Watts next?: With oil production set to remain flat, a shift to new sources is seen as necessary to reduce dependence on foreign imports

Strong economic growth and a rise in energy demand have exerted pressure on the Philippines’ energy sector in recent years. With large, easily accessible oil and gas discoveries long since picked over, a continued decline in petroleum production has encouraged a heavy reliance on imports. The substantial reserves in the Malampaya gas fields have given rise to a resurgence in domestic production, although output is expected to dwindle over the next 15 years. While new exploration blocks offered in 2013 could provide potential for more technically challenging opportunities in the coming years, the majority of the coveted offshore areas remain off-limits due to territorial disputes.

NATURAL GAS: Most hydrocarbons production in the Philippines is supplied by the natural gas segment, which plays a crucial role in supplying the domestic market and providing relief for the country’s heavy reliance on fuel imports. Unlike crude oil, natural gas output has remained robust over the past decade with production exceeding 100,000 standard cu feet (mmscf) every year since 2005, according to the Department of Energy (DoE). Domestic production peaked at 140,368 mmscf in 2011 when the country’s largest gas field, Malampaya, reached peak production. Output has since declined, to 134,563 mmscf in 2012, 123,944 mmscf in 2013 and 30,943 mmscf by end-May 2014.

Natural gas production is currently dependent on the expansive Malampaya gas play, which accounts for virtually all output. The San Antonio gas field situated in the Cagayan Valley yielded a total of 3541.3 mmscf of natural gas during its 15-year lifespan, with a peak of 375.9 mmscf in 2000, but was closed in 2008. More recently, the Libertad gas field located in Northern Cebu came on-line in 2012 but produced just 72,424 mmscf in its first year. The Libertad gas field is operated by the UK-based Forum Energy under service contract (SC) 40 with production sold to Filipino company Desco as fuel for gas-to-electricity power generation. The field’s reserves are currently estimated at 0.9bn cubic feet (bcf) for proven reserves and 4.1 bcf for proven, probable and possible estimates. Indeed, from February 2012 until the end of 2013, commercial production at the Libertad field totalled 151 mmscf of gas.

By far the largest single consumer of natural gas in the Philippines is the electricity generation segment, which consumed 116,549 mmscf of domestic natural gas in 2013, good for 97.7% of the 119,250 mmscf consumed over the year. Industrial use of gas accounted for another 2.23% (2665 mmscf), with the transportation sector using 35 mmscf, primarily in the form of compressed natural gas (CNG). Other proven reserves are located in the Iloilo and Central Luzon basins, where oil and gas resources were discovered in 1953 and 1979, respectively, but not yet been developed.

MALAMPAYA: The most significant energy project in recent decades is the development of the Malampaya natural gas field operated by a consortium of Shell Philippines Exploration (45%), Chevron Malampaya (45%) and the state owned Philippine National Oil Company (PNOC, 10%). Situated north-west of Palawan Island at a depth of approximately 3000 metres below sea level, Malampaya is a crucial contributor to the country’s electricity production, supplying nearly half of the Luzon power grid’s electricity requirements.

The total natural gas off-take dipped to 119.67 bcf in 2013, down from 130.28 bcf in 2012 and the 140.37 bcf produced in the project’s peak year of 2011. Condensate sales also declined from 4.58m barrels in 2013 to 3.82m barrels in 2012 due primarily to a 30-day maintenance shutdown conducted from November to December 2013. The gas raised from the Malampaya field is used primarily to fuel three gas-fired thermal power plants supplying the Luzon power grid: the 1200-MW Ilijan power plant; the 1000-MW Santa Rita power plant; and the 500-MW San Lorenzo power plant. A smaller portion is transported via pipeline to the Pilipinas Shell Petroleum refinery in Tabangao, while other supplies are converted into CNG to be used as fuel for a pilot phase of the CNG public transport project. So as to maintain a sufficient number of supplies for these power plants, operator Shell is currently in the midst of Malampaya Phase 3 (MP3) expansion. This expansion, and the drilling of two infill wells for the Malampaya Phase 2 (MP2) project are expected to improve the gas supply by countering naturally occurring decreases in volume and pressure as the field matures. Original estimates placed reserves at 2.7trn-3.2trn cubic feet (tcf) of natural gas and 85m barrels of condensate, though at least 1tcf was already raised by 2014, with the remaining supplies expected to be depleted by 2030, depending on the rate of production.

OIL RESERVES: Limited discoveries of new oil reserves in recent decades have led to an increasing reliance on foreign imports for crude and refined petroleum products. Although domestic oil production experienced a modest uptick in 2010 as the result of new output from the Galoc field, it remains a fraction of what it was during peak production in the 1970s, when the country produced 8.57m barrels in 1979 from the Nido field. Now long past its prime, Nido has not produced more than 100,000 barrels per year since 2009, while other small plays, such as Matinloc, Tara, North Matinloc and West Linapacan, are all producing less than 100,000 barrels per annum or have shut down altogether.

The lone bright spot in the sector (excluding condensate from the Malampaya gas field, which dwarfs traditional petroleum production in the Philippines) is the Galoc development located in Palawan’s proven oil and gas fairway, at a depth of approximately 290 metres. A joint venture between Galoc Production Company (a wholly owned subsidiary of Otto Energy) with a 33% stake, Galoc Production Company (26.8%), Nido Production (22.9%), Oriental Petroleum & Minerals Corporation/Linapacan Oil Gas & Power Corporation (7.8%), the Philidrill Corporation (7.2%) and Forum Energy Philippines (2.3%), production from Galoc grossed 1.72m barrels in 2013, up from 1.48m barrels in 2012, according to Forum Energy. Proved and probable reserves were estimated at 25.4m barrels as of January 2013, according to operator Otto Energy, and the field is on pace to produce a total of 2.9m barrels in 2014.

This recent uptick in production can be attributed to the second phase of the field’s production, initiated in June 2013 with the drilling of two additional production wells, Galoc 5 and Galoc 6. This saw a surge in production from the four operating wells to 14,500 barrels per day (bpd) in October 2013, before output tailed off slightly to stabilise at around 9800 bpd at year’s end, while also extending field life by three years to 2020. A third phase of development is possible in the future, pending the results of exploratory efforts in another prospect adjacent to the active field. Ever since the start-up of production in October 2008, the Galoc oil field has produced a total of 13.3m barrels of crude oil through June 2014, at which point in time production was averaging approximately 8450 bpd.

New exploratory efforts are also being carried out in the West Linapacan block in the north-west Palawan basin by operator RMA Energy Group. If these tests prove promising, this could signal a revival of the block, which has been inactive since 1997 after a five-year production run that topped out at 3.16m barrels of oil in its initial production year of 1992. Other encouraging results have also been received of late for the Gas2Grid project in Cebu (SC 44), and further exploratory drilling is expected in other contract areas, such as Frontier Oil Corporation in north-west Palawan (SC 50) and Otto Energy Investments in east Visayas (SC 51), with drilling also expected in at least three other blocks located off Palawan Island (SC 54, 58 and 63).

A variety of other relatively unexplored areas also hold considerable promise for the future, including several offshore blocks offered up for bidding in mid-2014 (see analysis). In addition to the blocks tendered out in the contested West Philippine Sea, other candidates for big payoffs include a 13m-ha area located off Luzon Island’s eastern seaboard, known as the Benham Rise, and the Scarborough Reef off the west coast of Luzon.

TOWARDS NATURAL GAS: As the Philippines and the global energy market as a whole shifts its energy priorities away from crude oil and towards cleaner, more plentiful natural gas, the DoE has set out a road map to establish a network of pipelines to transport gas around Luzon from 2017-22. The interconnected web of nine different pipelines will initially be built to supply industrial consumers with excess supplies from the Malampaya field as early as 2017 – though industry experts told OBG that this timeframe may be too ambitious – with the goal of eventually integrating liquefied natural gas (LNG) regasification terminals, production fields, industrial clients and power plants. These will supplement the 530 km of natural gas transmission pipelines already constructed in order to transport gas from the Malampaya gas field to fuel three power plants.

GAS REQUIREMENTS: As laid out in the DoE’s Philippines Energy Plan (PEP) 2012-30, the initial stages of development will include the construction of the 105-km-long, high-pressure Batangas-Manila 1 (BatMan 1) to serve as the network’s backbone. Projected to be on-line by 2017, the $2.1bn BatMan 1 will supply gas requirements to the economic and industrial zones located along the route from Tabangao, Batangas to Sucat, Paranaque as well as for the transport sector.

The feedstock for this transmission line will initially be derived from the Malampaya gas field, but with supplies there expected to be expended by 2030 at the latest, long-term plans call for additional supplies be fed into the system via LNG imports by 2020. The second major phase of development will be the 140-km-long Bataan-Manila 2 (BatMan 2), which is slated for completion by 2020 to supply markets in Subic and Clark, along with the Limay combined-cycle power plant that could be converted from coal to natural gas. The proposed trunk pipelines linking BatMan2 to Subic (40 km) and Clark (25 km) are projected to be completed in 2021 and 2022, respectively. The primary transmission lines – BatMan 1 and BatMan 2 – are scheduled to link up in 2022 via the 40-km undersea BataanCavite (BatCave) interconnection and through the 35-km Rosario, Cavite, Laguna (RoBin) line. Like BatMan 1, BatMan 2 will also include an LNG regasification terminal located in Limay, Bataan.

Additional pipelines in the PEP include the 35-km Sucat-Malaya pipeline (2017), an underwater, high-pressure gas transmission pipeline from Sucat, Paranaque to service the Malaya Plant in Rizal (needs to be converted for natural gas and likely to be mothballed in 2015); the 15-km Sucat-Fort Bonifacio pipeline that will service commercial establishments in the Bonifacio Global City (2017); and the EDSA-Taft Gas Pipeline Metro Manila city gas distribution network (2020).

The country’s first regasification project is expected to begin importing gas by 2015 as part of a new 600-MW gas-to-power project in Pagbilao, Luzon. Developed by Australian-headquartered Energy World Corp, the $1bn project will have a capacity of 3m tonnes per annum (tpa) and is being partially financed by the Development Bank of Philippines to the tune of $550m. Additional proposed LNG projects include Shell's 4m-tpa floating storage and regasification unit, expected by 2016 in Batangas, and PNOC's 3.5m-tpa LNG hub in Bataan, originally planned by 2018, but now on hiatus.

POWER SUPPLY: Due to the island geography of the Philippines, electricity interconnection remains fragmented, with the majority of power allocated to three main power grids: Luzon, Mindanao and Visayas. In terms of capacity and demand, the largest is Luzon, which remains chronically undersupplied, to the extent that emergency measures are being implemented to avert blackouts (see analysis). Accounting for roughly three-quarters of the country’s total power output, the Luzon network generated 54.82 GWh of electricity in 2013, or 72.8% of the total generated in the Philippines that year, according to the DoE.

Generators connected to the Mindanao grid supplied 11.1 GWh, 14.75% of the domestic total, with power producers in Visayas accounting for the outstanding 9.35 GWh (12.42%). The country had a total combined installed capacity of 17,325 MW at end-2013, though the actual amount of dependable power is in fact significantly less, as many older plants have less dependable and efficient equipment, prone to both scheduled and unscheduled maintenance stoppages.

Traditional coal-fired thermal power plants are the largest contributor in terms of capacity, accounting for 32% (5568 MW) of the Philippines’ power supply, with oil-fuelled power plants contributing another 19% (3353 MW). Power producers have taken advantage of the active geologic conditions within the country by developing one of the most productive geothermal networks in the world. The 1868 MW of installed capacity in 2013 accounted for less than 11% of all power capacity, while large hydro power projects contributed another 3521 MW, good for just over 20% of total capacity. Natural gas-fired power plants have expanded over the past decade with the commercialisation of the Malampaya gas to power project, which employs a network of three gas pipeline-fed power plants: the 1060-MW Santa Rita power plant, the 530-MW San Lorenzo power plant and the 1271-MW Ilijan power plant. Coal was the predominant fuel in 2013 with 32,081 GWh produced, accounting for 42% of all electricity. Natural gas generators supplied another 18,791 GWh, good for 24.9% of the total, followed by hydro with 10,019 GWh (13.3%), geothermal with 9605 GWh (12.8%) and diesel generators with 3805 GWh (5%).

Much has been accomplished already to promote investment in the sector. Most notably, the Electric Power Industry Reform Act was passed in 2001 as a means to finalise the transition from state to private control of domestic electricity assets. As a result, the Philippines has one of the most liberalised electricity markets in Asia, resulting in private ownership of generation assets, as well as unbundled transmission and distribution services. Independent power producers can sell output to local distributors though power purchase agreements or sell on the electricity market.

COMING ON-LINE: With easy access to cheap fuel and potentially large power generation capacity, new coaland natural gas-fired thermal power plants are proving attractive to developers. A host of greenfield and brownfield projects are in various stages of construction, including a 414-MW gas-fired San Gabriel combined-cycle power plant, a 100-MW Avion power plant in Batangas City, a new 430-MW unit at the Pagbilao coal-fired power plant and a 4x138-MW coal project in Mindanao. Several other coal-fired plants are also being constructed in Mindanao, including a 105-MW plant by Alcantara and Aboitiz’s 2x150-MW project.

Other projects are advancing more slowly due to approval hurdles. San Buenaventura is seeking approval from the Energy Regulatory Commission of its power sharing agreement with Meralco for a 460-MW coalfired plant in Quezon, while a 600-MW one in Subic just got the environmental go-ahead, but will likely remain a target of environmental groups. Expansions of existing plants are also slated to take place, such as the 150-MW expansion planned for an existing 164-MW power plant in Iloilo City, Visayas, a 350-MW expansion of the Calaca coal-fired plant to 1200 MW and a 600-MW expansion of the Masinloc power plant to double output, though progress has largely halted on the latter.

While renewable energy capacity does not generally pack the same punch as a stand-alone, 1000-MW thermal power plant, alternative power generation is expected to take on an increasingly significant role in the country’s future primary energy mix. Although the majority of renewable energy in the Philippines is now being supplied by the large hydro and geothermal power plants, newer, more intermittent technologies are being rolled out across the country in large part due to new incentives granted to the sector via the 2008 Renewable Energy Act (see analysis).

WIND & SUN: The initial 13-MW stage of the country’s first renewable energy project within the feed-intariff scheme, the San Carolos solar project, came online in May 2014, followed by the 9-MW second stage in July. The project is operated by renewable energy developer Bronzeoak Philippines, and it represents the first in a portfolio of renewable projects that the firm and others like it are developing in the Philippines.

Other solar ventures operated by Bronzeoak include an 18-MW farm located in La Carlota, Negros Occidental (which could later be expanded to 40 MW) slated to come on-line in July 2015, a 22-MW project in Manapla (with a possible expansion to 45 MW) scheduled for completion by 2016, as well as two more stages of development at the Socasol site which could boost capacity there to 45 MW. Looking to diversify yet further, Bronzeoak is also building biomass power plants at each solar site, with the three power plants projected to combine for 70 MW of installed capacity, as well as a 60-MW wind farm also slated for San Carlos in 2016. A 40-MW rooftop solar farm developed by the Majestic Energy Corporation in Cavite province is also scheduled to begin operations in 2015.

Wind was a bright spot in the renewables segment in 2014, with significant capacity coming on-line. The race for feed-in-tariff eligibility saw several hundred MW of capacity built with equity, with the 150-MW Burgos Wind Project and the 81-M Caparispisan Wind Energy, both in Illocos Norte, among the winners.

OUTLOOK: Crude oil production should stay relatively flat in the coming years, with marginal increases in existing fields off-setting their decreased productivity, while natural gas supplies from the Malampaya field continue to decline over the next decade as it matures.

Exploration in new, primarily frontier areas could mitigate the country’s increasing reliance on foreign energy sources to some degree, although any significant reserves are likely to remain tied up in territorial disputes for the foreseeable future. It is clear that several challenges remain with respect to the country’s electricity supply in the short term, particularly in Luzon. However, the implementation of new projects and incentives should help to alleviate the shortfall in the medium-to-long term, even as energy demand continues to climb at a rate in excess of 4% per annum.


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The Report: The Philippines 2015

Energy chapter from The Report: The Philippines 2015

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