Philippines’ expansion plans for natural gas-

The Philippines’ energy regulator – Department of Energy (DoE) – has pushed for a greater share for natural gas (including liquefied natural gas [LNG]) in its draft fuel policy mix, prepared in 2014. To encourage energy diversification in the country, the DoE expects the share of natural gas to increase to up to a third over the next 16 years. The plan, if approved, may also mean lower coal imports for the Southeast Asian country, which buys the fuel mainly from Indonesia to feed some of its power plants.

Southeast Asia Infrastructure provides an overview of the Philippines’ natural gas sector, its policy and institutional framework, and key natural gas pipelines and LNG projects in the country…

Overview of the natural gas sector

According to the US Energy Information Administration, proven natural gas reserves in the Philippines are about 3.48 trillion cubic feet (tcf). Natural gas consumption in the Philippines has remained at modest levels and is comfortably met by indigenous gas production. In 2014 (January-June), natural gas production and consumption in the Philippines was recorded at 30.94 billion cubic feet (bcf) and 29.78 bcf respectively.

The importance of natural gas is highlighted by the fact that the electricity generation sector accounts for over 97 per cent of the total gas consumed in the Philippines. Further, natural gas accounts for about 27 per cent of the power generation in the country. Almost all gas comes from Malampaya gas field in northern Palawan. The Malampaya gas field is the country’s sole commercial gas field, which commenced delivery of gas in October 2001. The domestic pipeline network in the Philippines is about 530 km long, which is used to transport gas from the Malampaya gas field to three power plants – the 500 MW San Lorenzo, the 1,000 MW Santa Rita and the 1,200 MW Ilijan. Notably, the Malampaya gas concession expires in 2024. Industry players opine that while the field may have enough gas for some further expansion, it is not considered sufficient for more than five years beyond 2024 at current levels. Therefore, in order to exploit natural gas reserves in the Philippines, the government is currently seeking partners to infuse required capital investments. Nevertheless, once the reserves at the Malampaya field are depleted, the country’s reliance on natural gas imports would increase substantially.

Policy and institutional framework

The natural gas industry in the Philippines is still at a nascent stage. The DoE is the executive department of the Philippines government responsible for regulating all activities related to natural gas exploration, production, development, utilisation, transportation, distribution and policy implementation. The state-owned Philippine National Oil Company (PNOC) is the dominant player across all segments of the gas industry in the country. The upstream segment is primarily controlled by PNOC’s subsidiary, Philippine National Oil Company Exploration Corporation (PNOC-EC). The company functions by forming joint ventures with foreign players to ensure that the needed technology for efficient exploration and production of natural gas in the country is brought in and utilised. The key foreign companies operating in the gas exploration segment in the Philippines include Netherlands-based Royal Dutch Shell, US-based Chevron Corporation and Occidental Petroleum, and Canada-based Forum Energy Corporation.

The principle governing law in the Philippines is the service contract system under the Oil Exploration and Development Act of 1972. Additionally, service contracts are bound by the consultation, consent and benefit sharing provisions of the Local Government Code and the Indigenous Peoples’ Rights Act (IPRA). A production sharing regime is used in the Philippines. The contractor is allowed to deduct the costs of exploration and production up to 70 per cent, against the gross proceeds of annual production. The remaining net proceeds are then shared between the contractor and the DoE in a 40:60 ratio. Service Contract 38 (the Malampaya-Camago contract) is considered the foundation of the Philippines gas project and the model service contract.

Key natural gas pipeline and LNG projects

In order to bolster the Philippines’ natural gas sector, the government has undertaken as many as nine pipeline projects under the Philippine Energy Plan (PEP). Once commissioned, these pipelines are expected to relieve some of the power problems faced in Mindanao. Since February 2014, the cities of Davao and Zamboanga as well as other parts of Mindanao began experiencing seven to 12 hours of unpredictable brownout. Notably, Mindanao has a perennial energy crisis, which is primarily due to it being largely dependent on ageing hydropower plants. The commissioning of several natural gas pipeline projects will bring in more diversification to the fuel supply mix of Mindanao, and would help contain the power shortage in the island.

As mentioned before, with the limited scope for natural gas exploration and production from the Malampaya gas field beyond 2024, the Philippines needs to secure gas supplies through alternative means as well. Currently, the Philippines does not have any LNG terminals. However, the country is located near major LNG suppliers and consumers, and advantageously positioned for investment in LNG. As a result, a few companies have undertaken the construction of LNG terminals in the country. One of the biggest hurdles in the development of LNG infrastructure is the existence of coal as a cheaper energy source in the Philippines. The reluctance of some utilities to invest in gas-fired power generation is seen as one factor hindering the development of LNG projects.

Outlook

In light of the increased focus on natural gas, the fuel is expected to play a crucial role in the Philippines’ energy mix in the future.  Apart from the government’s assistance, the country has also received funding support from external sources for the development of its energy sector. For instance, in March 2014, the US Export-Import Bank signed an  MoU with the DoE to provide support to the Philippines’ energy sector. The estimated value of the MoU is $1 billion and it would target renewable energy and LNG projects in particular. While coal is projected to continue to be a significant contributor to the domestic energy supply during the foreseeable future, a rise in the share of LNG in the energy mix is expected to be facilitated by upcoming LNG import terminals in the Philippines.