THE chairman of Shell’s companies in the Philippines said his group is keen on investing more in the country, but called on the government to put in place a longer-term stable fiscal environment so that investors would be encouraged to come in and help look for new indigenous energy sources.
“Shell is prepared to invest. Shell remains interested in exploring in the Philippines provided we can get clarity in the fiscal regime. We have a low level of reserve and we need to explore more,” said Cesar G. Romero, who is also the president of Pilipinas Shell Petroleum Corp.
Shell companies in the Philippines include Shell Philippines Exploration B.V. (SPEx), which leads the Malampaya consortium, operator of the facility off Palawan’s gas field which is a vital source of energy for Luzon.
Other consortium members are Chevron Malampaya Llc. and Philippine National Oil Co. Exploration Corp. (PNOC-EC). The consortium has remitted a total of over $10 billion in revenues to the National Government since the project’s start of operations in 2001.
The group operates the Malampaya natural gas platform under Service Contract (SC) 38) in which 70 percent of the gross proceeds from the sale of natural gas would go to the contractor to recover the investment cost. The remaining 30 percent is shared by the government and the consortium on a 60-40 basis, respectively.
The consortium’s contract with the government will end by 2024. The gas reserves can last until 2027 to 2029. “By that time, there will still be gas but not sufficient to fuel the gas plants,” said Romero. The Malampaya Deep Water Gas-to-Power project has been providing around 30 percent of the country’s energy needs.
This even peaks to 50 percent during the summer months. Since 2001, the Malampaya project has been drawing natural gas from beneath the seafloor of the West Philippine Sea, and this fuels five power station plants with a total generating capacity of 3,200 megawatts. It is also Pilipinas Shell’s refinery and compressed natural gas refilling station.
“We are looking at various territories beyond SC38. We maintain a dossier of areas we are interested in. Of course, SC38 remains a focus. We are quite confident that we will be able to stand a good chance especially of the area involved is deep water,” said Romero.
There are two things that worry Shell: a Commission on Audit (COA) ruling that, if pursued, spells a P53-billion tax deficiency for the consortium, and the TRAIN 2 tax reform law.
The COA earlier overruled the petition of the Malampaya consortium that income tax was already imputed in the government’s 60-percent share in the Malampaya royalties. The tax, the consortium argued, was deductible from the government’s share of the Malampaya earnings.
However, the COA said there is no provision in the law stating that the income tax of the contractors forms part of the share of the government. Back then, the COA noted in its 2009 report a P53,140,304,739.86 tax deficiency.
The consortium has filed a petition for certiorari before the Supreme Court.
In September 2015, SPEx filed an arbi-tration case against the national gov-ernment with the Singapore International Arbitration Center. In July 2016, SPEx filed another arbitration case in the International Center for Settlement of Investment Disputes against the national government regarding its tax dispute.
Tax reform
For incentives, Romero wants to know the fate of Presidential Decree (PD) 87 once the second tax-reform package is implemented next year.
PD 87 was issued by former President Ferdinand E. Marcos Sr. to amend the earlier PD 8, which promotes the discovery and development of the country’s indigenous petroleum resources.
Under PD 87, fiscal incentives, including tax-free importation of equipment and supplies, exemption from all taxes except income tax, income tax assumption (i.e. payment of income tax out of the government’s share), accelerated depreciation, free market determination of crude oil price, and easy repatriation of investments and profits, are offered.
These incentives will no longer be offered when the proposed Package 2 of the tax-reform program is implemented.
“Like everyone else, we ask for the government not to remove the incentives,” he said, while explaining that the service contract system with all its incentives under PD 87 helped the Philippines attract local and foreign companies, including the majors, who were finally able to discover indigenous oil and gas in commercial quantities.
SPEX Managing Director Don Paulino said the government must also quickly resolve the geopolitical issues that the country is facing with its neighbors so that new explorations can be done without much hindrance.
“Our neighboring countries started at the same level as us. But now the Philippines is lagging behind in explorations. What we need right now is to encourage more explorations so we can find and develop new indigenous energy sources,” he stressed. “An example of this is what we have been doing with Malampaya in the last 17 years,” he added.
Image credits: Shell