Hunting through the depths: Desperate search for new oil and gas

By on January 2, 2019

Throughout the year 2018, the energy sector stands on wobbly ground, the policies being pushed by the Department of Energy (DOE) were hardly concretized; the pace of regulation of the Energy Regulatory Commission (ERC) had gone from slow to even slower stride; while the legislative branch often bows to the whims of foreign sponsors or the widely-perceived State-side anchor of lawmaking.

Such confluence of factors and the dizzying turns of policy modifications had thus thrown the energy sector into an even deeper quagmire of desperation – and the only way to get us out of that mess is to flip the story spin into something that could offer hope.

Toward the end of the year, the DOE latches on to one big bet on finding the next gas field akin to Malampaya; or conceivably, a massive-scale oil production field – that in turn could either change the entire energy landscape of the country – or if the process and the investment environment would fail, the Philippines could be relegated further on to the losing end, Manila Bulletin said in a yearend report.

Troubled waters

What are the odds though? To the energy officials who are at the frontline of inviting investors to explore Philippine basins for prospective commercial oil and gas finds – the torments are mounting: The policy-vexing US$1.1-billion Malampaya tax case is still pending at international arbitration and dispute resolution proceedings in Singapore and the United States – coupled with a case filed at the Philippine Supreme Court; there’s also that pending moratorium of exploration at the labeled “troubled waters” or conflict areas within the West Philippine Sea; the presence of a high court jurisprudence voiding the power of the Energy Secretary as signatory of petroleum service contracts and had instead vested such power to the President of the Philippines; the nullification of the farm-in and farm-out deals in the entry and unloading of interests by petroleum service contractors; and other several policy hurdles that could go against the country on enticing those investment dollars for its upstream petroleum sector.

And as if that’s not enough – the Department of Finance also joined the fray – since in the process of its intent to rationalize all tax incentives that shall be integrated in the second tax reform package of the Duterte administration, intentionally or not, it is also targeting to scrap the incentives that had served as major succor for capital flow in the upstream petroleum industry.

Energy Secretary Alfonso G. Cusi acknowledged that he has “high mountains to conquer” and “extremely deep oceans to navigate” if only to provide fixes in the policy terrain of the petroleum industry.

On November 22, 2018, the DOE formally opened to investors its offer of 14 new blocks for petroleum contracting (the pre-determined areas or PDAs at onshore and offshore blocks); while it also set “nomination flexibility” that will allow investors to submit proposals year-round on petroleum service areas that they prefer and the ones that could fit their budgets and choice of technology deployments.

The pre-determined areas straddle six basins in various parts of the country – covering 73,576.66 square kilometers of both shallow and deep-water drilling prospects in East Palawan, Cagayan, West Luzon, Sulu Sea, Cotabato and Agusan-Davao basins.

As of last count, the energy department has initially stirred up the interest of about 18 big-ticket investors – those that have deep pockets and with extensive investment experiences in global oil and gas development domains.

The true test of their interest, however, will only come at a time when they finally submit proposals and the required documents on their hand-picked blocks. The prescribed submission period is within 180 days or six months from the contracting launch.

“This is for our energy security, this is why I am keenly pushing for this. We have been lagging behind even among our neighbors in Southeast Asia, so I really wish that we could step up on our exploration activities,” Mr. Cusi said.

On the targeted exploration of the so-called conflict areas, the energy chief made a stern statement that “it’s the rules of the Philippines that will be followed… our sovereignty will not be compromised. On the commercial issue of oil drilling and development, it’s clear that we have to resolve that within the bounds of our laws.”

Mr. Cusi, so far, is now engaging his Chinese counterpart for the parties to settle things anew at the negotiating table so both parties could draw up the long-wished for legally binding joint exploration framework that shall serve as guidepost to investors of both countries. A deal is anticipated firmed up this 2019.

Global hiccups

Beyond the troubles at home, the DOE will also have to contend with even more disturbing developments globally – in the oil and gas commercial production space. Weekly news of price rollbacks at Philippine petrol pumps had been exhilarating to consumers, conversely though, this may dampen capital flow in the upstream side of the business – similar to what happened in the 2014-2015 when most E&P (exploration and production) companies resorted to billion-dollar budget cuts.

The energy chief is still not caving in to that scenario though, as he opined that “it will take seven years before an exploration activity could yield result, so I don’t think our petroleum contracting will be affected by recent global developments,” – if referenced on the fresh round of oil price crash in the world market.

Nevertheless, ratings firm Moody’s Investors Service has indicated that a further fall in global oil prices could ignite fresh struggle on the part of petroleum companies to rake in viable return to shareholders.

Moody’s said “volatile prices will likely reign in global oil markets throughout year 2019” – taking cue on recent developments like the production cut-back recently sealed by the Organization of the Petroleum Exporting Countries (OPEC) and the Russian-led alliance of oil producers; while the increasing inventory of the United States had been injecting a strapping counter-balance to that.

“Exploration and production companies will struggle to improve shareholder returns,” the ratings firm warned; and for markets in Asia and the Pacific, in particular, it has been reckoned that “companies will continue large investment cycles in refining capacity and upstream production to support fuel demand growth.”

The overall prognosis of the ratings firm on oil prices will be at the range of US$50 to US$70 per barrel through year 2020, with numerous streaks of volatility. “We see the price range of the marginal barrel around US$55 to US$60 per barrel, which anchors our price range,” Moody’s has qualified.

It further stressed that “the recent volatility reflects concerns about a weakening global economy, higher Saudi and Russian production, demand destruction tied to the strong US dollar and tariffs, mixed signals on Iran sanctions and financial speculation.”

The technology equation

By far, the last four years of the oil sector’s boom and bust cycle enabled industry players to “weather the downturns” – and for a brief episode in 2018, they were already capitalizing on the price upswings.

What these tight spots actually taught them was gaining the ability to “focus on new ways of working, reducing costs” and utilizing new technology across the value chain.

Digital transformation, according to Chris Bredenham, oil and gas advisory leader of consulting firm PwC, will feature largely in the search as well as development of new oil and gas fields in the world – and these new technology deployments could range from: The use of drones to inspect remote facilities that in turn could reduce safety and health risks; the use of robots to undertake monitoring and safety checks; as well as the utilization of virtual reality to simulate the drilling of wells which in turn could reduce investment risks for drilling.

He stressed that “digital disruption is here to stay… and companies must embrace this to reap the rewards.”

So far, Bredenham said, companies have already learned to keep pace with “a low-cost environment,” and it has just been turning beneficial now that oil prices have been moving from their recovering pace to new strain of crumbling prices.

He expounded “keeping up capital discipline and further improving productivity will yield sustained results for the industry.”

As assessed by the International Energy Agency, pivot for demand growths will be towards Asia, hence, this is a market bloc in which the oil industry players have been keeping a close watch on.
All of these industry cautions then are timely and relevant for countries advancing ventures for new oil and gas field commercial discoveries – and the Philippines is no exception.

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