Malampaya Experience Shows Philippines May Lose from Spratly Deal with China

By Sonny Africa
IBON research head

IBON Features– A deal by the Philippine government with China on the exploitation of oil resources in the Spratly Islands is not only unconstitutional but will likely have the country on the economic losing end. This is the experience with the Malampaya natural gas project where foreigners disproportionately benefit from the country’s natural gas resources.

The US$4.5 billion Malampaya Deepwater Gas-to-Power Project exploits an estimated 3.7 trillion cubic feet of natural gas (Tcf) reserves, accounting for 95% of the country’s proven such reserves. However the project is 45% owned by Shell Philippines Exploration (SPEX, which is also the project’s operator), 45% by Chevron-Texaco and only 10 percent by Philippine National Oil Company (PNOC).

These two foreign TNCs then effectively control virtually all of the country’s natural gas and corner the largest share of benefits from its exploitation. For their investment SPEX and Chevron-Texaco expect to get US$14 billion back over 20 years, or P574 billion at current exchange rates. As it is, Shell Philippines Exploration BV declared net income of P3.5 billion and Chevron Malampaya LLC of P7.5 billion in 2006, or a total of over P11 billion. The Department of Energy, in turn, declared Malampaya gas sales revenues of just P5.4 billion in 2006.

SPEX and Chevron benefit from significant incentives under PD 87 of 1972 and Service Contract No. 38. Among others they are allowed to deduct all operating and capital expense (not exceeding 70%) from gross income. They are also exempted from income tax, entitled to duty free importation and unrestricted entry of foreign personnel.

On the other hand, the government has failed to negotiate any kind of meaningful technology transfer which means a perpetual reliance on foreign firms for exploitation of our energy resources. Such government neglect is to blame for the never-ending argument that foreign investment is needed for the expertise they bring. Foreign firms will always disproportionately benefit from the country’s natural resources as long as they have this technological leverage.

The Malampaya project was officially inaugurated in October 2001. Located off-shore Palawan in the South China Sea, it remains the country’s single largest foreign investment project in the country’s history. It was immediately criticized for violating the Constitutional limit on foreigners of 40% on exploration, development and utilization of natural resources. IBON Features