DOE seeks end to Shell arbitration case

THE PHILIPPINE government seeks to resolve the international arbitration case with operators of the Malampaya gas platform led by Royal Dutch Shell plc.

Outgoing Energy Secretary Zenaida Monsada told reporters that the Department of Energy (DOE) had formally asked the Office of the Solicitor General (OSG) to try to have the case dismissed.

“Hopefully, the parties will agree to have the case dismissed. It may not reach the next administration,” Monsada said.

Monsada said she had informed incoming Energy Secretary Alfonso Cusi of the development.

She did not give details, however, of how the Philippine government is trying to convince the Shell-led consortium and/or the international arbitration panel to drop the case.

In September last year, the DOE confirmed that the Shell-led consortium had sought international arbitration on the issue of allegedly unpaid tax obligations to the national government.

Monsada had said that under Service Contract No. 38 (SC38), the consortium pays taxes directly to the Bureau of Internal Revenue and the same amount is taken out of the government receivables (60 percent share of proceeds) from the Malampaya gas operations.

Back-channel talks have been ongoing since last year, to try to resolve the issue “in a collaborative way” between the consortium and the Philippine government, sources said.

The Commission on Audit (COA), in decisions dated April 6 and May 11, 2015, ordered the DOE to collect income tax of about $2.9 billion (about P53 billion) from the Malampaya consortium on the grounds that this should be paid on top of the government’s 60 percent share of net proceeds; that is, after allowable expenses are deducted. The DOE appealed COA’s order but was rejected.

In a letter to President Benigno S. Aquino III last May, Royal Dutch Shell plc CFO Simon Henry said COA’s order to collect the $2.9 billion was “erroneous.”

As far as the consortium is concerned, he said, income taxes payable from 2002 until 2014 were deemed paid by the DOE out of the 60 percent government share of net proceeds.

This is expressly provided under SC38 and COA’s order saying otherwise had left the consortium with no other choice but to initiate international arbitration, Henry said.

In an exclusive interview, Royal Dutch Shell’s upstream international director Andy Brown, who leads Shell’s upstream (oil exploration, production, and LNG) business, stressed that “sanctity of contracts,” as well as good regulatory and investment climates, were needed to sustain investor interest in the Philippines.

The consortium serving as contractor of SC38 (Malampaya) comprise Shell Philippines Exploration B.V. (SPEX; 45 percent), Chevron Malampaya LLC (45 percent) and PNOC Exploration Corp. (10 percent).

International arbitration is a leading method for resolving disputes arising from international commercial agreements and other international relationships.

The practice developed to allow parties from different countries to resolve disputes more quickly, more efficiently, and without the uncertainties that may be associated with litigation in national courts, while still offering enforceability of arbitration agreements and arbitral awards.