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Duterte EO removes obstacle to oil exploration deal with China firm

MANILA, Philippines – A major roadblock to an oil exploration contract with a Chinese state-owned oil producer has been removed, thanks to a new executive order signed by President Rodrigo Duterte.

Executive Order (EO) No. 80, signed by the President on Tuesday, May 28, repeals an Arroyo administration EO that prohibits the Philippine National Oil Company (PNOC) from awarding farm-in and farm-out agreements for oil exploration, development, and production.

With former president Gloria Macapagal Arroyo's EO No. 556 (series of 2006) out of the way, Duterte is free to sign a deal that allows PNOC Exploration Corporation (PNOC EC) to partner with another firm to implement Service Contract No. 57 (SC 57).

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PNOC EC was awarded this service contract in September 2005 to conduct petroleum exploration and development in a 720,000-hectare area in Calamian, northwest of Palawan.

Energy Secretary Alfonso Cusi had said PNOC EC hoped to partner with Chinese state-owned China National Offshore Oil Corporation (CNOOC) for the venture.

With Duterte's new EO, PNOC EC is free to do just this.

"The PNOC EC is hereby permitted to enter into farm-in/farm-out agreements through which: (a) third parties can participate in the service contracts awarded by the government to PNOC EC and (b) PNOC EC can participate in the service contracts awarded by the government to third parties," reads EO No. 80.

Cusi had specifically mentioned Arroyo's EO No. 556 as an obstacle to Duterte green-lighting SC 57.

"PNOC EC cannot continue the agreement or the acceptance of the CNOOC proposal until that EO is amended," he had said in November 2018 during a Malacañang news briefing.

Among other things, EO No. 556 had also required PNOC to "follow a strict bidding procedure" when tapping parties interested in oil exploration.

Cusi confirmed to Rappler that Duterte's EO takes out the requirement of public bidding for third-party participants in PNOC service contracts. But he gave assurances that the selection process will be governed by guidelines "consistent with existing rules and regulations and best practices."

Selection process for third parties

Farm-in and farm-out contracts are defined in Duterte's EO as a practice that allows third-party participation in a venture to "spread the risks inherent in oil and gas exploration, development, and production."

The EO states that the Department of Energy (DOE), in consultation with the Governance Commission for Government-Owned or Controlled Corporations, will make the rules on the selection process for the third parties.

The selection process has to consider provisions in existing government selection procedures that "enhance transparency and objectivity."

For instance, it could require that any farm-in or farm-out contract be reviewed by the Office of the Government Corporate Counsel.

Farm-in or farm-out agreements can also only take effect upon the DOE's approval.

EO No. 80 was issued amid the Duterte administration's push to develop indigenous energy resources. A major part of this push is a memorandum of understanding with China to conduct joint exploration for oil and gas in the West Philippine Sea.

The initiative has raised concerns on how it would affect the Philippines' claims to the West Philippine Sea, which is within its exclusive economic zone. China claims the area as theirs, despite an international ruling which struck their claim as invalid.

In October 2018, the Duterte administration entered into its first petroleum service contract with Israeli company Ratio Petroleum Ltd to explore for oil and gas in a 416,000-hectare area east of Palawan. – Rappler.com

Pia Ranada

Pia Ranada covers the Office of the President and Bangsamoro regional issues for Rappler. While helping out with desk duties, she also watches the environment sector and the local government of Quezon City. For tips or story suggestions, you can reach her at pia.ranada@rappler.com.

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