Philippine Mineral, Oil and Gas, and Coal Tenure Systems

Philippine Mineral, Oil and Gas, and Coal Tenure Systems

Dennis A. Quintero

Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.


Resources Law Conference South East Asia19 February 2009


©2009 Baker & McKenzie 2

I. Introduction

• Minerals, petroleum, and coal are owned by the State

• Revenue-sharing or Production-Sharing Agreements between government and contractors


I. Introduction

• Open to 100% foreign ownership:

(1) Large-scale minerals development through Financial or Technical Assistance Agreements (requires US$50 million for development and construction) (“FTAA”);

(2) petroleum Service Contracts (“SC”); (3) mining Exploration Permits (“EP”); and (4) Mineral Processing Permits



I. Introduction • Limited to Filipino citizens or corporations

at least 60% Filipino-owned:

(1) Mineral Agreements:a. Mineral Production

Sharing Agreement (“MPSA”), b. Co-Production Agreement

(“CPA”), c. Joint Venture Agreement

(“JVA”)

(2) Coal Operating Contracts (“COC”)



Most Recent Developments

• Minerals Sector:

(1) Third Generation Model FTAA(2) Amendments to the Mining Act Implementing Rules and Regulations

• Oil and Gas/Coal Sector:

- latest model SCs and COCs formulated during latest Philippine Energy Contracting Round



II. Mineral Tenure Systems



A. Exploration Permit

• Exploration includes prospecting, trenching, drilling, shaft sinking, and tunneling

• Term: 2 years, renewable for similar periods; maximum 6 years for metallic and 4 years for non-metallic

• Submit a Declaration of Mining Feasibility (“DMF”) to the government during EP term – to qualify for MPSA or FTAA (to proceed to extraction)




• Hectarage (per company):

- onshore, per province: 16,200 hectares- onshore, entire Philippines: 32,400 hectares- offshore: 81,000 hectares




• Relinquishment: - first 2 years of EP term: at least 20% of EP

area- rest of extended EP term: at least 10%

• Grounds for EP Cancellation by Government:(1) violation of Mining Act, IRR, and EP provisions(2) adversity or breach of peace in EP area



• Accounting Treatment of Exploration Costs:- Prior to drilling: charged to operations- Costs for drilling, acquisition of property

rights: deferred as a non-current asset; transferred to PPE if exploration results are viable; otherwise written off




B. MPSA

• MPSA is one of three types of “Mineral Agreements” between government and contractor under Mining Act (requiring minimum 60% Filipino equity)

- other two being CPA and JVA- among three types, only MPSAs, and no

CPA or JVA, have been entered into by government



B. MPSA• MPSA

- gives exclusive right to conduct mining within the MPSA area

- MPSA holder to provide financing, technology, management, and personnel

• CPA- government to provide other inputs to operation

other than mineral resource

• JVA- government and contractor set up a joint venture

corporation, with each holding equity interests



B. MPSA• Term:(1) Integrated MPSA

- Entered into prior to effectivity of DENR Admin. Order 2005-15

- term of 25 years, renewable for another 25 years– contains an exploration phase (similar to EP), aside

from development/operating phase– within the term of exploration period, MPSA holder to

submit DMF and Three-Year Development Work Program

– development of mine must be completed within 36 months from approval of DMF by government



B. MPSA

• Term:(2) MPSA Entered into Upon DAO 2005-15 Effectivity

- this type of MPSA originated from an EP that has been converted into an MPSA, after DMF filing

- no longer includes an exploration phase; only development and operating phases

- Upon DMF approval, this type of MPSA will have a new term of 25 years



B. MPSA

• Term Renewal:- after expiration of initial 25 year term, renewable for

another 25 years upon mutual agreement- government may bid the project after initial 25-year

term, but original MPSA holder has right to match highest bid

• MPSA can be converted into FTAA, subject to DENR approval



B. MPSA

• Hectarage (for corporations):- onshore, per province: 8,100 hectares- onshore, entire Philippines: 16,200 hectares- offshore, entire Philippines: 40,500 hectares



B. MPSA

• Relinquishment:- area after final relinquishment must not be more

than 5,000 hectares for metallic minerals and 2,000 hectares for nonmetallic mineral

- the DENR may allow a contractor to hold a larger mining area depending upon the nature of the deposit and technical/financial capability of the contractor



B. MPSA

• Fiscal Regime and Obligations to Local Community/Indigenous Peoples (“IPs”)- 2% excise tax payable to government based on

gross output (actual market value from each mine without deducting mining, processing, refining, transporting, handling, marketing and other expenses) minimum royalty to IPs equivalent to 1% of gross output

- minimum funding for Social Development and Management Program (“SDMP”) equivalent to at least 1% of direct mining and milling costs



B. MPSA

• MPSA obligations suspended on account of Force Majeure- force majeure determined by DENR- force majeure includes dispute with NGOs- action/inaction by government, rebellion

• Government can suspend MPSA if:- contractor does not comply with Mining Act and/or

IRR- contractor fails to timely pay taxes, fees, and

charges owing to the government



B. MPSA

• MPSA will terminate or be terminated if:- term expires- contractor withdraws from MPSA

due to non-viability of mining operations- contractor violates MPSA’s terms and

conditions- contractor fails to pay taxes, fees, charges owing to

the government for two straight years- contractor makes false statement or omits facts



B. MPSA

• MPSA will terminate or be terminated if:- contractor fails without just cause to commence

commercial production within agreed timetable- contractor violates approved work program or

approved modification thereof



B. MPSA

• ArbitrationTribunal of three arbitrators

- subject to Philippine Arbitration Act:

» an aggrieved party can petition a Philippine court to direct that the arbitration proceed

» court can appoint third arbitrator if parties cannot agree

» hearing to start within 5 to 15 days from appointment of arbitrators

» written award must be made within 30 days after hearings close, but extendible upon parties’ mutual consent



C. FTAA

• Large-scale exploration, development, and commercial utilization of mineral resources

• Contractor has exclusive rights to explore, mine, process, refine, and dispose of minerals and mineral products and by-products from FTAA area



C. FTAA

• Supreme Court upheld Constitutionality of Mining Act and FTAA in December 2004 ruling, in rare reversal of court’s own decision issued in January 2004

• Court upheld validity of up to 100% foreign ownership of companies holding EPs, FTAAs, and Mineral Processing Permits

• Oil and gas SCs likewise validated



C. FTAA

• Third Generation Model FTAATerm:

- 25 years; renewable for an additional 25 years upon mutual agreement

- basis of renewal is identification of sufficient mineral resource



C. FTAA

• FTAA Phases/Periods (25 years total initial term)

(1) Exploration: 2 years + 2 years extension(2) Pre-feasibility Study: 2 years(3) Feasibility Study: 2 years (submit DMF)(4) Development and Construction: from DMF

approval and after environmental and local government consents are obtained

(5) Operation: from date of declared date of commercial operation until end of term



C. FTAA

• Hectarage- onshore: 81,000 hectares- offshore: 324,000 hectares- or both combined

• Surface Areas- may be acquired by government for the contractor

at latter’s expense



C. FTAA

• Relinquishment- 25% of total area for first 2 years of exploration:

10% of remaining area during each year of extended exploration period

- FTAA area after relinquishment not to exceed 5,000 hectares, unless size of deposit or operations warrants larger area (increase in size subject to DENR approval)



C. FTAA

• Government may suspend FTAA if:(1) contractor fails to comply with any provision of the FTAA, Mining Act, or IRR(2) contractor fails to pay government taxes and fees

• Contractor’s obligations suspended due to Force Majeure- definition of Force Majeure similar under

MPSA - suspension due to Force Majeure subject to

MGB approval



C. FTAA• FTAA term may be suspended due to temporary

non-feasibility (economic or technical) declared by contractor, subject to DENR approval

• Government may terminate FTAA due to:(1) material violation of FTAA(2) contractor’s failure to pay taxes and fees for two

straight years(3) intentional and material false statement(4) contractor’s failure to establish a Mine Rehab Fund(5) contractor’s failure to register FTAA and payment of

fees at MGB Regional Office after execution



C. FTAA

• Arbitration- government and contractor to agree on rules of

arbitration (Philippine Arbitration Act, UNCITRAL, or ICSID)

- in case of UNCITRAL or ICSID arbitration, venue is SIAC or ICSID Centre as the case may be



C. FTAA

• Fiscal Regime- determine “Net Mining Revenue” and “Basic

Government Share”

Net Mining Revenue:

Gross Output from sale of mineral products Less: Deductible Operating Expenses (cash basis)Plus: Government Taxes, duties, and fees included as

part of deductible expenses__________________Net Mining Revenue



C. FTAA• The required final government share is equivalent to at

least 50% of the Net Mining Revenue• Basic Government Share, consists of the following:

(1) FTAA holder’s income tax;(2) customs duties and fees on imported capital

equipment;(3) value-added tax on imported goods and services;(4) withholding tax on interest payments on foreign loans;(5) withholding tax on dividends to foreign stockholders;(6) documentary stamps taxes;(7) capital gains tax;(8) Excise tax on minerals;



C. FTAA• Basic Government Share, consists of the following:

(9) royalties for mineral reservations and to indigenous peoples, if applicable;

(10) local business tax;(11) real property tax;(12) community tax;(13) occupation fees;(14) registration and permit fees; and(15) all other national and local government taxes,

royalties and fees as of the Effective Date of the FTAA.



C. FTAA

• If the Basic Government Share is less than 50% of the Net Mining Revenue, an "Additional Government Share", to bring up the total government share to 50% of Net Mining Revenue, must be paid by the contractor

• Recovery Period:- contractor can recover actual pre-operating expenses - five years from start of commercial production or

NCF = Total Pre-op Expenses, whichever comes first- only items (1) to (8) of Basic Government Share are

paid by contractor



C. FTAA• Post-Recovery Period:

- items (1) to (15) of Basic Government Share are paid by contractor + applicable Additional Government Share

• Sale of Minerals by contractor (basis of Gross Output)- must be at market price- arms-length- marketing agreements/sales contracts subject to

DENR approval• Stabilization Clause

- in case of change in law or regulation reducing or prejudicing the rights of contractor under FTAA, government and contractor undertake to negotiate amendments to FTAA so that contractor will enjoy terms and conditions no less favorable



Environment, Social Programs, IPs, Local Government Consents

• Common to MPSA and FTAA• Environment:

- Environmental Compliance Certificate(“ECC”)

- Environmental Protection and Enhancement Program (“EPEP”) = 10% of Total Project Cost

- AEPEP = 3-5% of direct mining and milling cost



Environment, Social Programs, IPs, Local Government Consents• Environment:

- Contingent Liability Rehab Fund, consisting of

(1) Monitoring Trust Fund = at least PhP50,000(2) Rehabilitation Cash Fund = 10% of EPEP cost or

PhP5 Million, whichever is lower(3) Environmental Trust Fund = PhP50,000 (4) Mine Waste and Tailings Reserve Fund(5) Final Mine Rehabilitation and Decommissioning

Fund = annual contributions starting from commercial operations to cover full extent of work necessary for mine closure



Environment, Social Programs, IPs, Local Government Consents• Social Programs

- Social Development and Management Programs = annual minimum of 1% of direct mining and milling costs

• IPs- prior consent required before DENR approves any

mining tenement- IPs entitled to royalty of at least 1% of gross

output



Environment, Social Programs, IPs, Local Government Consents• Local Government Consents:

- for exploration applications (under EP or FTAA): proof of consultation and/or project presentation to the concerned local government units is required;

- for projects in the development stage:prior approval or endorsement in the form of a resolution or certification by at least majority of the local government councils concerned (barangay council, municipal or city council, and provincial council) is required before the contractor can proceed to development and/or utilization activities.



Oil and Gas



Petroleum Service Contract

• Allows contractor to conduct “Petroleum Operations”- searching for petroleum, drilling and natural flow or

suction or the like, and incidental operations

• “Petroleum”:- crude oil or mineral oil, natural gas or hydrocarbon

gas, condensate, casinghead petroleum spirit, bitumen, asphalt, mineral gas, and all other similar or naturally associated substances




• Term:- exploration: 7 years with designated sub-

phases + 3 years extension + 1year “additional” extension (to determine commerciality)

- production: 25 years less the additional extension of exploration period + [5+5+5 year renewals]



Petroleum Service Contract• Government/Contractor’s Share from Annual

Production:Gross Proceeds 100Less: Filipino Participation Incentive Allowance (maximum is 7.5) 7.5Less: Cost Recovery (not to exceed 70% of Gross Proceeds) 70

Net Proceeds 22.50



Petroleum Service ContractNet Proceeds 22.50Government Share (60% x 22.5) 13.50

(income tax will be paid out of this government share)

Contractor’s Share (40% x 22.5) 9Income Tax

(Contractor’s Share/70%) x 30% (new income tax rate effective 1 January 2009) 3.86

Government Share, after deduction of income tax:(13.5 less 3.86) 9.64

National Government Share (60% x 9.64) 5.78Local Government Share (40% x 9.64) 3.86




• Cost recovery:

- contractor will be reimbursed for all operating expenses not exceeding 70% of the gross proceeds from annual production

- if the operating expenses exceed 70% of gross proceeds, excess recovered from the operations of the succeeding year



Petroleum Service Contract• Filipino Participation Incentive Allowance

(“FPIA”):

Filipino Participation Incentive Allowance30% and above 7.5%27.5% but less than 30% 6.5%25% but less than 27.5% 5.5%22.5% but less than 25% 4.5%20% but less than 22.5% 3.5%17.5% but less than 20% 2.5%15% but less than 17.5% 1.5%Below 15% 0%




• FPIA- maximum 7.5% also given by DOE if:

(1) Filipino participation is at least 15% + SC is in a Deepwater Area (at least 85% of SC area in depths beyond 200 meters); or

(2) Filipino participation is at least 15% +well drilled is in water depths beyond 200 meters, even if outside Deepwater Area




• Abandonment costs- contractor required to establish a sinking fund within one

year from commercial production

• Marketing of Petroleum- contractor will market government’s share of petroleum, unless

government elects to receive its share in kind

• Stabilization- in case of change in law or regulation, the Parties

Parties shall immediately meet and negotiate on an equitable allocation of the benefits with the end in view of retaining the commercial terms or gains by which this Contract was agreed to by the Parties




• Insurance

- to cover, among others:(1) damages to drilling installations(2) third party liability(3) liability for pollution and clean up

expenses (4) expenses for killing blow-outs




• Government can cancel SC, in the absence of justifiable cause, and after due notice, if contractor fails to :(1) fulfill its work obligations(2) remit the government share within 60 days

from lifting or delivery date(3) post required performance bond(4) implement required safety measures(5) submit required reports



Petroleum Service Contract• Performance Bond

- sufficient to cover minimum expenditure commitments for exploration and development

- surety(ies) must be acceptable to DOE

• Consultation and Arbitration- if dispute cannot be settled amicably, ICC

rules apply- 3 arbitrators- Venue is the Philippines, unless parties otherwise

agree



Coal



Coal Operating Contract

• Contractor operates COC area on behalf of government

• Contractor provides services, technology and financing for coal operation




• Term

- exploration: 2 years + 2 years

- development and production : 10 years + 10 years + [3+3+3+3 years](need environmental and indigenous people’s consent, if COC is within ancestral domain area)



Coal Operating Contract• Revenue Sharing

Gross Income [i] 100.0 (net of commission and brokerage/delivery expenses)Less: Cost recovery (90% of gross proceeds or actual operating expenses[Iwhichever is lower) 90.0 Net proceeds 10.0 Less: Operator’s fees and allowances

Basic operator’s fee (40% of net proceeds) 4.0 Special allowance[(30% of net proceeds) 3.0

___Government share 3.0DOE/National GovernmentShare (60% x 3): 1.8Local government share(40% x 3): 1.2




• Performance Bond- amount depends on approved annual work

program- surety(ies) must be acceptable to DOE

• Abandonment- contractor has obligation to properly abandon and

rehabilitate all sites affected by the coal operation




• Contractor’s obligations suspended due to force majeure

• DOE may cancel the COC, after due notice, if contractor fails:(1) to fulfill work obligations(2) secure ECC within time required(3) timely remit government share(4) timely post performance bond(5) meet DOE safety standards(6) submit reporting requirements to DOE(7) comply with Coal Act and applicable regulations


Matrix ofMining Laws of ASEAN Countries

Based on data provided by individual member countries of the ASEAN Federation of Mining Assocications and supplemented by Quisumbing Torres/Baker & McKenzie ASEAN offices as of 16 October 2008


Mining Act (1995)

PHILIPPINES CAMBODIA LAO PDR MALAYSIA MYANMAR THAILAND

Mineral Development Act (1994)

State Mineral

Enactments

Mines Law (1994)

Minerals Act (1967)

Mineral Law(1996) amended bythe Law Amending andSupplementinga number ofArticles of The Law onMinerals(2005)

Law on Management

and Explorationof Mineral Resources

(2001)

Mining Law(1997)

PRINCIPAL MINING LEGISLATION

VIETNAM


Mines and GeosciencesBureau and Departmentof Environmentand NaturalResources


StateGovernments

Departmentof

Mines

Departmentof PrimaryIndustriesandMines

Ministryof NaturalResourcesand Environmentin consultationw/ provinciallevel Peoples’Committees for mineral prospecting, exploration schemes and mineral activity permits

Council forDevelopmentof Cambodia (CDC)Ministry of Industry,Mines and Energy

Departmentof Promotionand Managementof Domestic and ForeignInvestment

AUTHORITY THAT ISSUES THE LICENSES/PERMITS OR ENTERS INTO MINERAL AGREEMENTS

VIETNAM


2 yearsrenewablefor up to 6 yearsfor prospectingandexploration


Varies acrossStatesExample:

2 years,renewable for another 2 years forprospecting

10 to 15 Years for exploration

3 years, renewablefor 2 yearsand longer,if requiredfor pros-pecting andexploration

3 years, re-newable fora period notexceeding2 years (total of 5 years for prospectingand explo-ration

12 months rene-wable for another12 months forprospecting

2 years renewable for 2 years for exploration

2 yearsrenewablefor up to 4 yearsfor exploration (2 years at a time) for prospectingand exploration

2 years but may be extended upto 2 years (1yrat a time) forprospecting

3 years renewable for up toto 4 years (2yearsat a time) forexploration

DURATION OF PROSPECTING LICENSES OR EXPLORATION LICENSES

VIETNAM


25 years.Renewablefor another25 years

(mineral agreement)


Varies acrossstates

Example:A mining leaseshall be granted for themaximum economic lifeof the miningoperation butshall not Exceed an Initial term of 21 years.Renewalshall not exceed 21 years

25 years.renewable

5 yearsat a time

(mining license)

25 years

(minerallicense)

Based on eachproject’s feasibilitystudy report onmineral mining, butshall not exceed30 years andrenewable for20 years

(minerallicense)

5 years.renewablefor another10 years(5 years atat a time)

(minerallicense)

30 years.renewablefor another20 years(10 years atat a time)

(minerallicense)

DURATION OF MINING LICENSES OR MINERAL AGREEMENTS

VIETNAM


40% foreignEquityLimit forMPSA

Noforeign equitylimits forholders of ExplorationPermits, FTAAor Mineral ProcessingPermits


None.(Subject tofulfillmentof applicablegovernmentcriteria)

Joint Venturewith the

Government

Thai ownershipof shares at least40% of totalcapital

None.(except forprecious minerals)

None Joint Venturebetween thegovernmentand domesticand/orforeignparties

FOREIGN OWNERSHIP LIMITATIONS

VIETNAM


Possible


Possible Indefinite Possible PossiblePossible Possible.Provided activitieshaveprogressedpast theprospectingstage

MINING RIGHTS TRANSFERS

VIETNAM


The higherof 30% or

2% MinimumCorporate Income Tax (MCIT)based on grossincome


27% 30% 30% 25%20% 20%

Fiscal and Taxation Policies

CORPORATE INCOME TAX

VIETNAM


No


No Yes No Yes No No

EXPORT TAX

VIETNAM


Plan forrehabilitation

Environmentalimpactassessment

MALAYSIA

OrganizationsAnd individualspermitted to exploitminerals mustpaycollateral forEnvironmentandland restorationto the VietnamEnvironmentProtectionFund

Environmental ImpactAssessment

EnvironmentalImpactassessmentand study

EnvironmentalManagement plan

Mine siterestoration andRehabilitation

Financialguarantees

Environmental WorkProgram

EnvironmentalComplianceCertificate

Environmental Protectionand EnhancementProgram

AnnualEnvironmental Protectionand EnhancementProgram

Final MineRehabilitation/DecommissioningPlan

Monitoring Trust Fund

Rehabilitation Cash Fund

VIETNAMLAO PDRCAMBODIAPHILIPPINES

KEY ENVIRONMENTAL REGULATIONS


A small scale miningpermit shall be grantedonly to Vietnameseorganizations and/orindividuals;

priority given to organizations and/orindividualsresiding in the localitywhere minerals arelocated

Only Lao citizensusing their ownsources of funds maybe artisanal miners

Two types of small scale miningpermits:

(1) Small Scale Mining Permits

- granted to PhilippineNationals (Filipino citizens orcorporations at least60% Filipino owned); and

(2) Small Scale Mining Contracts

- granted under theregulations to cooperativescomposed of Filipino smallscale miners

VIETNAMLAO PDRPHILIPPINES

SMALL SCALE MINING

Artisan Mining Licensemay be issued only topersons of Khmer nationality

CAMBODIA


Required

Mineral export license

THAILAND

Generally, none.

Certain minerals need to meet quality standardsbefore they can beexported; quality isvalidated by accreditedLaboratories

minerals coming frommines identified bythe government for domestic deepprocessing cannot beexported

Required

The Ministry of Ministry ofIndustry-Handicraft grants approvals for export of minerals

Required

Mineral Ore Export Permitissued by the Secretary ofthe Department ofEnvironment and NaturalResources; needs proofof payment of therequired excise tax

VIETNAMLAO PDRPHILIPPINES

MINERAL EXPORT PERMIT


Dennis A. Quintero

Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.

Thank You!

Date post:	21-Oct-2014
Category:	Investor Relations
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Philippine Mineral, Oil and Gas, and Coal Tenure Systems

Investor Relations