Energy firms need to draw up exit plans—DOE

Energy undersecretary Jose Layug. Photo from doe.gov.ph

MANILA, Philippines—The Department of Energy (DOE) is drafting a circular that will mandate all companies holding a Philippine petroleum service contract to submit an “abandonment” or exit plan to be followed when their licenses expire, as well as maintain a sinking fund solely for this purpose.

“The DOE is considering a circular on ‘abandonment’ for petroleum service contractors. It needs to be clear [on] the obligations of service contractors when they abandon the projects [after 25 or 50 years],” said Energy Undersecretary Jose M. Layug Jr. “You’ll be surprised—our existing service contracts do not have an abandonment clause.”

The circular will ensure that appropriate parties are held accountable in protecting the environment “and make sure that we are adequately prepared both financially and technically when there is abandonment of a service contract area,” Layug further explained.

Even the country’s most successful natural gas project to date—the $4.5-billion Malampaya deep water-to-gas power project—did not have an abandonment clause in the service contract awarded to the consortium operating it, according to Layug.

In other jurisdictions, a sinking fund is set up by petroleum service contract holders as soon as they begin commercial production.

In the proposed circular, the DOE is looking to mandate all service contract holders to submit an overall development program in case of abandonment and to start maintaining a sinking fund under an interest-bearing escrow account within a year from the start of commercial production.

The amount to be put in the sinking fund can be charged as an operating expense. This means it is cost recoverable, Layug explained.

But the energy official said that they have yet to peg a suitable figure for the sinking fund, which should be sufficient enough to pay for the necessary costs to remove whatever needs to be removed after a company ceases operations in a particular oil or gas field.

As soon as it takes effect sometime next year, the circular will be retroactive, which means that the companies or consortia operating producing fields like the Malampaya—which has been operating since 2001—will be required to submit their abandonment program within a particular time frame and to start setting up a sinking fund for this purpose.

For its part, the Philippine government will also have several options under the proposed circular. One, the government may have the option to implement the abandonment program given sufficient funds.

If the field is still producing and the operator has already maximized its 50-year tenure, the government may have the option to take over the operations of the service contract.

Oil wells in the Philippines have already produced a total of 62 million barrels of oil, 45 million barrels of condensate and 1.011 trillion standard cubic feet of gas from 1979 up to 2010.

The oil have been sourced from the rich oil and gas fields of Malampaya, Nido, Matinloc, Cadlao, Tara, North Matinloc, Galoc, West Linapacan and Tindalo.

At present, there are only 27 active petroleum service contracts in the country.