Lessons for the explorers of the next Malampaya

Reserves from the Malampaya gas field, located 50 kilometers offshore northwest Palawan, will soon be depleted. —INQUIRER PHOTO

Current developments in the Middle East, particularly the seizure of a British-registered vessel and the recent shooting of a US drone, both of which happened in the important Strait of Hormuz (through which most of the oil exports to East Asia passes) once again highlight the vulnerability of oil-importing countries like the Philippines.

These are grim reminders of the first oil crisis, which pushed the Philippines to launch a comprehensive indigenous energy development program in 1976 and reduce its heavy dependence on imported energy.

It ultimately led to the reduction of the country’s dependence on imported energy from 92 percent in 1976 to about 40 percent by 2016, as boosted by: the discovery and development of relatively small but commercially viable oil fields; the Philippines becoming the world’s second-largest user of geothermal energy for power generation; the development of the world-class deep water Malampaya gas field; the expansion of Philippine coal production from only 100,000 tons per year in 1976 to over 14 TPY by 2016; and the exponential expansion of renewable energy.

Malampaya was the largest and most complex because of the prohibitive water depth (850 meters) and long distance from the Luzon market requiring over 500 kilometers of undersea pipeline.

Current challenges

Notwithstanding these success stories, the Philippines is now confronted with two energy security challenges. Firstly, these achievements have been limited to the power sector and the transport sector is still almost wholly dependent on imported oil. Thus, the Philippines could be in a very precarious situation in the event the Strait of Hormuz is closed.

Secondly, Malampaya, which fuels 40-50 percent of Luzon’s power requirements, is projected to be depleted by the mid-2020s. This could lead to massive brownouts and blackouts.

Potential sources

To address these challenges, the Philippine Petroleum Association of the Upstream (Oil and Gas) Industry (PAP) is working closely with the government agencies to revitalize oil and gas exploration.

As pointed out by the Department of Energy, the Philippines is still very much underexplored. Even in offshore northwest Palawan, where Malampaya and other oil and gas fields are located, new leads and prospects have been delineated that need follow up exploration and drilling. In addition, extensive 2D and 3D seismic surveys conducted in offshore southwest Palawan had delineated several large oil and gas prospects, which together could be multiples of Malampaya.

I am therefore hopeful that there are new oil and gas resources big enough to substantially supply the transport sector and replace Malampaya in the undisputed areas in offshore Palawan.

Most likely, however, they are also in prohibitive water depths. Fortunately, Malampaya is a success story, from which developers can learn important lessons.

Lessons from Malampaya

Malampaya was a complex project, but was completed on schedule and under budget. By August 2019, it shall have contributed $11 billion to the government’s coffers, saved at least $8 billion in forgone energy imports, ushered in the era of a fossil fuel much cleaner than coal, and consistently fuels up to 40 percent of Luzon’s power requirements.

Malampaya has therefore proved to be the single most important upstream energy project for the country and important lessons can be learned from four key ingredients to Malampaya’s success.

Firstly, Shell had extensive experience in developing deep water gas projects worldwide, particularly in the Gulf of Mexico, and therefore had the technical expertise needed in all aspects of Malampaya development. This was aptly demonstrated during the development stage and the subsequent operations stage up to the present.

Secondly, Shell had embraced the principle of sustainable development long before the final investment decision on Malampaya. This was clearly evident during the development stage from 1998 to 2001 when David Greer was Shell Philippines Exploration BV (SPEx) managing director. On various occasions, he consistently emphasized the company’s commitment to sustainable development.

It was from him that I first heard about the “three-legged stool” principle of sustainable development, which explains why equal importance must be given to the economic, environmental and social dimensions. One classic indicator of SPEx’s commitment was the decision to reroute the pipeline to avoid disturbing Mindoro’s complex and intricate biodiversity, even if it meant a much longer 504-kilometer and more costly pipeline. In my view, it was largely the strict adherence of SPEx management under Greer’s leadership to the principle of sustainable development that enabled the firm to manage the nontechnical risks during the development stage and contributed to the project’s outstanding success.

Thirdly, SPEx maximized the use of qualified Filipinos in the entire organization. As proven during the construction of the concrete gravity structure that was completed months ahead of schedule, Filipino engineers, technicians and workers can be world-class.

This “Filipinization” process further accelerated during the operations stage, when Filipinos were appointed to senior management and staff positions, as shown in the appointment of Sebastian Quiniones as managing director and upon his retirement another Filipino, Don Paulino, as his replacement. Both of them performed exceedingly well.

Fourthly, one of the main reasons for Malampaya’s success was Shell’s decision to allow PNOC-Exploration Corp. to come in, even if the law allowed up to 100-percent foreign participation. Discussions started in 1996, but was facilitated after Greer took over as managing director.

Negotiations on the terms of the farm-in agreement soon followed and by December 1999, Greer and I signed the agreement in behalf of SPEx and PNOC-EC, respectively.

Undoubtedly, PNOC-EC’s participation has enabled its managers and engineers to learn from an experienced multinational energy company on how to manage a large and complex megaproject in the upstream energy sector. Furthermore, the PNOC-EC became the most profitable subsidiary of the Philippine National Oil Co.

On the other hand, I believe that PNOC-EC’s involvement has enhanced the image of its multinational partners, SPEx and Chevron, in the eyes of the general public, and most especially among Filipino nationalists critical of foreign companies involved in the extraction of natural resources, but who now appreciate the technology transfer aspects of the project.

These ingredients to the outstanding success of Malampaya could serve as useful lessons to future developers of upstream energy projects in the Philippines, especially foreign companies.

Finally, credit must also go to the Philippine government for the then prevailing attractive incentives, consistency of policies and sanctity of contracts that made it viable to develop a natural gas field in prohibitive water depth and so far from the market. For the Philippines to find and develop the next Malampaya, it is of utmost importance that these policies are kept intact. —CONTRIBUTED