Delay in operation of power plant eats into government’s royalties

The five-month delay in the commercial operations of Kepco-Ilijan Corp. (Keilco) has eaten into the royalties that the National Government should have raised from the $4.5 billion Malampaya Deep Water-to-Gas Power project.

Keilco, which was supposed to commercially operate last January, is operated by Korea Electric Co. (Kepco) and the state-owned National Power Corp. (Napocor).

The 1,200 MW Ilijan power plant started its commercial operation last June 1. At present, Napocor is negotiating with Keilco for the payment of some $400,000 per day in liquidated damages due to the delay which was apparently caused by some "technical problems."

However, government sources said that Shell Philippines Exploration B.V. (Spex), the local upstream/exploration arm of the Royal Dutch Shell Group and the main operator of the Malampaya project, has opted to charge the take-or-pay cost on the total $9 billion National Government’s royalties.

Based on the take-or-pay contract between Spex and Napocor, the state-owned power firm wil have to pay 100 percent for the natural gas being delivered to the Ilijan plant though it is not yet operating commercially.

"They (Spex) are substracting from the royalties of the National Government, the take-or-pay cost that should be paid by Napocor to Spex," the sources said.

According to the sources, the royalties are already being booked on the Department of Energy (DOE)’s books. The sources did not give the figure of how much of the supposed royalties were eaten up by the "take-or-pay" provision.

"Based on the books of DOE, there are already royalties from Malampaya being booked. But there is no cash coming in. Instead of paying royalties to the National Government, the Spex is just getting the "take-or-pay" charge from the royalties," the sources said.

DOE estimates show that the Malampaya consortium will pay about $125 million in royalties to the government starting early this year up to the seventh year. This amount will increase to about $250 million in the eighth year and above. These estimates, however, are subject to changes based on the end result of the cost recovery program. – Donnabelle Gatdula