Bleak outlook seen for Philippines upstream sector

MANILA, Philippines — The decline of the Malampaya deep water to gas power project as well as underinvestment in exploration is creating a bleak outlook for the country’s upstream industry, according to Fitch Solutions Country Risk & Industry Research.

“The Philippines’ crude oil and natural gas production remains in freefall under the weight of natural declines and underinvestment in new exploration,”Fitch Solutions said in its latest report.

“The current dire situation poses significant risks to the Philippines’ future energy supply security given how reliant it is on oil and gas for power generation, industrial processes and transportation,”Fitch Solutions said.

The report cited historical data showing that output volumes have been broadly declining since the early 2010s with a lack of significant new finds as well as accelerating declines in Malampaya.

Fitch Solutions emphasized that efforts to extend Malampaya’s field life have produced diminishing returns over recent years, confirming statements by new operator Udenna Corp. that the gasfield could face a shortfall starting as early as 2022.

It also cited statements from the Philippine Senate Committee on Energy, which affirmed that Malampaya’s output was already in a ‘depletion stage’ despite earlier estimates that the gas could last until 2027.

“The situation is highly problematic for the Philippines, given that Malampaya remains its only significant source of oil and gas and supplies with the field providing 30 percent of the main island of Luzon’s electricity needs, or about 20 percent of the Philippine’s total electricity requirements,” Fitch Solutions said.

It emphasized that the gradual reduction in gas production from the field is already driving up consumer electricity costs and causing rotational power outages across the islands.

The report also stressed that efforts to spur exploration and discover tie-back opportunities to the mature field have not panned out either due to disappointing drilling results from deeper offshore areas and geological barriers associated with onshore petroleum exploration.

Offshore exploration also faces stringent opposition from China as it claims over almost the entirety of the South China Sea or the West Philippine Sea, where many of the Philippines’ remaining underexplored petroleum blocks are situated.

“Firms have not been willing to invest in the area amidst heightened tensions and uncertainties,” Fitch Solutions said.

“In spite of the dire situation at hand, there has been no new exploration announced in the Philippines after the lifting of the long-term ban on oil and gas exploration,”Fitch Solutions said, referring to the lifting of the ban on oil and gas exploration in October 2020.

Fitch Solutions, however, stressed that there appears to be a growing number of firms keen to rekindle interest in the Philippines despite lingering regulatory and maritime uncertainties.

It cited statements of Energy Secretary Alfonso Cusi in July confirming that the Department of Energy (DOE) has endorsed the awarding of unidentified three new service contracts (SCs) that are pending review by the Office of the President.

Fitch Solutions said PXP Energy subsidiary Forum Energy also expressed interest in resuming drilling works at its suspended SC-72 offshore Reed Bank, even without a partner, while Australia’s Sacgasco has  acquired Nido Petroleum and its four offshore production sharing contracts from parent firm Bangchak Petroleum and plans to evaluate resources in the license areas with a view towards realizing early production.

“As a prospective market to target for investors, however, the Philippines is highly interesting given the large, energy hungry domestic market and ample trade opportunities throughout to the region,”Fitch Solutions said.