SC 55 consortium commits to Palawan drilling program

The consortium behind Service Contract (SC) 55 said it is committed to exploring and developing the offshore gas field in Southwest Palawan.

This as rumors of a potential pullout of project operator and global petroleum giant BHP Billiton prompted investors to dump shares of minority shareholder Trans-Asia Oil and Energy Development Corp.

“Certainly, all the joint venture partners are committed to delivering the Cinco well consistent with our service contract commitment,” Gregor McNab, CEO of consortium member Otto Energy Ltd., said in a teleconference.

“It is an exciting well. It is a very material well for us so we are all keen to seeing that well drilled,” he added.

Trans-Asia president Francisco Viray said in a text message that the company shares the same commitment with Australia’s Otto Energy, adding that BHP Billiton is not withdrawing from the project.

BHP Billiton, which heads the SC 55 consortium, has lodged a notice of force majeure with the Department of Energy to preserve its permit rights over the project amid delays in its work program,  Otto Energy said. 

Energy Secretary Carlos Jericho Petilla earlier said if the consortium is unable to fulfill its obligations by August 2013, the department may award the contract to other interested parties. 

Otto Energy said BHP Billiton has formally filed a notice of force majeure with the Philippine government, hoping to suspend the timing of its current permit obligations and preserve its permit rights. 

Force majeure, the Latin term for superior force or an event beyond one’s control, is often a clause in contracts that usually frees parties from legal obligations in case unforeseen events occur. 

“The declaration of force majeure comes amid delays in receiving the Strategic Environmental Plan (SEP) clearance for SC 55 from the Palawan Provincial Council for Sustainable Development,” Otto Energy said. 

Otto Energy said the consortium was hoping to secure the SEP in September 2012 but encountered delays in the process. 

“The Sangguniang Panlalawigan (Palawan Provincial Board) has requested the submission by BHP Billiton, as the operator, of a comprehensive socio-economic development program for the province of Palawan prior to recommending endorsement of the SEP clearance, which is not a requirement under Philippine law, nor has it been required for exploration approvals in the past,” Otto Energy said. 

The consortium hopes that with the issuance of the notice of force majeure, the DE would suspend its obligations under the contract including the drilling of the Cinco-1 well until the group gets the SEP clearance. 

“The operator, the SC 55 joint venture and the Department of Energy will continue to work towards securing the SEP clearance and in doing so, remove the cause of the force majeure,” Otto Energy said. 

SC 55 is located near the Malampaya gas field in offshore Palawan. It includes the Cinco well but to date, no offshore drilling has occurred.

In terms of potential resource, the DOE estimates SC 55 to contain some 2.2 trillion cubic feet of gas, at par with the Malampaya field that currently provides fuel to three key power plants in Luzon.

“The effect of issuing the notice of force majeure is to suspend the obligations under the current fourth sub-phase of SC 55...and to preserve the remaining time under the exploration period of SC 55 until the SEP clearance is received,” Otto Energy said.

Trans-Asia, for its part, is looking at distributing its shares in SC 55 as a property dividend, a key move that will formalize the separation of the company’s power production and oil exploration businesses.

The announcement of a force majeure sent shares of Trans-Asia, which has a 6.82-percent stake in SC 55, tumbling 10.65 percent or 31 centavos to P2.60 despite the bull run in the local bourse.

In February, the DOE approved the transfer of Otto Energy’s 60 percent interest and operatorship in SC 55 to BHP Billiton which, in turn, agreed to pay the Australian firm $150 million.

The government has been hoping that the Cinco well under SC 55 would be the next Malampaya gas field as the exploration of the resource-rich but disputed Recto Bank has been hampered by conflicting claims from China and other countries.