As demand for energy continues to rise in conjunction with the growing economy, the Philippine upstream oil and gas segment is struggling to bring new domestic sources of hydrocarbons to the market. With the country’s most productive legacy fields now past their prime, investment is needed to tap into new fields and curtail the steady decline in domestic production.

New Horizons

As of late 2015 the Philippines still showed substantial untapped energy potential, with combined reserves of 4.78bn barrels of oil equivalent (boe) spread among 16 sedimentary basins. In recent years, however, new exploration activity has been limited, creating a delay in the development of new potential plays and the exploitation of these reserves.

The most accessible reserves were already developed over the past few decades by partnerships between large international oil companies and the Philippine government. These once-rich fields, which initially met a substantial portion of the country’s energy requirements, are now producing only marginal volumes, while exploration carried out in the interim has yielded relatively limited opportunities for development. At the same time, the global economic environment for oil and gas exploration has remained in a trough since commodity prices began falling in 2014. Due to budget constraints, energy companies have been pursuing only the most cost-effective reservoirs, consisting of easily accessible deposits that are inexpensive to tap – few of which can be found in the Philippines.

Ramping Up Exploration

In spite of these challenges, there are some promising developments within the sector. Moving in to take the place left by many of the now-absent private companies in the country, the Philippine National Oil Company Exploration Corporation (PNOCEC), the upstream subsidiary of state-owned Philippine National Oil Company, has become an aggressive player in the sector. The company channelled P8.04bn ($170.1m) into upstream exploration and development projects in 2015, primarily to boost output of the maturing Malampaya natural gas field, in addition to funding exploration efforts in other areas. Investment increased by another 4.4% in 2016 to P8.4bn ($177.7m), according to company statements. Of this figure, PNOCEC earmarked some P1.37bn ($29m) to slow the decline in output from the Malampaya field, in which it maintains a 10% stake.

In 2015 these ongoing exploration efforts yielded the first new natural gas discovery in the country since the 1992 Malampaya find in service contract (SC) 37, an onshore block covering the city of Santiago and the provinces of Isabela and Quirino. Between March and May of that year, PNOCEC drilled the Mangosteen 1 well to a depth of 2423 metres, revealing a successful gas discovery. The company hopes yield from the new field will eventually replace dwindling output from the San Antonio gas field, which previously supplied gas for power generation and provided electricity to about 10,000 households in the area. An appraisal well is being planned for drilling in 2017. Cumulatively, the company is a participant in eight SCs in the Philippines, covering an area of 57,630 sq km, including six offshore blocks (SC 38, SC 47, SC 57-59, SC 63 and SC 75) and one onshore block in the aforementioned SC 37.

The discovery of natural gas in SC 37 is particularly encouraging in light of the slew of less successful exploration projects carried out across the country in recent years. The failure to discover new large deposits in many still underexplored areas can be attributed to a number of factors, ranging from standard dry wells to political territorial disputes over certain blocks.

Auction Block

The government is aiming to spur new investment in the upstream sector through the issuing of new blocks through the fifth Philippine Energy Contracting Round (PECR5). Initially launched in 2015, PECR5 offers a total of 11 petroleum blocks with a combined area of more than 4.7m ha in West Luzon, South-east Luzon, West Masbate-Iloilo, East Palawan and the Recto Bank (also known as Reed Bank). The areas for exploration include block 1 in South-east Luzon; blocks 2 and 3 in Masbate-Iloilo; blocks 4 and 5 in North-east Palawan; block 6 in South-east Palawan; block 7 in West Palawan; and blocks 8-11 in West Luzon.

Once awarded, these service contracts allow for the exploration of assigned blocks for a period of seven years, and can be extended up to 10 years. Once a play is determined to be commercially viable, a 25-year production period is instituted.

Pricing Hurdles

Interest in these new blocks has so far remained tepid, with three companies bidding on only four of the 11 blocks in 2015 and 2016. The lukewarm response to the offerings was a result a combination of the current low and volatile oil price regime, said Rino Abad, director of the DOE’s Energy Resource Development Bureau. “We cannot deny the fact that oil prices affected the decision of oil companies,” he told the local press in July 2015. “Many companies are doing adjustments in terms of budget.”

Area 7, which is located along the Recto Bank, is widely thought estimated to contain commercial quantities of hydrocarbons and has been bid on by Colossal Petroleum Corporation, an affiliate of listed Coal Asia Holdings. The block is situated adjacent to the Philippines’ most productive oil and gas basin, the North-west Palawan Basin, in waters ranging in depth from 800 metres to 1700 metres.

In spite of the optimism surrounding the 468,000-ha block – the DOE estimates that the block contains as much as 165m barrels of oil and approximately 3.49trn standard cu ft (scf) of gas – interest was relatively muted. This is likely due in part to its location in an offshore area that is claimed by both the Philippines and China; a territorial dispute that has led to difficulties in developing oil and gas projects in the area.

The same group has also submitted a qualifying bid for area 5, which covers 576,00 ha offshore with depths ranging from 200 to 2000 metres. Located on the north flank of the East Palawan Basin and immediately west of area 4, the estimated resource potential of the block is some 1.90bn barrels of oil and 2.95trn scf of gas.

The only other company to offer up a successful bid was Israeli firm Ratio Oil Exploration, which submitted an offer for area 4 covering a total of 416,000 ha in the waters east of Palawan. The DOE also received a bid on the 424,000-ha area 1 from Yulaga Oil and Exploration Enterprises, but it disqualified the offer due to incomplete application documents. Located in the central portion of the South-east Luzon Basin, area 1 is estimated to contain 3.55bn barrels of oil and 2.26trn scf of gas, according to figures from the DOE.

Tax Impasse

Although the DOE received bids from these interested parties in 2015, no SCs had been issued as of late 2016, due largely to ongoing discord among different government entities. The problem stems from differing interpretations by the DOE and the Commission on Audit (COA) of Presidential Decree 87 from 1972, which lays out the mandatory income tax structure for oil and gas development.

At the heart of the issue is the sanctity of the current contract governing the country’s largest producing gas field, operated jointly by the Malampaya consortium, which includes Shell Philippines Exploration and Chevron Malampaya, and the PNOCEC. The contract for the Malampaya field initially allowed for a provision through which the income tax of the private contractors for the Malampaya gas project would form part of the government’s 60% royalty share.

This status was challenged, however, when the COA issued a notice of charge to collect approximately P151bn ($3.2bn) in income tax revenue from the Malampaya consortium, covering the period 2002-16, on the grounds that corporate income tax should not form part of the government’s royalty take in the Malampaya project. As a result of this move by the COA, the DOE stated in 2016 that it would not issue any new SCs until the Malampaya tax case as resolved.

As of December 2016 the Malampaya matter remained unsettled, and the DOE had yet to issue any new SCs for the PECR5. At the time of printing, it appears that the development of any new blocks will remain in a holding pattern for the foreseeable future.