Fixing A Depleting Energy Lifeline

The Malampaya gas field, located in the West Philippine Sea, off the coast of Palawan, was discovered in 1989 through the Camago-1 well. It was the first major natural gas discovery in the Philippines, and indeed, the first major upstream discovery of any kind. Developed by Shell, Chevron and the Philippine National Oil Company (PNOC), first gas flowed in 2001 and commercial production in 2002. Malampaya Phase 2 kicked off in 2013 and Phase 3 in 2015, while the gas itself powered a huge gas-to-power network in the industrial city of Batangas that provides up to 40% of the energy demand in the island of Luzon. For a single project to have such impact is transformative. But that’s not the problem. The problem is that Malampaya is still the only major upstream project in the Philippines. And it won’t be around forever.

In fact, if estimates are correct, it won’t even be around for another decade. Output from current wells is expected to fall steeply in 2024 and dry out in 2027. If that happens, the complicated network of pipelines criss-crossing the sea into Batangas and then north towards the capital will be empty. What options does the Philippines have?

Of course, Malampaya itself isn’t fully tapped. In fact, there is an undeveloped portion called Malampaya East that could hold up to 2.83 bcm of natural gas. If correct and commercialised properly, the lifespan of Malampaya could be extended into the early 2030s. However, the entire field lies in challenging deep waters. Global supermajors Shell and Chevron had the expertise to draw those volumes of hydrocarbons to the surface, but now they want out. Chevron exited Malampaya in November 2019, as part of an asset review to re-focus on shale, selling its 45% stake to local player Phoenix Petroleum that is part of the Udenna conglomerate. And now Shell, which is operator of Malampaya, wants out as well, offering up its own 45% stake as it starts rationalising its own portfolio. In a Covid-19 world, no major player wants to be holding on to a depleting asset, unless there are national issues at stake.

The natural candidate to acquire Shell’s departing stake would be PNOC, which is already 10% owner of Malampaya, since that would bring the disparate and minor upstream assets in the Philippines under more centralised control. PNOC has already expressed interest. Politically-connected Udenna also wants to expand, calling itself the ‘most suitable party’ to assume Shell’s interest (in Malampaya). And finally, San Miguel Corp, which owns and operates the power plants running on Malampaya gas (under service contracts that expire in 2022/24) is also keen to secure its crucial supply. On paper, all three are suitable suitors. In reality, however, none has the depth of technical expertise required to expand and explore Malampaya. They could be custodians of an expiring asset but may not be able to jolt it back to life.

Efforts by the Philippines to replace Malampaya have been not very successful, with only minor fields to show. Coupled with the country’s on-again, off-again showdown with China in the portion of the South China Sea that falls within the so-called ‘nine-dash line’, it is unlikely that a second Malampaya will ever be discovered very soon. Maritime confrontations have so far centred around fishing rights, but that’s only because no large hydrocarbon assets have been found in disputed waters. And, given Rodrigo Duterte’s current stand towards China, it is unlikely to change substantially.

Which leaves the Philippines one more option to replace Malampaya: LNG. The master plan for LNG centred around replacing and supplementing the infrastructure in Batangas with LNG receiving and regasification operations. Various versions of this plan have been floating around since the mid-2000s. In fact, the Philippine government reportedly came close to approving one of the several competing LNG project plans, some backed by international players, but most consisting of domestic firms, several times over the last ten years. But for some reason or other, no official order was ever issued. And time is running out.

Buying gas into the Philippines is relatively more straight forward, compared to exploring and investing into new gas fields. There’s plenty of LNG around: from Australia, Qatar, the US, even nearby from Malaysia or Indonesia. With the current glut in the market, it would have been an easy option to secure a major long-term supply contract that secure the future of natural gas in the Philippines now. Nothing has been built yet.

But it soon might. The Philippine government has finally given the official nod to an LNG scheme by local player First Gen Corporation (backed by Japan’s Tokyo Gas). The plan calls for an FSRU to be operational by 2H 2022, which is quite an ambitious timeline. Allowing for inevitable delays, the First Gen LNG project will cut it quite close to the projected plunge in Malampaya volumes due in 2024. It might be the first, but it won’t be the last. The Philippines will need more LNG infrastructure built to power its own growing demand. This all could have been put into motion several years ago if the government had not dragged its feet. Better late than never, but the result is a country cutting it very close to a depleting energy line.

End of Article

Market Outlook:

• Crude price trading range: Brent – US$38-40/b, WTI – US$36-38/b
• Oil prices slide back a notch below the US$40/b level, with growing concerns that the nascent recovery in demand will be cut short by the current second – and potentially wider – resurgence in the global Covid-19 pandemic
• A huge gasoil glut in Europe – triggered as refineries cut back on jet fuel and moved to diesel – might grow worldwide as well; several European refineries are already idling and making plans to permanently move away from refining
• The return of supply from Libya is also a concern; OPEC+ is also grappling with quota flouts not just from the usual suspects but also Saudi allies, which might rumble the club’s plan to stick to its tiered schedule for production cuts

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