Service Contract Allows De Facto Foreign Control Over Malampaya

Looking at Service Contract 38 and its implementation, government has practically become 'powerless' over Malampaya, and is therefore not in the position to ensure that Malampaya serves the national interest.

By Arnold Padilla

IBON FEATURES

Posted by Bulatlat

The US$4.5-billion Malampaya Deepwater Gas to Power Project in Palawan (an island some 590 kms from Manila) is supposed to reduce the country's overdependence on imported crude oil and refined petroleum products for its energy needs.

With the continuing climb of global oil prices since last year, the strategic importance of Malampaya and other exploration efforts to look for domestic energy sources has become more prominent.

But what is seldom discussed is that foreign oil companies and not the national government has effective control over Malampaya, raising serious doubts on whether the project could indeed provide the energy security of the country.

Foreign giants

Malampaya is covered by Service Contract (SC) 38 between the Philippine government as represented by the Department of Energy (DOE) and a consortium of service contractors composed of SPEX (45%), Chevron Texaco (45%), and the Philippine National Oil Company-Exploration Corporation (PNOC-EC, 10%).

SPEX is the exploration unit in the Philippines of Royal Dutch Shell, a transnational corporation (TNC) based in the United Kingdom and The Netherlands. Royal Dutch Shell is the world's third largest oil firm in terms of revenues and the second most profitable company. American TNC Chevron Texaco, on the other hand, is the world's fifth largest oil company in terms of revenues and the fourth most profitable.

Under the Service Contract arrangement, it is assumed that the government (through the DOE) retains ownership over the petroleum reserves of Malampaya, even as it hired the services of SPEX, Chevron Texaco, and state-owned PNOC-EC as contractors for the exploration, development, and utilization of Malampaya natural gas.

The Service Contract system took effect in 1973 with the enactment of Presidential Decree 87 or the Oil Exploration and Development Act of 1972 under the Marcos administration (1965-1986). This system is perceived as consistent with Article XII (National Economy and Patrimony) Section 2 of the 1987 Constitution which says that all natural resources in the Philippines including petroleum are owned by the State.

The Supreme Court, in its Dec. 1, 2004 decision declaring the constitutionality of Republic Act (RA) 7942 or the Philippine Mining Act of 1995 held the view that the contentious Financial and Technical Assistance Agreement (FTAA) is essentially a Service Contract, which Article XII Section 2 paragraph 4 of the 1987 Constitution supposedly allows.  This provision says that, "The President may enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils according to the general terms and conditions provided by law…"

Effective control

But even the Supreme Court's decision did not resolve the issue of effective State control over the country's natural resources as far as the Service Contract system is concerned.

Paragraph one of Article XII Section 2 of the 1987 Constitution explicitly asserts that "The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State."

The term control is generally defined as the power to direct or determine, or the exercise of authoritative power. Looking at SC 38 and its implementation, the government has practically become 'powerless' over Malampaya and therefore is not in the position to ensure that Malampaya serves the national interest.

To illustrate, instead of requiring that all the petroleum produced from Malampaya should be used to meet the domestic requirements and can only be exported if such requirements were met, SC 38 merely requires the contractors to supply a portion of domestic requirements on a pro-rata basis.

SC 38 defined pro-rata as the total volume of crude oil requirements for domestic consumption multiplied by the ratio of total quantity of crude oil produced by Malampaya to the entire Philippine production of crude oil.

Except for natural gas which supplies the three power plants in Batangas, the country has yet to utilize for domestic consumption the condensate and crude oil that have been extracted from Malampaya. From 2001 to 2004, Malampaya has produced around 9.9 million barrels of condensate, which have all been exported to Singapore for refining because local refineries owned by Pilipinas Shell and Petron Corporation could not supposedly process its components.

Condensate is a lighter type of crude that can be refined into gasoline, diesel, and kerosene. In addition, all the 1.9 million barrels of crude oil produced between December 2001 and April 2002 during the extended well test were also exported to a Chevron Texaco refinery in South Korea.

Crude oil gone to waste?

Worse, amid increasing world crude prices that have been hurting the national economy, SPEX and Chevron Texaco did not only export Malampaya oil and condensate but also adamantly refuse to develop the Malampaya oil rim which is a potential domestic source of crude oil for the Philippines.

Estimates of the quantity of crude oil stored in Malampaya vary. SPEX and Chevron Texaco put it at 18-32 million barrels while the DOE claims that the Malampaya crude oil reserves range from 28-40 million barrels. On the other hand, the Energy Information Administration (EIA) of the US Department of Energy, in its online country analysis brief on the Philippines wrote that Malampaya crude oil could reach as high as 85 million barrels.

SPEX and Chevron Texaco claim that the potential quantity of crude oil in Malampaya is too small to develop and have thus abandoned its earlier commitment to develop the oil rim for commercial production. The government decided to look for other foreign investors to develop the Malampaya oil rim while PNOC claimed it is ready to take over the project if the government asked it to.

But SPEX and Chevron Texaco have effectively disallowed the development of the Malampaya oil rim by asking for US$12 billion, or six times the amount of their investment in the upstream portion of Malampaya, in indemnity fund to be set up before the government allows any third party to encroach in the development initiatives for the proposed oil rim beneath the Malampaya gas field.

The indemnity fund, which is stipulated in SC 38, is to 'guarantee compensation for any damage to the profitability of the natural gas business,' according to the oil TNCs.

This issue has put into serious question the supposed control and supervision of the government over Malampaya. For the oil TNCs that operate the project, it is not profitable to develop the oil rim (and besides they are already earning from the sale of natural gas and condensate) while the issue is not merely profitability but national interest especially in the light of sky-high global crude prices.

The amount of Malampaya crude oil may be small relative to actual domestic requirements but compared with existing oil fields in the Philippines, it is the most productive and must be harnessed and maximized. To illustrate, Malampaya's five-month crude oil production yielded an average of 385,965 barrels per month, which is 22 times the combined monthly average of the country's only existing oil fields– Matinloc and Nido, also both in Palawan.

If Malampaya is under the full control and supervision of the DOE as guaranteed by the Constitution, then the government could have required the foreign operators of Malampaya to supply the local market first before exporting any petroleum, as well as develop for commercial production and domestic utilization all the petroleum found in Malampaya.

But SC 38 does not only allow the exportation of Malampaya petroleum but also contains a provision that prevents the government from further developing and maximizing the resources of Malampaya for the national interest. If not extracted as soon as possible, experts warn that crude oil under the Malampaya gas field may go to waste by 2008 or 2009 because the reservoir pressure will have been depleted by that time from the existing gas production, thus preventing commercial oil production.

Uphold people's ownership and control

Granting that the Philippine government does not have the technological know-how and financial muscle to explore, develop, and utilize by itself the country's petroleum resources, it is still not an excuse to blindly enter into contracts that only abuse our natural resources without due regard to the national and the people's interest. Even if we allow the participation of foreign corporations, the effective control over the natural gas or crude oil should still lies in the hands of the State. Clearly, in spite of the constitutional guarantee on the full State control and supervision of such resources, the Service Contract system has in fact stripped off the government of such right and obligation.

In the light of the raging oil price crisis, the most urgent task of the government is the reconsideration of the Malampaya Service Contract and all other petroleum Service Contracts in the country. What the 1987 Constitution says is merely financial and technical assistance from foreign corporations on large-scale exploration, development, and utilization of petroleum resources, and nothing more. PD 87 violates this constitutional provision and must therefore be repealed. A system that will uphold the people's ownership over the country's resources and ensure effective State control, while maximizing foreign technical and financial assistance must be enforced to replace the Service Contract system. IBON Features/Posted by Bulatlat

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