Clear tax uncertainty to secure PH energy supply, policymakers told

MANILA, Philippines—Philippine policymakers must carefully manage the looming transition from the country’s dependence on the declining resources of the Malampaya natural gas fields—including making the business environment more investor-friendly—to ensure the country’s energy security in the medium term.

An industry expert said such a transition will not happen overnight due to technological and financial limitations and must be started as soon as possible.

“As the developed world is discovering today, an ill-managed transition can prejudice economic growth and increase poverty instead of alleviating it,” former Energy Secretary Rafael PM Lotilla said in an interview.

Lotilla will be part of a four-person panel who will be at an online seminar on Tuesday (Oct. 19) morning—organized by the UP Vanguard Inc., SMC Global Power and the Philippine Daily Inquirer—to discuss the reliability and resilience of the country’s energy supply during and after the COVID-19 pandemic.

The former energy chief noted that the country’s upstream petroleum and natural gas industry will play a key support role for the transition from the Malampaya gas project whose reserves may run out as soon as 2024 by some conservative estimates.

“Natural gas definitely would play a role in the transitional stage,” Lotilla said. “The Philippines has an existing gas to power project and it has to be used to the hilt for that purpose.”

He noted, however, that there are policy issues that need to be resolved for the upstream sector as a whole, and even for a productive but declining gas field like Malampaya.

On top of the list are resolving tax issues that are a cause for uncertainty among prospective investors.

Lotilla explained that, since the 1970s, the Philippine government has consistently represented to investors that any corporate income tax due is assumed by the government and forms part of its 60 percent share of net revenues from such power projects.

“Foreign companies invested money on the strength of that representation,” he said.

However, the Commission on Audit’s 2011 decision reversing that rule has introduced uncertainty.

“This has to be resolved if Service Contract 38 and nearby areas are to be optimized, along with regulatory approvals on the sale of Shell’s stake in the SC 38 consortium and transfer of its role as operator,” he said.

In addition to resolving outstanding taxation about Malampaya, the expiration of the gas service and purchase agreement and the build-operate-transfer contract for the 1,200-megawatt Ilijan gas-fired power plant next year must also be resolved.

“[It is] important to address these for the rest of the sector to plan contingencies,” Lotilla said, adding that prospective investors also need more certainty before undertaking exploration and development work in other service contract areas.