Philippine Resources Industry – Down But Not Out A few months into his presidency, Rodrigo Roa Duterte has already created an impact in the resources industry. The mining industry experienced the biggest clampdown under the present administration when the Department of Environment and Natural Resources (“DENR”) undertook an intensive audit of the operations of metallic mining companies resulting in numerous suspensions and notices of violations. The industry was not helped either by lower demand for bulk commodities combined with a bleak global outlook for mineral production resulting in a fall in prices. On the other hand, global energy investments in 2015 were also down due to a sharp fall in upstream oil and gas capital spending. Petroleum markets are flooded with cheap crude and natural gas amidst growing concerns about climate change. The transition to a low carbon energy system envisaged in the Paris Climate Agreement is also paving the way for a shift in investments towards renewable energy. World Resources Update The forty biggest mining companies experienced their firstever collective net loss in 2015. Some analysts hope that late 2015 marked the bottom of the market, which was followed by sporadic rallies in early 2016 but others dismissed these as interpretations of increased volatility. Mining companies realised impairments of $53 billion in 2015 and have now writtenoff the equivalent of 32% of capital expenditures spent since 2010 resulting in the mothballing of marginal projects and curtailing capacity. (PwC, Mine 2016: Review of the Global Trends in the Mining Industry) On the energy front, petroleum companies have largely cut back on exploration over the last two years in an effort to reduce costs as oil prices fell from over $100 a barrel to roughly $50 a barrel. While, the price of crude has risen in recent days after a recent agreement among OPEC members to cut output modestly later in the year, industry executives continue to express skepticism that individual member countries will commit to curtail production. The silver lining is that with the industry cutting investment in exploration and production by $250 billion in 2015, and $70 billion more this year, it is only a matter of time before demand outstrips supplies and prices rise again significantly, although not until 2018 to 2020 at the earliest. (Clifford Krauss, The New York Times, 08 October 2016) The World Energy Investment 2016 published by the Organisation for Economic Cooperation and Development/International Energy Agency, reported that oil, the largest primary energy source, slightly increased its share of the global energy mix. Unlike oil, gas demand growth remained subdued due to the slowdown of electricity demand and the expansion of renewables that contributed to a fall in gasfired power generation investment. In addition, low petroleum prices led to cuts in investment in upstream and transportation infrastructure, with most major gas infrastructure projects in East Africa and the Eurasian region facing delays.
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Philippine Resources Industry – Down But Not Out A few months into his presidency, Rodrigo Roa Duterte has already created an impact in the resources industry. The mining industry experienced the biggest clampdown under the present administration when the Department of Environment and Natural Resources (“DENR”) undertook an intensive audit of the operations of metallic mining companies resulting in numerous suspensions and notices of violations. The industry was not helped either by lower demand for bulk commodities combined with a bleak global outlook for mineral production resulting in a fall in prices. On the other hand, global energy investments in 2015 were also down due to a sharp fall in upstream oil and gas capital spending. Petroleum markets are flooded with cheap crude and natural gas amidst growing concerns about climate change. The transition to a low-‐carbon energy system envisaged in the Paris Climate Agreement is also paving the way for a shift in investments towards renewable energy. World Resources Update The forty biggest mining companies experienced their first-‐ever collective net loss in 2015. Some analysts hope that late 2015 marked the bottom of the market, which was followed by sporadic rallies in early 2016 but others dismissed these as interpretations of increased volatility. Mining companies realised impairments of $53 billion in 2015 and have now written-‐off the equivalent of 32% of capital expenditures spent since 2010 resulting in the mothballing of marginal projects and curtailing capacity. (PwC, Mine 2016: Review of the Global Trends in the Mining Industry) On the energy front, petroleum companies have largely cut back on exploration over the last two years in an effort to reduce costs as oil prices fell from over $100 a barrel to roughly $50 a barrel. While, the price of crude has risen in recent days after a recent agreement among OPEC members to cut output modestly later in the year, industry executives continue to express skepticism that individual member countries will commit to curtail production. The silver lining is that with the industry cutting investment in exploration and production by $250 billion in 2015, and $70 billion more this year, it is only a matter of time before demand outstrips supplies and prices rise again significantly, although not until 2018 to 2020 at the earliest. (Clifford Krauss, The New York Times, 08 October 2016) The World Energy Investment 2016 published by the Organisation for Economic Co-‐operation and Development/International Energy Agency, reported that oil, the largest primary energy source, slightly increased its share of the global energy mix. Unlike oil, gas demand growth remained subdued due to the slowdown of electricity demand and the expansion of renewables that contributed to a fall in gas-‐fired power generation investment. In addition, low petroleum prices led to cuts in investment in upstream and transportation infrastructure, with most major gas infrastructure projects in East Africa and the Eurasian region facing delays.
According to the BP Statistical Review of World Energy (June 2016), global primary energy consumption increased by just 1.0% in 2015, similar to the below-‐average growth recorded in 2014 (+1.1%) and well below its 10-‐year average of 1.9% representing the lowest global growth since 1998. Renewables in power generation continued to grow robustly, to nearly 3% of global primary energy consumption, while coal consumption affected by climate policy, recorded the largest percentage decline on record falling by 1.8% in 2015, well below the 10-‐year average annual growth of 2.1%. Global coal production fell by 4%, with large declines in the US (-‐10.4%), Indonesia (-‐14.4%), and China (-‐2%). Coal’s share of global primary energy consumption fell to 29.2%, the lowest share since 2005. Global carbon dioxide emissions from energy are estimated to have been essentially flat. Energy investments are not yet consistent with the transition to a low-‐carbon energy system forecasted in the Paris Climate Agreement. While wind, solar PV and electric-‐vehicle investments are broadly on a trajectory consistent with limiting the increase in global temperature to 2°C, investment in other low-‐carbon technologies is falling behind. Renewable energy sources in power generation continued to increase in 2015, reaching 2.8% of global energy consumption, up from 0.8% a decade ago. Renewables accounted for 6.7% of global power generation. Upheaval in the Mining Industry Table 1 shows the current operating mines supervised by the Mines and Geosciences Bureau (“MGB”) together with approve and subsisting mining tenements. OPERATING MINES 45 metallic mines in operation
5 processing plants • 2 nickel processing plants (Coral Bay in Palawan and Taganito HPAL in
Surigao) • 1 copper processing plant (PASAR in Leyte) • 2 gold processing plants (Philippine Gold Processing and Refining
Corporation in Masbate and Mindanao Mineral Processing and Refining Corporation in Agusan del Sur)
More than 2000 operations for sand and gravel and other non-‐metallic minerals in the country MINING TENEMENTS Major approved/existing mining tenements
• Mineral Production Sharing Agreement – 339
• Special Mines Permit -‐ 2 • Exploration Permit – 31 • Financial or Technical Assistance Agreement – 6 • Mineral Processing Permit – 46 • Industrial Sand and Gravel Permit – 144 • Mining Patents– 223
165 applications for Exploration Permit accepted since the lifting of moratorium in March 2013; 12 were approved 6 advance projects with approved DMPF
• Balabag Gold-‐Silver Project ( Zamboanga del Sur) • Ipilan Nickel Project (Palawan) • Hallmark/Austral-‐Asia Pujada Nickel Projects (Davao Oriental) • Kingking Copper-‐Gold Project of NADECOR (Compostela Valley) • Boyongan-‐ Bayugo Copper-‐Gold Project of Philex (Surigao del Norte) • Comet Dinagat Nickel Project of Comet Mining (Dinagat Islands)
Table 1. Mining Operations and Mining Tenements (MGB, April 2016) The DENR just concluded its nationwide audit of metallic mine operations and recommended the suspension of twenty (20) mining operations for environmental violations, unsystematic mining methods and outstanding social issues on top of the ten (10) others including eight (8) nickel producers that were earlier suspended for environmental violations. Secretary Regina Paz Lopez announced that the DENR would commence a review of previously issued environmental compliance certificates (“ECC”) and mineral production sharing agreements. Lopez said the review would cover around eight hundred (800) ECCs and added that she wants to put a moratorium on the opening of new mines. Lopez is reportedly going to do a similar exercise on non-‐metallic mines including coalmines and quarries. In the meantime, the Chamber of Mines of the Philippines (“COMP”) is now requesting mine regulators for clear direction following the exit of Undersecretary and former MGB Director Leo Jasareno, who was earlier deputized by Lopez to head the mines audit. As at writing, none of COMP’s member companies recommended for suspension has yet to receive a show cause letter asking them to explain why their operations shouldn’t be stopped. Industry insiders deplore the lack of transparency in the manner the audits were conducted noting that the names of the suspended mining companies have been released to the media absent the detailed reasons for such suspensions. At least four miners recommended for suspension are currently nominated for the
annual presidential awards on good mining practice, which recognise companies with exemplary performance in environmental management, safety and health, and social development and management programs. The industry also questioned the oversight and involvement in the mine audit of Jasareno who for the past six years supervised many of the suspended mines in his capacity as MGB director. In addition, the industry was disturbed with the inclusion in the technical audit of non-‐technical members from some anti-‐mining civil society groups. Eugenia Victorino, economist at the Australia and New Zealand Banking Group Ltd. (“ANZ Bank”) said the environmental audit of the mining industry could significantly cut production and export revenues. While the ANZ Bank sees limited impact on growth, the risk is that more suspensions in mining production could lead to a further deterioration in the trade deficit, resulting in a much narrower current account surplus next year. Justino Calaycay, Jr. of A&A Securities said that the “crackdown” on miners could have an impact on unemployment and consumer spending. By his analysis, unemployment, which currently stands at 5.4%, could rise to between 5.8% to 6.0% while economic growth could drag to between 6.0% to 6.2% if and when the uncertainties clouding over the mining sector’s horizon continues. The DENR is also expected to embark on the audit of coal-‐fired power plants to determine their compliance with environmental standards. The DENR will commence the crafting of audit guidelines and criteria with focus on the conditions given to firms that obtained ECCs. The ECC review will include not only operating coal-‐fired plants, but also those undergoing construction and new applications. First on Secretary Lopez’s list is Semirara Mining and Power Corporation, the country’s largest coal mine, which was earlier directed to explain why its ECC for its Molave expansion plant in Antique should not be cancelled. It should be noted that Lopez’ family have investments in power companies generated by renewables, which may put her in a potential conflict of interest by reason of this directive. Needless to say, suspensions or closures of existing coal-‐fired power plants, cancelling of ECCs of plants under construction, and moratorium on ECC applications will have a tremendous impact on the country’s baseload power supply and prices, as coal accounts for about 44% of the country’s current total power mix. Figure 1 shows existing, committed and indicative coal-‐fired power plants while Table 2 lists existing power plants.
Figure 1. Existing, Committed and Indicative Coal-‐fired Power Plants as at September, 2016 (DOE)
Table 2. List of Existing Coal-‐fired Power Plants (DOE) On a bright note, the MGB is now advancing its review of the small-‐scale mining regulatory framework. The MGB announced that it will engage all provincial and city mining regulatory boards in a conference in order “to thresh out issues hindering the formalization of the small-‐scale mining sector and provide inputs to enhance the existing policies toward a responsible industry.” “The national
review of the existing rules and regulations on small-‐scale mining aims to increase the effectiveness, efficiency and transparency of the governing bodies for the promotion of responsible small-‐scale mining,” the MGB said. Large-‐scale miners have often cited small-‐scale mining operations as one of the main culprits in environmental violations and excesses because the sector has been weakly regulated which allowed existing laws and regulations to be circumvented. Upstream Petroleum Still Charting Stormy Waters Unless new fields are discovered and developed, petroleum production in Northwest Palawan is expected to cease in 2027 when the Malampaya reserves are depleted. Other existing fields are currently under cyclical production and nearing depletion. Some service contractors on the other hand have filed for technical moratorium status as commercial studies indicated that under current oil prices, development of the discoveries is not economically feasible.
Table 3. Current Producing Petroleum Service Contracts (DOE, December 2015) The constitutional challenge against Service Contract No. 46 (“SC 46”) known as the Resident Marine Mammal Case, also continues to hound the upstream industry. The Supreme Court nullified SC 46 on ground that the contract was not personally signed by the President in violation of Section 2, Article XII of the 1987 Constitution. The DOE through the Office of the Solicitor General (“OSG”) appealed the decision citing the qualified political agency principle, which allows the DOE Secretary to sign on behalf of the President by virtue of a Special Authority, and consistent with a legal opinion given by the Office of the President on 22 August 1988. The industry is also weighed down by Commission on Audit Decision No. 2015-‐ 115, affirming a Notice of Charge for income tax deducted from the national wealth share of the Philippine Government and directing the DOE to collect P53 billion from the SC 38 Consortium (composed of Shell Philippines Exploration B.V. Chevron Malampaya LLC, and PNOC Exploration Corporation). COA’s Regional Cluster Position is that Presidential Decree No. 87 (“PD 87”) did not allow tax exemption nor tax assumption. This is under appeal with the
Commission by the DOE through the OSG citing that PD 87 allowed tax assumption. The SC 38 consortium has also brought the matter to arbitration. Meanwhile, the West Philippine Sea maritime dispute continues to disrupt petroleum exploration in the country despite the Philippines obtaining a favourable ruling from the Permanent Court of Arbitration, which ruled the invalidity of China’s Nine-‐Dash Line and that it violated the exclusive right of the Philippines to its Exclusive Economic Zone (“EEZ”) by interfering with the petroleum activities of Filipino vessels in the EEZ. The award of three (3) petroleum service contracts in the recently conducted Philippine Energy Contracting Round No. 5 is still pending and dependent on the resolution of these issues. The good news in the oilpatch is the development activities under SC 49 being done by a HK-‐listed exploration company in Southern Cebu following its declaration of commerciality. Geothermal Energy on a Plateau Geothermal production in the Philippines has seen a steady decline during the past decade. Table 4 shows that since 2005, there was a negative increment of 145 MWe in geothermal plant commissioning.
Location Commissioned Decommissioned
Northern Negros 50
Tiwi Unit 4 110
Northern Negros 50
Tiwi Unit 3 55
Botong 20
Maibarara 20
Nasuji 20
Nasulo 30
Bacman 1 Re-‐engineering 10
Total 110 255
Table 4. Development increments and plant decommissioning since 2005 (DOE)
The DOE in coordination with the private industry realizes that it can no longer hope to discover conventional, “elephant-‐sized” geothermal resources as these have been fully accessed and evaluated by the former state-‐owned energy development and public utility companies. There is now an urgency to apply new development technologies to what previously were considered to be second tier resources e.g. technologies that can utilize acidic and young geothermal systems, development of low enthalpy geothermal systems, direct use of small-‐scale
geothermal energy technologies (for example, modular well head turbines), and hybrid technologies. With an appropriately structured feed-‐in tariff (“FIT”) rate that will provide guaranteed payment to investors through a universal charge, these acidic and lower enthalpy resources can be developed to generate electricity. In order to address the barriers related to costs and resource exploration risks faced by geothermal energy developers, the National Geothermal Association of the Philippines (“NGAP”) calls for the coverage under the FIT program of geothermal emerging technologies currently not commercially viable under existing market and pricing structures. Under the Renewable Energy Act of 2008 (“RE Act”), FIT is provided to solar, wind and other renewable energy sources considered “emerging technology”, to the exclusion of geothermal. Some geothermal power plant projects may languish because of the lower cost of coal-‐fired power generation but this can be addressed by prompt implementation of the Renewable Portfolio Standard and Green Energy Option under the RE Act, which will incentivize utilities to contract for geothermal power. On a bright note, the DOE is receptive to the proposal of including geothermal emerging-‐technology for inclusion in the FIT system, based on the recommendation of the National Renewable Energy Board, which must carry out an extensive study on the proposal. Following a series of public consultations with RE stakeholders, the Senate Committee on Energy is looking to the idea of amending the RE Act and formally requested NGAP to submit its position paper on the proposal. Facing the Constantly Shifting Regulatory Headwinds On the policy front, the Duterte administration through its ten-‐point socio-‐economic agenda seeks to expedite permitting approvals, which hopefully can ease the bottlenecks in the highly regulated resources industry. However, expedited regulatory actions and permit approvals continue to be on top of the wish list of resource developers. Table 5 lists current petroleum service contracts under notices of Force Majeure by operators by reasons of permitting issues and regulatory uncertainties.
Service Contract No.
Location Operator Commitment Status
53 Mindoro (Mindoro-‐Cuyo)
Pitkin Petroleum Ltd. Under Force Majeure due to issue with Indigenous Peoples in the area
57 N. Calamian (NW
Palawan)
PNOC-‐EC Under Force Majeure due to a pending Farm-‐In Agreement with CNOOC for approval by the President
58 W. Calamian (NW
Palawan)
Nido Petroleum Philippines Pty. Ltd.
Under Force Majeure due to the dispute in the West Philippine Sea
72 Recto Bank Forum (GSEC 101) Ltd. Under Force Majeure due to the dispute in the West Philippine Sea
75 NW Palawan Philex Petroleum Corporation
Under Force Majeure due to the dispute in the West Philippine Sea
Table 5. Petroleum Service Contracts Under Force Majeure (DOE) Table 6 on the other hand, shows geothermal service contracts currently bogged down by issues in relation to claims by indigenous peoples (IPs), opposition from local government units, and area conflicts with national parks.
Project Name Contract No. Location Potential Capacity (MWe)
Permits and Clearances Issues
Sal-‐Lapadan-‐Boliney-‐Bucloc-‐Tubo
GSC 2011-‐12-‐209 Abra TBD IP and National Park
Kalinga GRESC 2010-‐03-‐24 Kalinga 60 IP and LGU
Mt. Zion GSC 2012-‐01-‐037 North Cotabato/ Davao del Sur
20 IP and National Park
Mt. Zion2 GSC 2012-‐01-‐037 North Cotabato/ Davao del Sur
20 IP and National Park
Mt. Talomo/Tico GSC 2013-‐11-‐046 North Cotabato/ Davao del Sur
TBD IP and National Park
Mt. Sibulan/ Kapatagan
GSC 2013-‐11-‐047 Davao del Sur TBD IP and National Park
Table 6. Geothermal Exploration Projects with Permitting Issues (DOE) Recently, resource developers have to contend not only with the DENR but also with the Department of Agrarian Reform (“DAR”), which seeks to to declare a two-‐year moratorium on land conversion and upholding the validities of Certificate of Land Ownership Award (“CLOA”) on mineral lands.
The proposed moratorium will prevent the conversion of agricultural land to industrial land, intended for declaring mineral lands and building power facilities. Business and economic organizations composed of the Philippine Chamber of Commerce and Industry, the Foundation for Economic Freedom, the Makati Business Club, the Management Association of the Philippines, the Philippine Exporters Confederation, the American Chamber of Commerce of the Philippines, the European Chamber of Commerce of the Philippines and the Japanese Chamber of Commerce of the Philippines, warned in a joint statement that the plan of the DAR would be detrimental to rural development and creation of more jobs. The group noted that there are “lands classified as agricultural that are low-‐yielding and unproductive and preventing conversion of such lands to more productive uses... goes against... development of unproductive, idle agricultural land that could be better-‐used for commercial, residential and industrial uses.” DAR Secretary Rafael Mariano said he is also bent on upholding the validity of issued CLOAs, even if it would affect mining sites. Mariano, a militant farmer and former chairman of the Kilusang Magbubukid ng Pilipinas, added that he is not keen on canceling the CLOAs issued within the Tampakan Copper-‐Gold Project in Southern Mindanao. Mariano is one of the progressives appointed to the Duterte cabinet and a vocal critic of the mining-‐liberalization policy under the past two administrations. Mariano assured that the DAR is coordinating with various agencies to ensure that no rights, whether that of IPs or farmers, shall be trampled upon. Lopez also assured that no agricultural land would be covered by mining. Mariano said his agency would initiate an interagency meeting between the DAR, DENR, Department of Interior and Local Government and the National Commission on Indigenous People to discuss the resolving issues involving conflicting land-‐use policies. Conclusion The cyclical and unpredictable nature of the industry makes any effort to predict prices based on current prices and volatility, a difficult if not impossible undertaking. Geopolitical instability (petroleum), increased complexity of policy change (mining, petroleum), uncertainty over regulations (mining, petroleum), and technically challenging physical environments (geothermal) have aggravated existing risks for the local industry. It is highly likely that the present administration’s regulation of the industry will continue to intensify and the industry is clearly apprehensive by the way the government approach its regulatory agenda. Nevertheless, a changing landscape provides opportunities for resources companies willing to embrace a degree of risk and gain access to future growth areas -‐ technology, business optimization, etc. that will be the key to unlocking future potential.
Fernando “Ronnie” Penarroyo is the Managing Partner of Puno and Penarroyo Law Offices (www.punopenalaw.com). He specializes in Energy and Resources Law, Project Finance and Business Development.
