Unresolved Malampaya license extension may hamstring LNG investments

By Myrna M. Velasco – December 13, 2017, 10:00 PM
from Manila Bulletin

Lisbon, Portugal – The “unresolved” bid for a license extension of the current service contractor of the Malampaya field may emerge as a “critical element” that could eventually affect capital flow on planned liquefied natural gas (LNG) investments in the country.

In a sit-down interview on the sidelines of the recently concluded World LNG Summit, Alan F. Townsend, senior industry specialist for Infrastructure and Natural Resources Department of the International Finance Corporation (IFC) of the World Bank Group, sounded off that it will be greatly beneficial to the Philippine gas industry and the energy sector in general if that particular concern would be dealt with first by relevant government authorities as they prepare the country to propounded investment reset with LNG infrastructure facilities.

Fundamentally, he noted that the government must differentiate and straighten out scenarios on when the Service Contract (SC) 38 for Malampaya will be expiring in 2024; and what is deemed as production decline in the field.

“If the market knew today that Malampaya production in 2024 is literally going to be zero, interest in LNG might go up. And if the market knew that starting from 2025, it would still produce a little lower level than today in the next 10 years, people would be able to tailor investment decisions on those relating to gas-fired power projects or to LNG facilities, at least to that context,” he explained.

Townsend added the resolution of the Malampaya license extension, “from the perspective of the market, would have investors benefit knowing how and what will happen with that extension of the contract – what’s the volume, what’s the price, what’s the duration of the extension – is it 5 years or 10 years? Or would there be a lot of swings in the volume?”

To recall, the SC 38 consortium for Malampaya led by Shell Philippines Exploration B.V. (SPEX) lodged their application for 10-year extension in the past administration, but until now, there is no clarity how the government intends to sort that out.

The resounding narrative in the Philippine energy sector is for gas production in the Malampaya field already nearing depletion, but for industry veterans that have seen and evaluated historical seismic data on this commercially producing asset, its end may still be far from anticipated.

Townsend somehow shares that exposition, basing it from industry knowledge and accounts that he had gotten hold of on his seven years of service during his stint at the World Bank in the Philippines.

“A lot of people really think — if you take it from a lot of power generators in the Philippines, they’re saying we run out of gas by 2024. If that is literally true, that’s really an important data point. But my understanding is that, that’s not literally true – what’s definite to happen in 2024 is the end of the contract.”

He thus emphasized that “the question then is: after 2024, what can the field produce, and given different scenarios — for how long and how much you want the field to produce. There are investment numbers – those are among the details that should be clarified.”

The IFC executive noted that if a decision has to be made, it is prudent that it shall be firmed up under the Duterte administration because the next one may already have very thin leeway to deal with such critical national concern.

Townsend said “if you have an extension done by 2020, that is more than enough time for the operator to respond to technical work and financial mobilization and to make sure that investments will continue. That’s enough lead time before the step-down phase in 2022; then contract expiration in 2024.”

He stressed though that “if it doesn’t get done during the current administration, it’s a little bit of a problem because then you’ll be having a new team coming in that would still have to go through learning curve and they would genuinely then be under a lot of pressure.”

The IFC executive expounded “it’s always hard to make a good decision when you are under pressure, when your leverage is low.  The best way to make a decision is when you have time, you have access to technical advice that is needed and for government authorities to have that extra time to explain in simple terms what needs to be done and if it is for the best interest of the country – even if the decision is to extend the current arrangement, that has to be defended, and if the decision is to replace the current arrangement, that also has to be defended.  And that shall be done on a higher level, because it is a national asset.”