Malampaya late-life and decommissioning concerns (Part 1)

One of the major undertakings expected of Energy Secretary Raphael “Popo” Lotilla will be late-life and decommissioning concerns that come with the ageing of the Malampaya-Camago deep water gas-condensate fields.

Seven production wells that draw gas and condensate from the fields have been supplying about 40 percent of Luzon’s energy requirements for the past two decades, and have contributed over $10 billion in revenues for the Philippine government.

However, as with any oil or gas reservoir, depletion is a harsh reality, and even with new technologies available, all fields without exception have their end life. That time is nearing for Malampaya-Camago as its production levels drop despite the introduction of decompression facilities.

Several years ago, Shell Philippines Exploration B.V. (SPEX), as developer and operator of the two fields on behalf of the Philippine government, and a joint consortium made up of SPEX, Chevron Malampaya LLC and the Philippine National Oil Corp.-Exploration Corp. (PNOC-EC) had asked the Department of Energy (DOE) to extend its operatorship of the fields.

SPEX’s withdrawal

Last year, with no clear signals from the DOE, SPEX decided to withdraw from the consortium, and subsequently, subject to the approval of PNOC-EC and DOE, sold its stakes to Malampaya Energy XP Pte. Ltd. (MEXP), a subsidiary of Dennis Uy’s Udenna Corp.

Earlier in 2020, Udenna had bought Chevron’s share in the consortium through another subsidiary, UC Malampaya Philippines Pte Ltd., which was approved by PNOC-EC and DOE. UC Malampaya was renamed UC 38 LLC.

Legal cases have been filed concerning the UC 38 deal, although the DOE maintains that the sale is a private concern that does not impinge on the integrity of the government’s service contract on the Malampaya-Camago fields.

SPEX’s withdrawal, however, is different. The Shell company, in effect, leaves the operations of the Malampaya-Camago fields to a different party whose capabilities have to be vetted closely by the DOE.

Operator’s role

Not only should the new operator be able to prove that it can extend the late life of the fields to 2027, but also be capable in eventually decommissioning all the structures that had been built and installed over the last two decades to mine gas and condensate, and to bring clean energy to power plants.

While SPEX taps contractors that provide the day-to-day operations of the gas fields, its expertise in deep water oil and gas extraction provides a valuable role in the overall stewardship of the project that has insured its smooth running.

Such wisdom is expected of any party that would acquire SPEX’s share, especially during the precarious periods of late-life gas and condensate extraction where new technology is necessary to economically squeeze out as much fuels before finally capping the wells.

Not only was Udenna’s MEXP unable to prove its technical capability in taking over the SPEX responsibilities, it also raised questions about the overall financial health of the new company, and even the parent company. Moreover, had PNOC-EC and DOE approved the MEXP deal with SPEX, concerns were raised over Udenna’s supposedly deep relations with Chinese investors.

Different ball game

Faced with such challenges, Uy approached billionaire Enrique Razon to buy out the SPEX share. Razon’s Prime Exploration Pte Ltd., a subsidiary of his Prime Infrastructure Capital Inc., may be financially better off, but it will have to answer questions of technical capability.

Definitely, Prime Exploration alone cannot approximate the expertise that Shell and SPEX wield in managing field development projects, more so in a totally different ball game involving highly technical and risky late life and decommissioning work.

The learning curve for Prime will be steep given that SPEX will leave the project in 2024 when the consortium’s service contract life expires. At that point, negotiations under totally new terms will have to be signed and sealed to ensure that the Malampaya-Camago gas and condensate extraction continues.

Late life and decommissioning works involve many key technological, fiscal, environmental, regulatory, and industrial capacity issues that need to be considered by the DOE, and with this in view, the possibility of having new production sharing terms will have to take in emerging risks.

Competition among many countries in the region is building up in securing companies specializing in late life and decommissioning, which the DOE should seriously and urgently look into to protect the remaining reserves in the Malampaya-Camago fields.

Malaysia and Indonesia are countries with far more oil and gas producing assets currently in late-life development or already at the brink of decommissioning. Tougher international environmental laws, which will be discussed in depth in the next column, are now in play.

Tight timelines

The new Energy Secretary clearly will need to work double time to ensure the smooth turnover of SPEX’s operatorship to a new company that in turn will be able to assure the Philippine government and power companies that receive natural gas from the Malampaya-Camago fields of continued operations.

As Lotilla has expressed during a press briefing, the transfer of rights by Udenna’s MEXP to Prime Energy needs to be resolved first and soonest such that other timelines that need to be dealt with. Similarly, Prime Energy’s technical capability has to be assured.

Given all these uncertainties and tight schedules, the door could still be wide open for SPEX to continue its operatorship. However, if the Philippines is no longer in the Shell Group’s priority investment for oil and gas projects, DOE will need to tap other international companies with the needed expertise.

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