Malampaya group may pay up to $1B in royalties by mid-year

The National Government may start collecting by the middle of this year as much as $1 billion worth of royalties from the Malampaya deep water gas-to-power project, a ranking Shell Philippines Exploration B.V. (SPEX) official said.

SPEX external affairs general manager Facundo Roco, in a presentation before the Economic Journalists Association of Philippines (EJAP)-San Miguel Corp.-sponsored journalism seminar over the weekend, said they hope to fully recover the cost from the Malampaya project by June this year.

"The agreement was that, while we were on a cost recovery, 70 percent would go cost recovery and the remainder would be split over the 60 to 40 ratio. So, assuming we have already cost recovered by June this year, that means we have already cost recovered $2 billion,"he said.

Of the $4.5-billion total project cost, about $2 billion would be spent for upstream development while the remaining $2.5 billion was allocated for the development of the downstream natural gas project.

In 2005, the Department of Energy (DOE) estimated that without the cost recovery, government will be able to get $555 million worth of royalties.

The cost recovery program agreed by the project proponents and the government allows the SPEX-led consortium to recover 70 percent of the cost incurred in the project.

After the project proponents have recouped their costs, the government and the consortium will divide the remaining 30-percent revenues generated from the project. About 60 percent of the 30-percent balance will go the consortium and the remaining 40 percent to the National Government (NG).

"But once gone, then the formula would shift, the whole 60 percent goes to the government and 40 percent would go to the consortium. It might be earlier, but the government would be the one to announce it," Roco said.

The royalties to be paid by the consortium developing the Malampaya project is benchmarked on the prices of international crude.

The low-end of the targeted total royalties to be accrued by the NG from the Malampaya project is $9 billion while the high-end figure could reach up to $13 billion.

The Malampaya gas field is being developed with SPEX as the lead operator together with Chevron Texaco of the US and the government-run Philippine National Oil Co.-Exploration Corp. (PNOC-EC).

The earnings from the Malampaya project, the single biggest investment in the country so far, could also help the NG narrow down its budget deficit.

Apart from the royalties to be paid to the NG in 20 years, the government will still have additional revenues from the project through the earnings to be incurred by PNOC-EC, a subsidiary of state-owned Philippine National Oil Co. (PNOC).

PNOC-EC owns 10-percent equity in the Malampaya project. SPEX and Chevron Texaco, meanwhile, each has a 45-percent stake.

In 1989, Occidental Philippines Inc. discovered gas in the Camago-1 well in the area covered by Service Contract 38 in offshore of Palawan. The Camago find was in deep water and more than 300 kilometers away from its potential market.

In 1990, SPEX acquired 50-percent interest in SC 38. SPEX’s extensive drilling and evaluation program revealed the large Malampaya gas field and established its connection to the Camago find.

By 1995, the Malampaya field was estimated to have recoverable volumes of 2.7 trillion cubic feet of gas and 85 million barrels of condensate. The gas reservoir was enough to provide approximately 30 percent of Luzon’s power requirements for more than 20 years. This significant opportunity for commercial gas development led to the signing of gas sales and purchase agreements for Malampaya natural gas in May 1998.

Production from the Camago-Malampaya gas field provided fuel for the 2,700 megawatts (MW) combined-cycle gas turbine power plant in Southern Luzon since 2002.

These are the 1,200-MW Ilijan being managed by the Korea Power Corp. and the National Power Corp. (Napocor); and the 1,000-MW Sta.Rita and 500-MW San Lorenzo combined-cycle gas turbine plants in Batangas, being run by First Gas Power Corp. of the Lopez group.

Natural gas is seen as another major energy source being a cleaner fuel type.