The prevailing narrative of the Philippines’ energy sector in recent years has centred around energy security concerns and the challenge of meeting growing demand. Efforts to realign the energy sector were ramped up during 2017 with the launch of a couple of reforms targeting investment and the promotion of efficiency.
Modifications to the Electric Power Industry Reform Act of 2001 have come at a critical juncture for the Philippines, as robust economic growth has outpaced the sector’s capacity to meet surging demand. Due to the imminent exhaustion of the country’s gas fields, dependence on imports of hydrocarbons has grown, worsening the current account deficit. In addition to falling reserves, the cost of electricity is also a major concern. Despite decreases in recent years, prices remain among the highest in Asia (see analysis). This heavy cost burden has hindered investment, particularly in energy-intensive industries, while forcing consumers to pay high energy bills. Consequently, the task of delivering a sustainable energy mix that guards consumers against the risk of currency and price fluctuations continues to be a top priority for the government.
The Philippines ranked 70th out of 125 countries for sustainable energy on the 2017 World Energy Trilemma Index designed by the World Energy Council (WEC). Measured across three categories of energy security, energy equity (accessibility and affordability) and environmental sustainability, the Philippines received a grading of CCA, with A being the highest possible score and D being the lowest. It placed 63rd for energy security due to its ageing power plants and the limited lifespan of the Malampaya gas field, its primary source of domestic gas.
Meanwhile, having the third-highest electricity rates in Asia, behind only Japan and Hong Kong, the Philippines ranked 95th for energy equity. Though this is in the bottom third of the global table, the country has made progress in recent years, with the Wholesale Electricity Spot Market (WESM) reporting a decline in effective spot settlement prices (ESSP) since 2013, from P8.37 ($0.165) per kWh to P5.58 ($0.110) in 2014, to P4.46 ($0.088) in 2015 and then to P3.32 ($0.066) in 2016. In January 2017 ESSP hit a six-year low of P1.90 ($0.038), though the year ended with a slightly higher 12-month average (measured between December 26, 2016 and December 25, 2017) of P3.37 ($0.068) per kWh. While the nation still has a lot of challenges to address in energy security, accessibility and pricing, it was the world leader in the use of renewable and low-carbon sources, ranking first for environmental sustainability on the WEC index.
While hydrocarbons exploration dates back to the late 19th century, the discovery of gas in the Palawan offshore area in 1989 marked the rise of the natural gas industry. However, since operations began in the Malampaya field in 2001 the upstream segment has experienced low levels of investment and has struggled to bring domestic sources of hydrocarbons to the market, exacerbating the country’s dependence on imports. Therefore, finding a new energy source to replace the depleting Malampaya gas field is a major priority of the current administration.
In August 2017 the Department of Energy (DoE) released the Philippine Energy Plan 2017-40 (see analysis), which estimated that indigenous reserves consisted of 41.6m barrels of delineated oil, 3.4trn standard cu feet (scf) of gas and 37.9m barrels of condensate. The goal is to increase delineated oil reserves to 48.7m barrels over the mid term (2019-22), and then by a further 17% over the long term (2023-40) to reach 57.1m barrels. Meanwhile, gas reserves will be expanded to 4.7trn scf over the mid term, followed by a further 25% increase over the long term to 5.9trn scf. By 2040 condensate reserves are expected to grow to 56.8m barrels. To achieve these long-term objectives, the DoE has earmarked upstream projects at 11 oil fields, seven gas fields and four condensate fields to produce 115.4m barrels, 4trn scf and 45.9m barrels, respectively.
Overall, the strategy aims to provide basic electricity to all Filipinos by 2022 and meet all domestic demand by 2040. Total energy supply is estimated to reach 134.2m tonnes of oil equivalent by the end of 2040, with coal expected to account for 41.6% of the total energy mix, followed by oil with a 32.2% share.
Furthermore, in an effort to ramp up oil and gas exploration activity, the government has also initiated talks with China to jointly explore the disputed waters of the South China Sea (see analysis).
Supply & Demand
While plans are in place to bolster the upstream segment, dependence on imports remains high. Though a reduction of 6.1% on 2016, crude oil imports totalled 73.9m barrels in 2017, with around 90% coming from the Middle East and the remainder split between Russia, Australia, the UK and other ASEAN members. During this period, total imports of petroleum products reached 97.5m barrels, an increase of 11.8%. The country’s import bill for petroleum products rose significantly by 31.2%, from $7.5bn to $9.9bn. According to the DoE, 40.5% of imports in 2017 were crude oil, while the other 59.5% comprised finished products. Diesel oil accounted for 41.5% of the product import mix, followed by gasoline (18.3%), liquefied petroleum gas (LPG) (13.1%), kerosene/avturbo (9.5%), fuel oil (7.1%) and other products (10.4%).
Meanwhile, petroleum products exports rose by 6.2%, from 13.7m barrels in 2016 to 14.6m barrels in 2017. Over the same period, processed crude dipped by 2.3% to stand at 77.2m barrels, with refinery utilisation dropping from 75.7% to 74.2%, possibly due to extended maintenance shutting down refineries and affecting their turnaround schedules. Local petroleum refinery production output also fell, by 2.7%, to stand at 76m barrels. Similarly, diesel oil, kerosene/avturbo, gasoline and LPG output declined by 4.7%, 11.1%, 2.0% and 2.9%, respectively. Output of fuel oil, however, was up 25.1%, most likely a result of greater international demand.
Demand for petroleum products in 2017 averaged 445,500 barrels per day, up from the average of 426,600 barrels per day in the previous year. Average refining output stood at 208,200 barrels per day, which is less than half of the average daily demand. Meanwhile, diesel accounted for the majority of the production mix, with a 36.5% share, followed by gasoline with 24.4%.
Gas to Power
Domestic supply comes from two main gas fields: Malampaya and Libertad. The Malampaya field in Palawan has served as the primary domestic supply of gas since 2001. Under Service Contract 38, development of the field is overseen by a consortium of three companies: Shell Philippines Exploration, Chevron Malampaya and the Philippine National Oil Company Exploration Corporation (PNOCEC).
In addition to supplying gas to a Pilipinas Shell Petroleum Corporation oil refinery and a compressed natural gas refilling station, the Malampaya field also provides gas to five plants located in Luzon, with a combined generating capacity of 3211 MW. The 1000-MW Santa Rita, 500-MW San Lorenzo, 414-MW San Gabriel and the 97-MW Avion plants are owned by local holding company First Gen, which has a 25-year power purchase agreement with the Manila Electric Company, the country’s largest distributor of electricity. Meanwhile, the 1200-MW Ilijan power plant, the largest natural gas facility in the Philippines, is owned by the National Power Corporation and operated by Korea Electric Power Corporation (KEPCO) Ilijan Corporation – a consortium made up of KEPCO; Mitsubishi; local TeaM Energy, which is a partnership between Tokyo Electric and general trading company Marubeni; and Kyushu Electric. Operations fall under a 20-year energy conversion agreement based on a build-operate-transfer scheme that is set to expire on June 4, 2022. Under the government’s privatisation programme, San Miguel Corporation Global Power was declared the administrator of the Ilijan power plant in April 2010.
The Libertad gas field, located south-east of Bogo City in northern Cebu, began operations in 2012 under the direction of oil and gas service provider Forum Exploration Inc (FEI), a joint undertaking between Canadian Forum Energy and local firm Forum Pacific. While FEI’s initial intention was to use the field to produce power, the DoE stipulated in a 2007 confirmation letter that FEI must sell the natural gas as a supplier: in 2009 FEI signed a gas sales and purchase agreement with local energy equipment manufacturer DESCO to develop the field for power generation; then in 2011 the Energy Regulatory Commission granted DESCO permission to start operating a 1-MW, gas-fired power plant, with the power produced to be sold to local distributor Cebu II Electric Cooperative.
According to the DoE, the Philippines produced 139.2bn scf of gas in 2017, with consumption totalling 134.5bn scf, 98% of which was consumed by the power sector. To compare, production was slightly higher in 2016, at 140.5bn scf, with consumption at 135.1bn scf, 98% of which was taken up by the power sector.
Policies & Plans
As part of efforts to bolster energy projects and increase investment in the sector, President Rodrigo Duterte signed Executive Order No. 30 in mid-2017 for the establishment of the Energy Investment Coordinating Council. Tasked with expediting major energy projects, the inter-agency outfit aims to reduce the permit approval process from potentially years to 30 days for endeavours identified as Energy Projects of National Significance (EPNS) (see analysis). To qualify as an EPNS, a project must be deemed a significant contributor to economic growth and have a minimum capital investment of P3.5bn ($69.1m).
The Philippine Development Plan 2017-22, established by the National Economic and Development Authority (NEDA), is set to benefit the energy sector over the medium term. Under the five-year strategy, infrastructure projects geared towards power generation will be prioritised, with investment and implementation to be fast-tracked in accordance with Executive Order No. 30. Furthermore, the plan aims to foster competition and drive down electricity costs, which are among the highest in the region. Additionally, it will develop the natural gas and renewables industries, and focus on the interconnection of the entire grid and the development of off-grid areas, as well as the efficient transmission of electricity to various load centres.
Of the total 22.7 GW of installed generating capacity in 2017, renewable energy accounted for about 31%, only slightly behind coal with 35%. Breaking down the contribution of renewables to the overall energy mix, hydro made up 16.0%, geothermal sources 8.4%, and biomass, wind and solar had a combined share of 6.8%. While renewable energy accounted for almost one-third of total installed capacity, it accounted for only 24.6% of gross generation, with geothermal, hydro, biomass, solar and wind contributing 10.9%, 10.2%, 1.1%, 1.3% and 1.2%, respectively. Meanwhile, coal contributed a share of 49.6% towards gross generation.
To improve energy security, the government has drafted a number of policies that encompass multiple facets of the sector, such as the Philippine Natural Gas Regulation, which will guide the development of the natural gas industry (see analysis). On top of that, a stream of pro-business reforms is also set to bolster the industry. To this end, installed capacity is set to increase significantly over the medium to long term as a wide array of investments are expected in the utilities sector, which will help balance electricity supply and demand.
Coal & Hydro
As of December 31, 2017, the three largest coal plants in the Philippines were the 1294-MW Sual plant in Pangasinan, the 764-MW Pagbilao plant in Quezon and the 652-MW Mariveles Coal plant in Bataan. Installed capacity from hydroelectric power plants stood at 3627 MW in 2017, up slightly on 3618 MW in the previous year. As of end-2017, the three largest hydro plants were found in Laguna, Isabela and Pangasinan, with installed capacity of 2944 MW, 1420 MW and 940 MW, respectively.
Valued at an estimated $20.8bn, the Philippines had 10.4 GW of largely imported coal-fired expansion projects in its pipeline, in addition to its 7419 MW of existing capacity, according to the “Carving out Coal in the Philippines” report published in October 2017 by the Institute for Energy Economics and Financial Analysis, and the Institute for Climate and Sustainable Cities. However, these figures may not be reached; in a bid to reduce carbon emissions, the Tax Reform for Acceleration and Inclusion (TRAIN) Act was signed at the end of 2017, resulting in a tariff increase on the import of coal (see analysis).
With disparate territory of over 7600 islands, providing a stable, nationwide power supply has long been a major challenge for the Philippines. Despite being one of the fastest-growing economies in the world, access to stable electricity is still scarce in remote areas. Adding to the challenge, the high costs of diesel generation, not to mention the negative environmental impacts of diesel emissions, continue to plague rural communities.
As of December 2017, 2.4m households, or 16% of homes in the Philippines, were not connected to the power grid, according to the DoE. The National Electrification Administration reported that 19,740 sitios (rural territorial enclaves) had no access to electricity.
One opportunity for overcoming supply gaps lies in the modernisation of small island power systems through the adoption of renewable sources, which will lead to cheaper and cleaner power. “We see renewable energy alternatives, such as micro-grid and battery energy storage solutions, as viable alternatives in meeting the growing energy requirements in the Philippines, and providing much needed power to off-grid areas,” Olivier Coquerel, president and country managing director of ABB, a transport, energy, and infrastructure consultancy, told OBG. The Small Power Utilities Group (SPUG) provides access to electricity in remote areas where the national grid has little or no presence, mostly through the use of expensive diesel generators. To assist in offsetting diesel usage, a study was carried out by the International Renewable Energy Agency. According to their “Accelerating renewable mini-grid deployment: A study of the Philippines” report, released in October 2017, renewable energy mini-grids were identified as the missing link in achieving sustainable off-grid rural electrification. The report also suggested that SPUG take proactive steps to transfer its power generation sites to the private sector, thus freeing up capital to move to underserved areas.
Broadly speaking, the long-term success of the power sector depends on the ability of policymakers and investors to find a more practical energy mix, which protects consumers against price fluctuation as well as exchange rate volatility. While the TRAIN bill will increase the cost of importing coal, fossil fuels will continue to be key for power generation.
The petrochemicals industry’s dependence on imports will increase as production from the country’s main fields continues to drop, with natural gas consumption expected to surpass production for the first time in 2018. In preparation for this, the Philippines is looking to build its first liquefied natural gas terminal in Quezon (see analysis). Scaling up decentralised power systems is a top priority of the government, and with the increasing adoption of renewable technology, the goal of total electrification by 2022 is well within reach.