Has the search for oil become fossilized?

A few weeks ago, I stumbled upon an interesting and well-crafted infomercial. Actor Dingdong Dantes was the spokesperson and he highlighted the merits of renewable and alternative energy. Make no mistake about it, alternative energy has become synonymous with a “clean and green” environment and is definitely here to stay. But despite all the attention it has received, I hope we do not abandon our search for traditional sources of energy like oil.

The clamor for the use of alternative energy sources is no surprise. The rise of oil to US$140 per barrel last year reminded everybody just how dependent we are on this precious resource. The country consumes 325,000 BOPD (barrels of oil per day) of which only 800 BOPD is produced locally  (Source: Philippine National Oil Co. – Energy Development Corp. (Atty. Eduardo F. Hernandez, director, PNOC-EC). Our dependence on oil importation leaves us vulnerable to price fluctuations and subject to the whims and politics of other nations.

Several alternative energy companies have already entered the Philippine market. Bronze Oak Philippines has started its Ethanol facility in San Carlos, Negros Oriental and plans to put up two additional plants. Basic Energy has a similar Bioethanol project in Zamboanga. But are we as a nation ready to switch to alternative energy sources similar to Brazil?

During the 1970’s, Brazil was importing 75 percent of its oil requirements. When the Organization of Oil Exporting Countries (OPEC) oil embargo crippled the nation’s economy, Brazil’s then Dictator, General Ernesto Geisel decided to move the country in the direction of Alternative Energy. His vision was to use the country’s vast sugar cane plantations as a source for ethanol fuel. The government subsidized and financed new ethanol plants and directed state-owned oil company Petrobras to install ethanol tanks and pumps around the country.

Unfortunately, Brazil had a very difficult balancing act to maintain. It found itself caught in the middle of maintaining food security and meeting its energy needs. During the 1990’s, low oil prices led the government to phase out the subsidies.  The main source of ethanol – sugar cane also became a rare commodity. High sugar prices left the sugar mills with little or no incentives to produce the ethanol fuel. This left millions of ethanol alcohol car drivers chasing a diminishing supply of ethanol on the market.

The Philippines currently faces its own Food Security issues. According to the Department of Agriculture, we are planning to import 2MMT (million metric tons) of rice in 2009. What would happen if more and more rice lands were converted to sugar, cassava or corn to serve as the raw materials for the new ethanol and bioethanol plants? The amount of corn that it takes to produce enough ethanol to fill an SUV can feed an adult for an entire year (Source: Time Magazine Stress Testing Biofuels, May 12, 2009). Are we going to sacrifice our food security for energy self sufficiency? Which government agency is tasked to maintain this balance? Brazil had a dictator and was thus able to mobilize and coordinate the switch.

The Philippines continues to be a largely unexplored country for oil. Only 557 wells have been drilled since we first started drilling oil one hundred years ago. Of these, only 17 wells have produced oil and today only four wells are still producing oil. In the 1980s, Indonesia drilled as many as 400 wells a year. Our last major commercial discovery was in 1992 with the drilling of the Malampaya well. From 1991 to 2002 Indonesia has drilled 1,081 exploration wells, Vietnam has drilled 154 wells and Malaysia has drilled 956 wells (Atty. Eduardo F. Hernandez, director, PNOC-EC).

The Philippines has a total of 16 sedimentary basins covering a total area of 700,000 sq km. These areas are all surrounded by oil rich basins of Indonesia, Malaysia and China. In areas like North West Palawan where our oil production comes from, we have drilled only 1.6 wells per 1,000 square kilometers. In the US, American explorers drill one exploratory well per 9.4 square miles of favorable land (Source: Atty. Eduardo F. Hernandez, director, PNOC-EC). Given these statistics, can we honestly say that we have drilled enough?

In addition to this, there is the UNCLOS (United Nations Convention on the Law of the Sea). The outcome is still unclear but this agreement among different nations could potentially increase our areas of exploration by a factor of twenty. The idea is to outline the areas of exploration for each country. This is similar to awarding “underwater” economic zones. Territorial claims are based on the geology of each country. The Philippines has a claim of an additional 200 miles from its outermost islands based on the geology of its continental shelf. The Philippines could now have the largest unexplored oil territory than it has ever known.

Then there is the financial aspect. Whenever oil has been discovered in commercial quantities, the government has benefited. The government’s share from Service Contracts 14 and six was $81 million and $42 million respectively, while the private sector investors received $54 million and $18 million. Clearly, there is money to be made once commercial quantities are found.

The pursuit of energy resources whether they are renewable or not is something that must be given top priority. Nothing can stop the alternative energy steamroller but it doesn’t make prudent sense to forget about oil exploration entirely either. Moreover, any alternative energy program must be supported with government policies that are mindful of food security and the overall impact on the environment.

The search for energy sources contains monumental risks and rewards. A large commercial discovery can bring our country to a level of wealth, economic power and respect that it has never seen.

The challenges that lie ahead are immense; however I have always believed in historian Arnold Toynbee’s challenge and response theory. For him, civilizations arise by the response of creative individuals to the challenges of situations of special difficulty. The greater the challenge, the greater the response, the greater the response, the greater the chances are of success.

(Fernando Hernandez is a Senior Manager for Business & Financial Advisory Services of Manabat Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.

The views and opinions expressed herein are those of Fernando Hernandez and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected] or [email protected]).