While macroeconomic expansion and the government’s infrastructure development agenda have strengthened the Philippines’ trade and investment profile, rapid development has outpaced the capacity of the energy sector to meet surging consumer demand. In response, long-term policies and international agreements have been implemented in an effort to promote upstream investment, diversify energy sources and drive down the cost of electricity. Notable projects include the construction of the country’s first liquefied natural gas (LNG) import terminal and regasification facility, as well as the Visayas-Mindanao Interconnection Project (VMIP), which is likely to benefit various industries by improving the reliability and efficiency of energy supply (see analysis). Moreover, while disputes with China over sovereignty and resource access in the South China Sea – also known as the West Philippine Sea – have previously hindered upstream development, recent agreements on exploration and development activities in the disputed areas could potentially offset declining reserves at the Malampaya gas field, the Philippines’ primary domestic source of gas.
Recent Policy Developments
In a recent bid to bolster energy security and usher in a new wave of sector investment, policymakers have adopted a series of reforms. In June 2017 President Rodrigo Duterte signed Executive Order No. 30 (EO 30), which established the Energy Investment Coordinating Council (EICC) and charged it with expediting Energy Projects of National Significance (EPNS). In broad terms, EO 30 seeks to address the lengthy and cumbersome process of applying for oil and gas exploration permits while also promoting the development of the national grid. The inter-agency body is tasked with reducing the licence approval process – which, in the case of numerous proposals, has lasted for several years – to a maximum of 30 days for projects with EPNS status (see analysis). To be classified as an EPNS, an energy project must have a minimum capital investment of P3.5bn ($65.1m), make a significant contribution to economic development and have a positive environmental impact. In addition to EO 30, the Philippine Development Plan 2017-22 and the Philippine Energy Plan 2017-40 form integral parts of the government’s energy roadmap as they prioritise major power generation projects.
Structure & Oversight
The Department of Energy (DoE) is the state body charged with preparing and controlling all plans, programmes, projects and activities related to energy exploration, development, utilisation, distribution and conservation. One of its six bureaux, the Energy Resource Development Bureau, formulates regulations relating to the exploration, development and production of indigenous petroleum, coal and geothermal resources. Meanwhile, the Energy Utilisation Management Bureau is responsible for new energy technologies, alternative fuels, and the efficient and economic transformation, marketing and distribution of conventional and renewable energy resources. Alongside both bodies, the Energy Policy and Planning Bureau is in charge of providing a comprehensive assessment of demand scenarios and supply options, as well as studies of the impact of international commitments on energy policies. The remaining three DoE bureaux are the Oil Industry Management Bureau, the Electric Power Industry Management Bureau and the Renewable Energy Management Bureau.
Several DoE entities and a handful of independent government entities share responsibility for regulating different aspects of hydrocarbons production, including both onshore and offshore. The Department of Environment and Natural Resources is responsible for the issuance of Environmental Clearance Certificates for onshore and offshore projects.
Under Presidential Decree No. 87 of 1972, neither onshore nor offshore oil and gas production companies are subject to limitations on the percentage of their assets that may be owned by foreign investors, meaning non-Philippine entities and individuals can own oil and gas extraction outright. The same is true in the mining sector under the Philippine Mining Act of 1995, which permits 100% foreign ownership in cases of financial or technical assistance agreements. These permissions are exceptions to the stipulation laid out in the Foreign Investment Act of 1991 that at least 60% of a given business must be owned by a Filipino citizen, and are attributed to the considerable capital costs associated with the exploration and development of petroleum projects and large-scale mines.
A number of state-owned enterprises (SOEs) and agencies also fall under the remit of the DoE, including the EICC and the National Biofuels Board, which is responsible for regulating biofuels. The National Power Corporation (Napocor), meanwhile, is charged with supplying electricity to remote, off-grid areas and islands via standalone power generation facilities. As of April 2018 Napocor’s Small Power Utilities Group operated 275 plants in 238 areas in 198 municipalities across the archipelago. The privatisation and sale of those assets and other Napocor holdings are managed by the Power Sector Assets and Liabilities Management Corporation.
The national power grid is owned by the National Transmission Corporation (TransCo), and operated, maintained and developed by the National Grid Corporation of the Philippines. The National Electrification Administration is tasked with implementing the Rural Electrification Service Project, and with supporting the technical capabilities and financial viability of rural electric cooperatives. National energy resource exploration, exploitation and development are under the purview of the Philippine National Oil Company (PNOC).
Performance & Size
In terms of natural resources, gas and coal are the Philippines’ main indigenous fossil fuels. Proven gas reserves stand at 98.5bn cu metres, while economically recoverable coal and proven oil reserves are estimated at 316m tonnes and 100m barrels, respectively, according to a report published by the Asian Development Bank in October 2018. Together, the country’s untapped hydrocarbons deposits are estimated to be worth as much as $26.3trn.
Indigenous fossil fuels are also significant sources of export revenue. In 2018 exports of petroleum products brought in around P3.2trn ($59.5bn), up 14.2% compared to P2.8trn ($52.1bn) in 2017. Despite the increase, earnings in the final quarter of 2018 declined by 11.9% year-on-year, from P6.4bn ($119m) to P5.7bn ($106m). As of mid-May 2019 there were 22 active petroleum service contracts in the Philippines, with the DoE partnered with local affiliates of the international firms Shell and Total, as well as domestic oil and gas companies like Philodrill and PNOC.
While there are ongoing efforts to foster upstream activity, dependence on imports remains high. Crude oil imports increased by 10.4% in 2018 from 77.6bn barrels to 85.8bn. The vast majority of crude oil was imported from the Middle East, with Saudi Arabia, Kuwait and the UAE accounting for shares of 33.7%, 26.3% and 20.9%, respectively. Russia was the next-biggest supplier of the Philippines’ crude imports, accounting for 7.4% of the total, while other ASEAN states contributed 4.5%. According to the DoE, the Philippines’ maximum working capacity for the distillation of crude oil stood at 285,200 barrels per stream day during the fourth quarter of 2018. Local refiners processed a total of 86.5m barrels of crude over the course of 2018, equivalent to 83.2% of maximum working capacity. Meanwhile, between 2008 and 2017 the annual production of natural gas averaged 133.2bn standard cu feet (scf), reaching a high of 140.5bn scf in 2016.
One of the administration’s main energy objectives is to replace supply from the Malampaya gas field, which is nearing depletion and could cease production as early as 2024. The field currently supplies fuel to five natural gas plants that maintain total installed capacity of 3211 MW and together account for more than 20% of the installed grid capacity of Luzon, the country’s most populous island, and almost 15% of total installed capacity nationwide.
Accordingly, the government has stepped up its efforts to boost upstream activity in several regards. In November 2018 President Duterte and his Chinese counterpart, President Xi Jinping, signed a memorandum of understanding (MoU) to cooperate in oil and gas exploration and development in the South China Sea/West Philippine Sea. The MoU comes after the Philippines won a case before the Permanent Court of Arbitration that was initiated by President Duterte’s predecessor, President Benigno Aquino III, disputing China’s claim to sovereignty over a regional archipelago. However, the Duterte administration has not pressed for the ruling to be enforced, preferring to forge closer trade and investment relations. The MoU has helped to ease tensions over the territorial dispute, though it has faced domestic criticism from some politicians who argue that it works against the country’s national interest. Former President Aquino has singled out the administration’s reported openness to a 60:40 formula for revenue sharing, under which China would receive 40% of fuel earnings. According to the provisions of the MoU, an oil and gas steering committee will be formed between the DoE and China’s National Energy Commission with the aim of reaching cooperation agreements on joint exploration by September 2019.
Elsewhere, the DoE is offering tenders for 14 offshore oil and gas blocks in the Reed Bank – also known as Recto Bank – for exploration and development. Exploration in the area was initially suspended in 2014 due to the territorial dispute with China. The blocks fall on the Philippine side of the “nine-dash line”, the notional limit of Chinese claims on maritime sovereignty. The DoE has embarked on a series of roadshows to attract international investor interest in the blocks, which will be offered under the Philippine Conventional Energy Contracting Programme. Tender submissions were due on August 19, 2019, and as of May 2019 the DoE had reportedly listed 17 firms as potential partners.
In April 2019, in an important step in the development of a robust downstream natural gas industry for the country, the DoE issued a circular entitled “Implementing the Natural Gas Quality Standard for All Natural Gas Supply in the Philippines”, which stipulated new domestic regulations for the importation, trade, supply and distribution of natural gas. Under the revised rules, businesses that are engaged in downstream natural gas activities are required to submit reports in compliance with the Philippine Downstream Natural Gas Regulation. Those that fail to comply run the risk of losing their accreditation for importing and transporting natural gas in the country. “Fossil fuels will remain relevant for covering the remote islands, but LNG, which is a cleaner fossil fuel, is the next major source of power generation in the Philippines,” Krishan Kumar Ralhan, chairman of Kaltimex Rural Energy, told OBG.
As part of its long-term plan to transform the country into a regional hub for LNG processing and export, the DoE has considered several proposals from firms interested in building LNG terminals in Luzon. In early 2019 the DoE issued notices to proceed to Tanglawan Philippine LNG, a joint-venture between Phoenix Petroleum and China National Offshore Oil Corporation; the Australian firm Energy World; and First Gen, one of the Philippines’ biggest independent power producers, to build three independent LNG terminals in different locations. “Gas-fired plants are among the most competitive and flexible energy sources, especially compared to coal-fired plants,” Jon Russell, executive vice-president and chief commercial officer of First Gen, told OBG. “The capital cost of installing a regular gas-fired plant is three times cheaper than coal and significantly less damaging for the environment.”
Meanwhile, the government has continued to enforce the minimum fuel inventory requirement, which mandates that refiners, bulk sellers and liquefied petroleum gas marketers maintain stocks equivalent to 30, 15 and seven days, respectively. Likewise, in recognition of the country’s high-risk profile for natural disasters and the impact that such events have on reserves, the government has increased monitoring measures to ensure the continuous supply of oil.
In 2018, in the wake of typhoons Ompong and Rosita, the DoE issued a directive requiring oil companies in all affected areas to provide updates on the status of their facilities and supplies. As of the end of 2018 the total inventories of crude oil and related petroleum products stood at 2.5m barrels, a 15.4% increase over the closing level for the year prior.
Established under the Electric Power Industry Reform Act (EPIRA) of 2001, the Wholesale Electricity Spot Market (WESM) has provided transparency in power transactions for nearly two decades. In order to comply with the legal requirements set by the EPIRA – which require the WESM to be independently operated – the Independent Electricity Market Operator of the Philippines formally took over the WESM from the Philippine Electricity Market Corporation in September 2018 (see analysis). The Philippines has high electricity costs relative to its neighbours. Average prices on the WESM fluctuated in 2018, falling from P5.05 ($0.0939) per KWh in March to P2.66 ($0.0495) in August, before rising to P3.58 ($0.0666) in October and slipping back to P3.17 ($0.0590) in November. Prices on the WESM continued to increase during early 2019, contributing to the announcement by Meralco – the country’s largest electricity distribution utility – of a hike in its monthly electricity rate from P10.4961 ($0.1952) to P10.5594 ($0.1964) per KWh in April 2019 (see analysis). However, consumer prices are expected to fall with the completion of the VMIP, which will allow for more power grid interchanges on Visayas and Mindanao, and link them to the Luzon distribution network.
Concerning private sector power generation, Meralco serves an estimated 6.5m industrial, commercial and residential customers across 75 municipalities. According to the DoE, total nationwide installed capacity equalled 23,815 MW in the fourth quarter of 2018. By source, coal accounted for a plurality of the mix, with 8844 MW of installed capacity. Renewables comprised a further 7227 MW, while oil-based power sources and natural gas made up 4292 MW and 3453 MW, respectively. In terms of electricity sales, 82,6217 GWh was sold in 2018, representing growth of 6.2% on the 77,793 GWh sold a year earlier. Total nationwide electricity consumption in 2018 amounted to 99,765 GWh, representing a 5.7% increase compared to 2017. Luzon consumed 72,728 GWh – or nearly three-quarters – of the 2018 total, while Visayas and Mindanao utilised 14,266 GWh and 12,770 GWh, respectively.
Power is distributed from the national grid to 23 private utilities, 100 electric cooperatives and two utilities owned by local government units (LGUs). Elsewhere, there are 21 electric cooperatives, one multipurpose cooperative, three LGU-owned utilities and two qualified third parties serving as power distributors for the off-grid network, which is primarily energised by Napocor’s network of SPUG plants.
Although fossil fuels still comprise the majority of the energy mix, renewables – particularly hydropower – played a prominent role in 2018, accounting for 23,326 GWh, or 23.4% of total generation. Market-based incentives, such as the feed-in-tariff (FIT) programme, have helped make renewables more commercially viable. Under the programme, which was launched in 2012 for a 20-year duration, the Energy Regulatory Commission (ERC) charges a small fee on electricity consumption and uses accrued funds to make payments to qualified renewable energy developers, helping them recoup the costs of their investments in green projects more quickly. The ERC authorised TransCo to levy a FIT equivalent to P0.2226 ($0.0041) per KWh in 2018, marking a reduction from P0.2563 ($0.0048) per KWh in 2017 and short of the P0.2932 ($0.0055) per KWh requested by TransCo for the year.
The Philippines’ hydropower and wind energy potential amounts to 13,097 MW and 76,600 MW, respectively, according to a March 2017 assessment from the International Renewable Energy Agency. Solar represents another promising power source, as the country enjoys an average global horizontal irradiance of 5.1 KWh per sq metre per day. Although ensuring a stable supply of renewable energy remains challenging due to the difficulty and high cost of storage, technological innovations are expected to continue driving down the long-term costs of production, increasing the viability of raising their share the Philippines’ energy mix. “Solar power is already competitive compared to fossil fuels,” Gary Espino, president and COO of Pure Energy, a holding company with extensive investments in Philippine solar parks, told OBG. “We have managed to bring down the installation cost by as much as 40% over three years.”
In addition to supply-side changes affected by product innovations, the renewables segment is likely to receive a considerable boost from shifts in energy demand, particularly from segments of the transportation industry and the rise of environmentally conscious consumers. “Domestic demand for electric vehicles is set to grow in the coming years, spurred in part by the Department of Transportation’s Public Utility Vehicle Modernisation Programme,” Raymond Ravelo, head of Meralco’s strategy and business development office, told OBG. Additionally, the launch of the Build, Build, Build programme by the administration of President Duterte has created opportunities to change the energy sourcing of much of the country’s transit infrastructure. “Renewable energy solutions can also play a key role in developing a more environmentally sustainable public transport system,” Ravelo added.
Bold policy measures have the potential to unlock a host of economic opportunities in the energy sector, although factors beyond policymakers’ control – such as geopolitical instability, natural disasters and fluctuations in global energy prices – continue to present downside risks. Moreover, coping with rising energy demand will require that policymakers find a balance between its coal-derived base load and its peak capacity, which is fuelled by a combination of natural gas and several renewables. Nevertheless, rapid economic expansion, urbanisation and population growth will continue driving energy demand. Moreover, the development of new, commercially viable reserves along the Recto Bank and elsewhere, as well as the construction of the country’s first LNG terminals and regasification facilities, should help to structurally offset the depletion of the Malampaya gas reserve in the medium to long term. In particular, the MoU signed with China to jointly undertake oil and gas exploration activities could accelerate domestic production and produce major dividends for the upstream and downstream segments. While several bottlenecks remain to be addressed, the sector and the wider economy are likely to gain from the completion of the VMIP in 2020, which should help to increase the efficiency and affordability of power distribution in the coming years.
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