total of 1.64m barrels of oil in 2012, down from 2.33m barrels in 2011, according to data from the DoE. The 29.6% reduction was due largely to the Galoc field’s production suspension (which resumed in April 2012) and from a drop in production of other maturing reservoirs. By far the most productive and most recently tapped reserve is the Galoc oil field located off the north-east coast of Palawan Island and in service since 2007.

Galoc accounted for 90% of all domestic oil production in 2012 with 1.48m barrels recovered, down from the 2.18m barrels raised in 2011 and the 2.7m barrels in 2010. The production was supplemented in 2012 by output from the Nido, Matinloc and North Matinloc fields of 73,492 barrels, 71,136 barrels and 10,597 barrels, respectively. A lack of new production streams has led to sustained declines in domestic output since the 1980s (the country produced 8.57m barrels in 1979) broken up by a few short-term production spikes at various intervals. These temporary spurts include the Tara oil field, which produced 221,408 barrels from 1987-90; West Linapacan, with output of 8.53m barrels during 1992-96; Malampaya (1.93m barrels in 2001 and 2002); Tindalo (180,486 in 2010); and intermittent production runs from the North Matinloc field totalling 2.31m barrels since 1988, according to the DoE.

GOING FOR GAS: Consistent with worldwide evolution of the energy sector, the dedicated exploitation of natural gas has been a more recent trend for the Philippines, with the country’s first natural gas field, San Antonio, initially tapped in 1994. Since then, gas production has increased from 194.78m standard cu feet (scf) of gas from one field to 135.5bn scf recovered in 2012, according to DoE data. As the Galoc field dominates oil production, the Malampaya field offshore Palawan province dominates the natural gas sector, accounting for 99.9% of all domestic output in 2012 at 135.45bn scf. This is consistent with recent production levels which have ranged from around 129bn140bn scf each year since 2007 (barring a shutdown in 2009) and down slightly from the 140.37bn scf tallied the previous year, due primarily to a seven-day suspension in operations for maintenance on the shallowwater platform in Palawan in July 2012.

“There is significant optimism in exploration activities in offshore Palawan as confirmed by probability of geophysical success studies conducted, where data gives a high indication of the presence of hydrocarbons and gas given favourable rock formation,” Pedro A Aquino, Jr, president and CEO of Philippine National Oil Exploration Corporation (PNOC-EC), told OBG.

In addition to its natural gas output, the Malampaya project also yields a significant amount of condensate, which generally fluctuates at 4.4m-5.6m barrels per year, with a 2012 output of 4.64m barrels, according to the DoE. This was 8.48% less than the 5.07m barrels extracted in 2011. Joining Malampaya in 2012 was the Libertad gas field, which added 72.42m scf of gas in its inaugural run and is the only other active gas project since the San Antonio field halted production in 2008. The Libertad field began production in February 2012 and is operated by the Forum Exploration Corporation, which uses the gas to power a 1-MW mobile gas turbine to supply power on Cebu Island.

NEW HOPE: Looking to diversify domestic hydrocarbons production away from essentially one primary field for oil and one for natural gas, the government recently concluded its fourth energy contracting round (PECR 4) consisting of 15 oil and gas concessions encompassing more than 10m ha, as well as 30 coal concessions. Initiated in June 2011, the offerings attracted interest from a range of international and local companies, with the DoE ultimately awarding five exploration contracts to eight companies in February 2013.

The winning bids were for Area 1 located in the Cagayan basin and awarded to the Australian firm Planet Gas; Area 4 located in north-west Palawan basin and awarded to a consortium composed of Philex Petroleum, PNOC Exploration and PetroEnergy Resources; Area 5 also in the north-west Palawan basin awarded to a consortium of Pitkin Petroleum and Philodrill Corporation; Area 7 situated in the Cuyo Platform located in the southern part of the Mindoro Basin awarded to NorAsian, the local unit of Australia-based Otto Energy; and Area 14 in the east Palawan basin awarded to Loyz Oil Australia.

The approvals will open up investment in excess of $5m per block for new exploration activity, including geological, geophysical and seismic studies, as well as exploratory wells costing up to $100m each, according to a statement by the DoE.

GOING BACK FOR MORE: The Cadlao field, which last saw action in 1991 when production was suspended after 10 years of operations, which yielded more than 10m barrels of oil, is also the subject of renewed interest. It is now owned and operated by Cadlao Development Company (formerly Blade Petroleum), with an 80% share in the project, and local partner company VentureOil, which holds the remaining 20%, under service contract (SC) 6 and covers an area of 3500 ha located offshore north-west Palawan.

Although the reservoir was plugged more than 20 years ago, more favourable market conditions and technological advances have persuaded the partners to redevelop the field to tap into the estimated 6.05m barrels of oil reserves. Already in advanced stages of development, the project is expected to produce at a rate of 10,000-15,000 barrels per day (bpd) for four to five years, according to Cadlao Development Company.

Another redevelopment project that has recently pulled off the scrap heap is the West Linapacan oil field, which was also active in the 1990s before falling victim to the economic realities of the day. Now operated by no less than eight joint venture partners led by Australian junior developer Nido Petroleum with a 22.28% stake in the project, SC14 C2 consists of an 18,000-ha tenement located in 300-350 metres of water approximately 60 km offshore from Palawan Island. The primary oil-bearing structures of interest are West Linapacan A, which produced in excess of 8m barrels from 1992-96, and West Linapacan B. The venture, which will be operated by partner RMA Limited, could begin producing oil by 2014, according to Nido.

EXPLORATION: While largely overlooked by premier international oil majors, a number of junior exploration and production companies are continuing their search for viable reserves within the Philippines. In 2012 these efforts included around 8500 line km of 2D seismic data of the offshore area in the Sulu Sea off north-west Palawan and onshore in Leyte, according to DoE statements. Additional 3D seismic surveys totalling 184 sq km were also carried out in new sections of the already productive Galoc Block located in north-west Palawan.

Other areas of interest which have been the subject of exploratory activity in recent years and could also hold substantial reserves include Recto (also known as Reed) Bank in the 880,000-ha SC72 block located in the West Philippine Sea being explored by Forum Energy Philippines, and SC59 and SC62 located north-east of the island of Borneo, which are being explored by BHP Biliton and Palawan Sulu Sea Gas, respectively.

LEGISLATION & REGULATION: Oil and gas exploration and production is regulated by the DoE under a service contract system which was first installed in 1973 with the enactment of presidential decree (PD) No. 87, also known as the Oil Exploration and Development Act of 1972 and later amended in 1983. Over the years these regulations have been adjusted by numerous executive and administrative orders.

Among the more significant of these modifications are executive order (EO) 556 issued in 2006 which banned farm-in and farm-out agreements in favour of a strict public bidding process for oil and gas contracts, which invalidated prior deals made by the PNOC. Under this system, all minerals including petroleum and natural gas are the property of the state and may only be developed through revenue-sharing or production-sharing agreements via SCs between private contractors and the government. During the exploratory phase, which can last up to a decade, the contractor assumes all risks and obligations for the contract area. If commercially viable amounts of oil or gas are discovered during this time, the contractor is then granted the right to enter into the production phase for a period of 25 years, with further extensions pushing the contract life up to a maximum of 50 years.

INCENTIVES: Profits from these ventures are split between the government, which receives a 60% cut, and the energy developer, with 40%. To compensate for fragmented and technically challenging oil and gas reserves found within its territory, as well as other factors that increase the risk perception of the Philippines, PD 87 allows for relatively generous fiscal incentives for investors. These include cost reimbursement of up to 70% of gross production with carry-forward of unrecovered costs; exemption from all taxes except income tax, with the income tax obligation (30% corporate tax rate) paid out of the government’s share; exemption from all taxes and duties for importation of materials and equipment for petroleum operations; and free market determination of crude oil prices.

“The Philippines’ incentive scheme for exploration and production is among the best in the Asia in economic terms, ranking either first or second if benchmarked with other countries in the region,” Phil Byrne, managing director of Nido Petroleum, told OBG. “As a result, what a company gets back as net profits is very high, which provides high incentives for upstream players.”

STATE PARTICIPATION: While the oil and gas sector is open to foreign participation throughout the value chain, the Philippines maintains its own domestic energy company in the PNOC. Created by PD in 1973 to secure and manage a stable supply of oil for the country in response to the tumultuous energy markets and political realities of the day, PNOC’s mandate has expanded over the years to include a variety of subsectors including refining, petrochemicals, transport, marketing, real estate development and both conventional and renewable power generation. In total, the company currently operates five subsidiaries to handle its increasingly diverse holdings: PNOC Exploration Corporation, PNOC Shipping and Transport Corporation, PNOC Development Management Corporation, PNOC Alternative Fuels Corporation and PNOC Renewables Corporation.

Some of the company’s most visible operations remain its oil and gas interests, the most valuable of which is the Malampaya deepwater gas-to-power project, the largest energy infrastructure project ever undertaken in the country. PNOC is also involved in another seven petroleum and five coal exploration and development projects, as well as a number of natural gas ventures (including BatMan-1 and -2). Other major partnerships PNOC is involved with include its stake in the Petron refinery, as well as the country’s first petrochemicals complex located in Limay, Bataan.

DOWNSTREAM: Deregulated since 1998, the downstream oil sector consists primarily of two key players on the refining side: Petron and Pilipinas Shell. The largest refinery operating in the country is the 180, 000-bpd capacity Limay refinery operated by Petron, in which PNOC and Saudi Aramco hold 40% stakes, with the remaining 20% held by the public. Pilipinas Shell operates the second refinery located near Manila, Tabangao, with a capacity of 110,000 bpd, along with some 800 petrol stations. A third major downstream player is Caltex Philippines, which converted its 86, 500-bpd refinery into a dedicated import terminal in 2003 and now operates solely as a marketer and distributor through its network of 850 retail petrol stations.

In total, 69.29m barrels of crude were processed in the country in 2012, down 10% from the 62.39m barrels refined the previous year, according to DoE figures. As a result, capacity utilisation also fell on the year from 69.1% to 62%. The decline was attributed primarily to successive shutdowns of both refineries in the second quarter of 2012 for maintenance.

Petron controlled the lion’s share of the domestic retail market in 2012, accounting for 38.5% of all downstream petroleum products, followed by Shell, with 24.4%, and Chevron (Caltex) at 9.9%, with more than a dozen other smaller players in the market. Petron is also in the midst of a $2bn upgrade for its Limay plant, which is designed to raise the facility’s capabilities to process a wider array of crude inputs and produce more higher-value refined products, including liquefied petroleum gas, petrol, diesel and petrochemicals, according to company reports. Initiated in April 2011, the Refinery Master Plan phase two will include an upgrade of its coker unit to 37,500 bpd and double the propylene production capacity, as well as allowing for production of Euro 5-grade fuels.

In addition to conventional refineries, the country is also producing an increasing amount of ethanol and biodiesel. This is backed by ambitious legislation that seeks to increase annual consumption of biodiesel and bioethanol to 160.7m litres (2% blend) and 536.29m litres (10% blend), respectively, by 2014.

SUPPLY & DEMAND: Domestic demand for finished petroleum products increased 3.9% in 2012 to 110.99m barrels from the 106.86m barrels the previous year, according to DoE data. Diesel oil accounted for 42% of all consumption, for which demand rose 4.5% on the year, with unleaded petrol accounting for 23.3% of refined products (demand up 6% on the year). For diesel fuel this has resulted in a shortfall of 4500 bpd between domestic supply and demand, as well as 4700 bpd for premium petrol. As a result, suppliers imported 54.75m barrels of finished petroleum products in 2012, up 18.9% over the 46.07m barrels purchased in 2011. Crude oil imports decreased 6.7% on the year from 69.62m barrels in 2011 to 64.94m barrels in 2012. The bulk of crude was sourced from the Middle East, at 79.4% of the total. The value of oil imports amounted to $13.86bn in 2012, up 7.9% over the previous year’s bill of $12.85bn, according to DoE data.

OUTLOOK: The production declines of oil and gas which have characterised the Philippines in years past are expected to reverse themselves in the short term due to new sources coming on-line. In the longer term, the awarding of new contracts from the PECR 4 is a promising start, although much remains uncertain regarding the future productivity of these blocks and other disputed offshore blocks. Consumption is also expected to recover, meaning the country will still need to import a substantial amount of its petroleum products, although efforts to expand its domestic biofuels programme should mitigate these costs going forward.