Malampaya gas field

Gatchalian: DOE unit ‘bent rules’ to approve Udenna-Chevron Malampaya buyout

Aika Rey
Gatchalian: DOE unit ‘bent rules’ to approve Udenna-Chevron Malampaya buyout

RULES BENT? Senator Sherwin Gatchalian, chairman of the energy committee, presides over a hearing on Service Contract 38 or the Malampaya gas-to-power project on September 28, 2021.

Senate PRIB

Senator Sherwin Gatchalian hits the Department of Energy, saying that a 2007 circular was 'used to legitimize' the Malampaya deal and it 'wasn't applied to protect the people'

Senator Sherwin Gatchalian said the Department of Energy (DOE) “bent rules” in order to approve Dennis Uy’s acquisition of a Chevron subsidiary that has a 45% stake in the Malampaya gas field.

Senators quizzed energy officials on Tuesday, September 28, as the Senate energy panel headed by Gatchalian delved deeper into the approval of the Udenna-Chevron deal.

In 2019, Uy’s Udenna Corporation announced that its subsidiary UC Malampaya Philippines acquired all of Chevron Malampaya LLC’s shares. Chevron Malampaya has a 45% stake in the Malampaya gas field.

After the deal was finalized at the consortium level, Chevron Malampaya was renamed UC38 LLC.

In April, the DOE approved the Udenna-Chevron deal, after evaluating the technical, financial, and legal capability of the firm that will take on the shares.

“Balu-baluktot ang financial analysis. My hunch is UC Malampaya is not qualified and UC Malampaya is Udenna. Para maging qualified siya, you evaluated UC38. In other words, namili kayo kung ano ang i-evaluate ‘nyo para mag-qualify,” Gatchalian told DOE Financial Services Director Araceli Soluta.

(You bent rules in your financial analysis. My hunch is UC Malampaya is not qualified and UC Malampaya is Udenna. For it to be qualified, you evaluated UC38. In other words, you chose which one to evaluate for it to qualify.)

The members of the consortium holding an operating interest in Service Contract (SC) 38 or the Malampaya gas-to-power project also included Shell Philippines Exploration and the Philippine National Oil Company. SPEX previously held 45%, while PNOC still has 10%.

Similar to the Chevron deal, Uy’s Malampaya Energy bought SPEX, effectively getting hold of its 45% operating interest. Pending review by the DOE, Uy virtually has a 90% operating interest in SC 38.

Office of Senator Sherwin Gatchalian
How did DOE approve the transaction?

During Tuesday’s hearing, Gatchalian pointed out that the internal evaluation by DOE Financial Services showed that the office did not evaluate the financial capability of UC Malampaya, the firm that bought the Chevron subsidiary.

What the DOE unit did instead was to check on the capability of UC38 “as member of the consortium.”

According to DOE Department Circular (DC) 2007-04-0003, the firm to be evaluated has to submit audited financial statements and annual reports for the last three years, as well as particulars of financial resources available to the prospective transferee.

Based on the financial evaluation of the DOE unit, UC Malampaya and UC38 submitted an unsigned and unaudited financial statement for the period of January 1 to September 30, 2020, while parent Udenna submitted audited financial statements for 2017 to 2019.

The evaluation showed that UC Malampaya had a working capital of negative $137.16 million while UC38 had $177.42 million.

Gatchalian asked Soluta if UC Malampaya would pass the financial test. Soluta could not answer directly.

“Your evaluation is not rocket science since you looked at the working capital against the work program. Since the working capital is negative, will it qualify?” asked Gatchalian.

Soluta maintained that they “only focused on the members of the consortium.”

Later in the hearing, it was also disclosed that the work program submitted to the DOE – which its Financial Services office used in the evaluation – was not yet final.

“Parang maling-mali ang proseso (The entire process seems flawed). This is very important. This is part of our energy security,” said Senator Nancy Binay.

“They based [their approval] on unaudited financial statements and based it on a draft work program? I am shocked, Mr. Chair. Small businesses have to undergo scrutiny while for this big transaction, their assessment was based on drafts,” added Binay in Filipino.

Soluta said someone from the Energy Resource Development Bureau (ERDB) had been following up on their evaluation.

Gatchalian hinted that the questionable approval might be a topic for the Senate blue ribbon committee, as Soluta could not answer who was following up on them.

Mental gymnastics?

Throughout the hearing, Soluta insisted that they focused on evaluating UC38 “because it was a member of the consortium.”

She also said: “We were trying to make our evaluation as fast as possible. The evaluators are covered by ARTA (Anti-Red Tape Act) so they are trying to do their best to evaluate.”

In a memorandum to Energy Secretary Alfonso Cusi, the financial evaluation portion showed that UC38 is “financially qualified to acquire” the 45% stake of Chevron Malampaya in SC 38. UC38 and Chevron Malampaya, however, are the same entity.

Soluta said she does not agree with the “financially qualified” statement.

Senate of the Philippines

However, the same evaluation from Soluta’s office said UC38 is financially capable “as transferee” of the 45% interest. This is what was being cited by the memorandum to Cusi.

Office of Senator Sherwin Gatchalian

Gatchalian pressed, “Do you stand by your statement?” Soluta could not answer directly.

The senator added: “Whether you don’t answer or you won’t answer yes or no, this came from your office. So take it that in your opinion, UC38 is the transferee – which is absolutely wrong. Because the transferee is UC Malampaya.”

Should the DOE have not approved the buyout?

Gatchalian also asked the DOE if Chevron Malampaya violated SC 38 with the buyout.

Gatchalian cited Section 16.4 of SC 38 which says: “The rights and obligations of Second Party under this Contract shall not be assigned or transferred without the prior approval of the Office of Energy Affairs…”

“This transaction should not be approved anymore because they already violated the fundamental contract that guided the entities under SC 38. Why, despite the violation, your department still approved this transaction?” asked Gatchalian.

ERDB Director Cesar dela Fuente reasoned, “In the eyes of DOE, you can transact privately, on the business side, but it hasn’t been perfect and consummatedly transferred unless approved by the DOE.”

Gatchalian said the DOE should have recognized the violation, because it “sets a bad precedent.”

DOE Assistant Secretary Gerardo Erguiza Jr. responded that the transaction merely involved the acquisition of stocks. He said his earlier position was that there should not have been a review, but Legal Services Director Arthus Tenazas countered that there should be one, in the interest of the public.

Gatchalian said: “We have to be consistent. The DOE made the decision to use DC 2007 to protect the public.… My takeaway right now is the 2007 [circular] was used to legitimize the transaction. It wasn’t applied to protect the people.”

Aside from the questionable financial and legal evaluation, Gatchalian said the technical check made by the DOE seemed “superficial.”

In the next hearing, Gatchalian said he would show the Senate panel and the DOE why a competitive bidding process should have been undertaken.

Malampaya delivers a fifth of the Philippines’ electricity requirements through the supply of natural gas to five power plants in Luzon. The gas field is seen to be depleted by 2027.

SC 38 or the Malampaya gas-to-power project is set to expire in 2024. The Philippine government has yet to announce whether the license would be extended, but the DOE said on Tuesday that negotiations are ongoing.

In October 2020, President Rodrigo Duterte lifted the moratorium on oil and gas exploration in the West Philippine Sea in preparation for the depletion of Malampaya. – Rappler.com

Aika Rey

Aika Rey is a business reporter for Rappler. She covered the Senate of the Philippines before fully diving into numbers and companies. Got tips? Find her on Twitter at @reyaika or shoot her an email at aika.rey@rappler.com.