With the power segment poised to rebound while the oil and gas segment struggles to keep pace with surging demand, the Philippine energy sector is very much in flux. However, years of significant investment in power are now beginning to bear fruit, with thousands of megawatts of new capacity slated to come on-line over the next decade.

The arrival of this new electricity supply across the country, in the form of both conventional and renewable sources, should have a substantial effect as the Luzon grid moves from the brink of rolling blackouts during peak summer months to a well-supplied and balanced market. Still unconnected from the Visayas and Luzon grids, the long-neglected Mindanao power system is also experiencing an unprecedented expansion of capacity, which should provide an ample power supply for the foreseeable future.

The picture is less rosy for hydrocarbons, which have experienced low levels of upstream investment in the years since the substantial Malampaya deposit was discovered and tapped. With little in the way of new discoveries, domestic crude oil production has remained stagnant, leaving the country increasingly reliant on imports to meet growing domestic demand. Meanwhile, natural gas output is continuing a slow, steady decline in spite of optimisation efforts, and production is far below the peak levels achieved in the late 2000’s.

Natural Gas

The natural gas industry can be characterised as an emerging segment, focused almost exclusively on its first commercial-scale project, the Malampaya gas field. Located in Northern Palawan, the project is operated by Royal Dutch Shell’s local subsidiary, Shell Philippines Exploration, along with partners Chevron-Texaco Philippines and the Philippine National Oil Company Exploration Corporation (PNOCEC). The majority of offtake from the field is accounted for by purchase contracts supplying three combined-cycle gas turbine power plants, totalling 2700 MW of installed capacity, since October 2001. Smaller quantities of gas are piped to a refinery operated by Pilipinas Shell Petroleum Corporation (PSPC) and a compressed natural gas refilling station. The $4.5bn project also includes a 504-km, 24-inch deepwater pipeline that transports the gas to the Tabangao onshore gas processing plant in Batangas province.

Falling Reserves

In 2015 the country’s total natural gas production was 122.54bn standard cu feet (scf) – its lowest level since 2006, and 6% less than the 130.35bn scf produced in 2014. The majority of this was sourced from Malampaya, with the field producing 117.93bn scf of gas in 2015 and 126.3bn scf in 2014. In 2015, 115.79bn scf of this supply went directly towards electricity generation, while 2.14bn scf was used by the industrial sector. In 2016 total domestic output rose by 14.7% to reach 140.52bn scf, 94.2% of which was consumed for power generation and 2% by industry.

The Malampaya field is expected to continue to witness declines in productivity until it is depleted sometime after 2020. With only operator Shell privy to the full extent of the remaining gas supplies in the reservoir, estimates vary on how long the field will be able to meet current demand of nearly 3000 MW of capacity. Some estimates point to rapid declines starting as early as 2020, with others forecasts suggesting as late as 2024.

Despite this uncertainty on timing, the depletion of the field sometime in the next decade is a foregone conclusion. The major question for the power sector, therefore, is how to replace this supply. Little progress has been made in new upstream discoveries over the past decade (see analysis), and long-term energy strategies laid out by the government call for a greater use of natural gas in the power generation, industry and transportation sectors. The state has also invested substantial amounts in gas distribution infrastructure, as detailed in the Master Plan Study for the Development of the Natural Gas Industry drawn up by the Department of Energy (DOE) with technical assistance from the Japan International Cooperation Agency (JICA). In the power sector alone, the DOE estimates that natural gas could account for up to 11,900 MW in the Luzon grid by 2030, along with another 2150 MW in Visayas and 2500 MW in Mindanao.

However, with no plans in place for additional domestic production and no existing import regasification terminals in the country, the means of supplying the substantial amounts of natural gas necessary to fuel the developments laid out in the plan remain in question. Although the government granted a permit to construct a liquefied natural gas import terminal to Energy World Corporation in Pagbilao, Quezon, no import terminals were yet operational in the country as of the end of 2016.


The Philippines remains heavily reliant on imported crude to meet its oil needs as a growing demand and declining domestic production have resulted in a steadily increasing amount of foreign oil supplies. Total oil production reached 2.37m barrels in 2015, down from the 3.07m barrels produced in 2014, although significantly more than the 1.88m barrels registered in 2013.

These fluctuations are due primarily to changes in output at the county’s largest producing oil reservoir: the Galoc field, operated by Nido Petroleum. The company carried out its second phase of development at Galoc in the second half of 2013 and then optimised production of the field in 2014, resulting in a 63% increase in output over the previous year.

In 2015 the Galoc field produced a total of 2.26m barrels of oil at a rate of 6179 barrels per day (bpd), accounting for more than 95% of all domestic oil production on the year. This output was divided into three separate cargoes, which were shipped overseas; two were sold to SK Energy in South Korea, and one to Thai Oil Public Company in Thailand.

Production at Galoc dropped to 5344 bpd in the first half of 2016, bringing the year-to-date total to 972,663 barrels. Total petroleum export earnings for the first half of 2016 reached $316.2m, down 24.3% year-on-year as a result of the decreased volume and lower oil prices for Palawan light.


With the bulk of domestically produced oil exported elsewhere, the Philippines relies heavily on crude oil imports to supply its refining and petrochemicals industries with the raw inputs needed for the petroleum products consumed in the country. The Philippines imported a combined 78.8m barrels in 2016, up 0.9% from the 78.1m imported the previous year. The majority – some 87% – of this was sourced from the Middle East, led by Saudi Arabia, which accounted for 36.1%, followed by Kuwait (33.6%) and the UAE (13.3%), according to statistics released by the DOE. To supply the growing number of vehicles in the country, refineries in the Philippines are continuing to pump out petroleum products, processing 77.48m barrels in 2015. This was 26.2% more than was processed the previous year, due primarily to lower refinery utilisation in 2014 as a result of above-average downtimes due to emergency and maintenance shutdowns. In 2016 this rose by a further 2% to 79m barrels.

When operating at maximum capacity, the working crude distillation capacity of the domestic sector tops out at 285,000 bpd. However, this refining capacity is still not enough to meet growing domestic demand, which has surged in recent years on the back of lower fuel prices to reach 155.4m barrels in 2016, up 8.5% on the previous year. Diesel was the most widely consumed fuel, accounting for 41.8% of demand, followed by petrol at 23.2%, liquefied petroleum gas (10.9%), kerosene/avturbo (10%) and fuel oil (8.3%). Naphtha and other products accounted for the remaining 5.8%. The result of the country’s dependence on foreign hydrocarbons is a sizeable net oil import bill, which totalled $6.78bn in 2016. Some 52.2% of this was accounted for by finished products, with crude oil comprising the other 47.8%. While the volume of imports increased by around 6.8% over the year, the overall bill declined by 12.4% as a result of lower energy prices.

On The Grid

The Philippines looks likely to move towards a more decentralised system than is employed today. For now, however, the traditional centralised grid system, powered primarily by large-scale fossil fuel plants, continues to serve as the backbone of economic development. As the most cost-effective method of producing electricity on a large scale, coal-fired power plants will likely continue to make up the mainstay of power capacity for the foreseeable future despite the inroads being made by renewable sources.

Midway through 2016 the Philippines power sector had a total installed capacity of 20,055 MW, of which 17,925 MW was classified as dependable. The substantial presence of large-scale geothermal and hydropower plants in the Philippines, along with the more recent expansion of solar, biomass and wind projects, has renewable energy sources leading the pack in terms of installed capacity. Taken together, hydro, solar, wind, geothermal and biomass constitute 34.3% of all installed capacity, followed closely by coal plants (33.2%), oil-based generation (18.2%) and natural gas (14.3%). These ratios are transposed in terms of generation, however, due to the variable nature of renewable energy compared with the consistent output of baseload, hydrocarbons-fuelled plants. Coal-fired plants generated 46% of all electricity in the first half of 2016, followed by natural gas and renewables, which each accounted for 24%. Meanwhile, oil-based capacity, which serves a role as emergency backup, accounted for 6%.


Supplying power to the political and economic hub of the country, the Luzon grid boasts more than double the capacity of the two other grid systems combined, with more than 14 GW of installed generation capacity as of July 2016. After continuing to add new capacity over the past few years – both in the form of large, coal-fired power plants, as well as a constellation of smaller renewable power sources – the Luzon grid at last looks to be equalising its existing dependable supply load with current peak demand levels.

This was not the case as recently as early 2016, when warm temperatures and sustained droughts brought on by El Niño stressed the system to the point of failure, forcing government regulators and grid operators to scramble for stop-gap solutions such as the interruptible load programme (ILP). Originally instituted by the DOE and the Energy Regulatory Commission in 2010 for the Mindanao grid, and employed years later in Visayas, the ILP was designed to help mitigate energy supply deficiencies until new capacity became available.

The programme works by contracting private companies with standby generation capacities, such as operators of shopping malls, for example, to participate in the ILP, entitling them to financial compensation should they use their own generating facilities during instances of power supply deficit. Although the Luzon grid was forced to implement ILP procedures in order to manage demand during red alerts as late as 2016, the new generation capacity being added to the grid is expected to make these procedures a thing of the past.

The most significant project to come on-line in recent years was the second unit of the 270-MW circulating fluidised bed Calaca power plant in Batangas province, operated by the South Luzon Thermal Energy Corporation. The unit, which came on-stream in early 2016, follows the 2015 completion of the 300-MW expansion of the Southwest Luzon Power Generation Corporation. An additional 11 solar projects came on-line over the same time period, ranging in capacity from 2 MW to 63.3 MW. With these additions, the total installed capacity feeding power into the Luzon power system stood at 14,117.6 MW as of June 2016, with 12,940.5 MW classified as dependable.

Breaking With Convention

Although the large-scale, fossil fuel-burning power plants with capacities in the hundreds – or even thousands – of megawatts provide the dependable baseload backbone required for the national grid system, renewable power sources have been making significant inroads into the sector.

Older hydro and geothermal power plants continue to make up the bulk of current renewable power generation in the country, with 3609 MW and 1917 MW of installed capacity, respectively, as of June 2016. The rapidly expanding solar segment was the second largest, with 684 MW installed, followed by wind (427 MW) and biomass (233 MW). Although the combined output of the newer technologies of solar, wind and biogas account for only a fraction of total national output, their presence has expanded dramatically in just a few short years; the combined contribution of these three technologies totalled just 153 MW of installed capacity at the end of 2013.

Incentives For Renewables

Historically, renewable energy in the Philippines has been built on the bedrock of the high-capacity hydro and geothermal projects that have been operating for decades. More recently, a new wave of renewable energy has been sweeping the country as a result of the implementation of incentive programmes.

Instituted in 2012, the feed-in-tariff (FIT) programme pays out to certain qualified renewable energy developers at a set higher rate than conventional power plants, allowing them to recoup their investments more quickly and guaranteeing priority offtake for any power produced. The first two waves of FIT projects have already been issued by the National Renewable Energy Board (NREB) from 2012 to 2016, with all certifications ostensibly granted on a first-come, first-served basis until the renewable energy caps are achieved.

In addition to the favourable environmental impacts of a greater reliance on renewable energy, another often overlooked benefit of the FIT scheme, and indeed renewable energy as a whole, is the reduction of tail-end energy costs from the national grid system. Because the highest prices are paid out for standby, last-resort power generation – generally from more expensive diesel generation, which is typically used only when necessary to prevent outages – the utilisation of relatively cheaper renewable sources at the front end reduces the overall average price of power as a whole.

“These are the benefits renewables are bringing,” Don Dia, director of renewable energy developer Bronzeoak, told OBG. “They offset the high costs of emergency standby, diesel generation, not to mention the negative environmental impacts of dirtier diesel emissions,” he added.

The FIT programme is funded by a surcharge levied on distributors, which was originally set at P4 ($0.09) per kWh. Once the scheme gained momentum, however, this pool of funds became insufficient to cover the costs of the growing number of approved FIT participants, and the charge was upped to P15 ($0.32) per kWh in early 2016. One unfortunate consequence of the overall decline in electricity prices in recent years has been a larger-than-anticipated effect on the funding pool designated for paying out FIT beneficiaries.

As the wholesale electricity spot market price of power has dipped ever lower, towards P5 ($0.11) per kWh, the gap between the set FIT price has widened. As a result, the amount of money needed to cover the difference has increased, which may cause policymakers to look long and hard at how the next stage of the FIT scheme is implemented in order to limit the impact of subsidisation.

A New Deal

A pivotal shift in FIT programme’s role in the industry occurred in 2016, when two solar developers – Solar Philippines Tanauan and PowerSource First Bulacan Solar – signed 50-MW power purchase agreements (PPA) with Meralco to sell solar power to the national grid at a rate of P5.39 ($0.11) per kWh. This is well below the current FIT rate, which sits above P8 ($0.17) per kWh, and is competitive with fossil fuel prices.

“Since companies can sign at this price, it may not be necessary to pay FIT prices, which can distort power market prices,” said Lawrence Fernandez, the vice-president and head of utility economics at Meralco. It would, however, be premature to apply the economics of this specific project across the sector as a whole given the cost variability for each separate project. Energy prices can skew substantially due to factors such as land acquisition, grid connection, permitting and others.

The impending third stage of FIT allocations from the NREB has already been mapped out by the government, which has compiled a recommended course of action for the next stage of renewable energy development. The plan includes a further reduction of FIT rates over an allocation of hundreds of new megawatts of power projects.

Whether or not this recommendation is heeded by the administration of President Rodrigo Duterte and the ultimate decision-makers at the DOE, however, is unclear. As of October 2016 new members of the NREB board had yet to be appointed, so any decision on the future of the renewable incentive scheme will have to wait until after this occurs, meaning a new board is unlikely to be able to make an informed decision before 2018.

If the FIT scheme is scrapped, an alternative to encouraging growth in the sector without direct government subsidies would be to require electricity retailers to acquire and sell a basket of different energy generation that would include a set minimum level of renewables. If this were to go through, however, wind power developers would be at a sizeable disadvantage due to its higher capital expense and the randomness of generation output compared to rapidly falling solar cell costs, which also operate during peak demand times.


Oil and gas production in the Philippines is expected to continue its gradual decline in the coming years as maturing fields lose productivity, with the primary Malampaya field on track to experience a more severe drop-off in output sometime after 2020. Staving off this decline in the longer term will depend on the success of the currently limited exploration efforts, as well as resolving technical and political issues surrounding the current round of new exploration blocks.

Nonetheless, sustained investment across a wide spectrum of the utilities sector should lead to a dramatic increase in installed generation capacity across the country over the next decade, which should rectify the current mismatch between electricity supply and demand. Beyond this horizon, new projects will need to be approved and initiated for domestic capacity to keep in step with projected demand growth, particularly given the eventual depletion of the Malampaya field.

Renewable energy capacity should also continue to expand as the pipeline of FIT-approved projects is delivered, although future renewable projects may be more reliant on price-competitive power delivery rather than government incentive programmes. Though the FIT scheme has garnered substantial interest, the program’s future remains murky. The arrival of a new administration in 2016 in particular has brought with it a reticence to further incentivise renewables at the expense of higher power prices.