Malampaya gas field

[ANALYSIS] The Reed Bank gaffe and misunderstanding Malampaya

Dean de la Paz

This is AI generated summarization, which may have errors. For context, always refer to the full article.

[ANALYSIS] The Reed Bank gaffe and misunderstanding Malampaya

Image of BBM: Yummie Dingding/PPA POOL

'The Malampaya issue has returned to the public’s consciousness. The unburied coffin of the undead, a virtual Pandora’s box, was reopened.'

After extended hearings at the Senate Committee on Energy, two separate complaints with the Office of the Ombudsman, a petition for certiorari and prohibition at the Supreme Court, even a securities fraud and misrepresentation complaint filed at the United States Securities and Exchange Commission and a commitment by the California State Attorney General to investigate, the Malampaya issue has returned to the public’s consciousness. The unburied coffin of the undead, a virtual Pandora’s box, was reopened.

It all happened in front of an international audience. In that it was an embarrassment officials desperately tried to parry.

According to Vera Files, “President Ferdinand ‘Bongbong’ Marcos made an inaccurate reference to issues in the Reed Bank (Philippine name: Recto Bank) in response to a question about the impending depletion of the Malampaya gas field.”

Reed Bank sovereignty and territorial issues are entirely distinct from the current and immediate Malampaya issues.

One, the question focused on the “biggest immediate need.” The terms “immediate” or “impending” refer to a 2027 deadline. While exploration and development at the Reed Bank might address the field’s depletion within 15 years, way past 2027, it does not address the  “biggest immediate need.”

Two, a verbatim quote from Marcos shows he referred to the Malampaya gas fields as “being questioned in certain cases, certain areas by China.” That is inaccurate. The cases and areas around Malampaya are not being questioned by China.

At face value the blunder seemed harmless, even humorous. The result of poor advice at best and perhaps, at worst, profound ignorance given entangled corporate profiles set against a backdrop that spans between the vision of the father and the periphery of his son.

Needing to confront the debilitating oil crisis of the early 1970’s Marcos Sr. took his cue from developments in the oil industries of two neighboring economies seeking self-sufficiency and independence from the embargoes of the Organization of Petroleum Exporting Countries.

One fully developed its oil and gas company from a state-owned monopoly founded in 1957. Within 10 years, and after a critical merger, it established Pertamina. It also established an oil academy and an apprentice technical school to develop local talent to competently run Pertamina’s operations.

Nearby another state-owned oil and gas company was established. Petroliam Nasional Berhad or Petronas has since expanded into over one hundred countries with direct interests in thirty-five.

The question of competence, inherent technical capability, financial wherewithal, and legality were among the principal concerns Marcos Sr. addressed following these models. This included a requisite autocratic greenlight prior to any contract involving our oil and gas resources. These concerns cannot be over-emphasized. Marcos himself crafted Presidential Decree 87.

Section 5 of PD 87 entitled “Execution of contract” dictates “Every contract herein authorized shall, subject to the approval of the President, be executed by the Petroleum Board (now the DOE) created in this Act, after due public notice pre-qualification and public bidding or concluded through negotiations.”

None were followed when, recently, 90% of Service Contract (SC) 38 was transferred.

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Moreover,  Section 11, “Transfer and assignment,” stipulates “The rights and obligations under a contract executed under this Act shall not be assigned or transferred without the prior approval of the Petroleum Board: Provided, That with respect to the transfer or assignment of contractual rights and obligations under this Act to an affiliate of the transferor, the approval thereof by the Petroleum Board shall be automatic, if the transferee is as qualified as the transferor to enter into such contract with the Government.”

Note the Marcos protocols violated. Prior approval must be obtained by the Petroleum Board or the DOE. Following Section 5 due public notice pre-qualification and public bidding or negotiations are precedent requisites for presidential approval. All these prior approvals, pre-qualification or public bidding or negotiations could not have occurred or been obtained because Section 11 demands that ‘the transferee is as qualified as the transferor to enter into such contract with the Government’. More, if the transferee is not an affiliate.

One was a newly incorporated start-up. The other disclosed that its Malampaya initiative is its maiden attempt in oil and gas exploration, effectively admitting it had none prior to being awarded. This is further validated by disclosures in its offering prospectus.

While capital can be raised through the equity markets or via debt, sufficient financial capacity must be inherently present prior to any approval as this forms part of the bidder’s extant profile. Transferees cannot subsequently sell down post approval and only thereafter be considered qualified. This is especially critical where experience and technical capability are requisites. Those cannot be bought along Morayta. Hence none of the transferees were inherently “as qualified as the transferor (Chevron or Shell).”

The DOE however argues that a six-month operation of Malampaya is proof of competence. But the objective of PD 87 envisioned much more. Foremost was to mitigate front-end exploration risk where the risk of failure is carried by entities adequately experienced and technically qualified in oil and gas exploration and development.

The other was to establish full self-sufficiency and complete state control over patrimonial assets. This would have been an endearing Marcos legacy had Ferdinand Jr. understood its full significance bridging the crisis his father sought to address over half a century ago to challenges and resurrected demons surrounding him today.

Here the 2024 terminal date of SC 38 is significant. Malampaya’s operations were to be taken over by the government at no cost where the government remains the owner and PNOC EC, its apprentice contractor.

One of the most critical points in grasping the governance aspects of this issue is to understand why graft charges were filed with the Ombudsman and not with either a lower court or a regular court. If there is one thing we must understand, it is that government officials are being accused of violating PD 87, specifically its critical prior technical and financial requisites. The private entities are merely third parties impleaded alongside. –

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