"Of course there is politics in the joint venture."
"Of course there is politics in the joint venture."
(Conclusion )
(Continued from Saturday)
It was Velasco who first suggested the service contract in lieu of the concession system to projects involving the exploration, development and utilization of oil resources. He wrote, to quote: “Concession for oil is similar to that for mining. Once a concession area had been identified for exploration, the private innovator would submit to the government estimates of the expected volume of oil that could be tapped and the cost to be incurred in the exploration. After selling the oil in the international market, the investor would recover his cost and then take his share of the profit, with the remainder paid to the government. Now, the problem was that given the very complicated accounting system. oil concessionaires usually had a lot of leeway to pad the costs, even to the point of claiming that they lost money, so that the government seldom receive anything from whatever oil was sold by these concessionaires.”
“The service contract, on the other hand, was based on the concept of production sharing, which upheld the sovereignty of the producer-country over its own resources and guaranteed a share of the product itself without the royalties and that complicated accounting of the old concession system. At the same time, fair returns awaited firms (as service contractors) that assumed oil exploration risks and provided the necessary technology and capital. For exploration ventures that the Philippine government financed, a stipulated service fee was paid to the service contractors for having finished services and technology. If the service contractor financed the exploration, besides providing services and technology, the company’s operating expenses would be reimbursed side from the service fee.”
Executive Order No. 131 virtually abrogated P.D. No. 334 creating the PNOC. Shell enjoyed the advantage because of Buenaventura. Other companies that joined the consortium at Malampaya gas wells like Chevron and EDC also enjoyed the restored concession system by the mere payment of royalty fees and by the numerous tax exemptions and discounts. In the MOU signed on Nov. 22, 2018 between Secretary of Foreign Affairs Teodoro Locsin, Jr. and China’s Foreign Minister Wang Yi He, some analysts insist that it should be one of service contract in the belief that it will serve to reaffirm our claim of sovereignty in the area.
Be that as it may, the parties cannot draft an agreement interpreted as either a concession contract or service contract much that it was an agreement reached by two sovereign states. Neither of the two can be treated as a contactor or contracting party. In fact, the two states refrained from asserting the issue of sovereignty because it does not vest to any of the parties that right. The Philippines only enjoys the right to claim over that portion of the South China Sea as part of its exclusive economic zone (EEZ), but does not vest sovereign right over the area.
Should we insist, it is possible that China can also claim portions of that area as part of its EEZ pointing to those islands it occupies as the starting point in demarcating that country’s EEZ. The two simply tried to focus on the resources that could be extracted with China respecting our 60-40 provision in our Constitution and this is pursuant to Deng Xiaoping’s dictum of settling disputes by setting aside the issue of sovereignty.
Today, the interest of PXP Energy Corp., owned by Manuel Pangilinan of First Pacific Corp., to join the exploration alongside with PNOC and China’s National Offshore Oil Corp. (CNOOC) poses a big question. Under what arrangement will it seek to have itself accommodated? Would Pangilinan’s participation alter the arrangement in view of the 60-40 sharing, or will it only affect the 60 percent share of the country to private energy company that officially stands as private subcontractor?
Interpreting the original intent of the MOU, it is clear that the Philippines is expected to deal only with China except if Vietnam decides to join later. Nonetheless, should PXP Energy Corp. be allowed to join, the arrangement could no longer be called joint venture, notwithstanding whether China would allow a private oil company to join and enjoy a status equal that of PNOC and CNOOC which are government corporations tasked to carry out the project.
There is also the problem of partition of the volume and value of oil and gas that may be extracted. Even assuming that China would allow that, most likely it will not allow its 40 percent share to be reduced, considering that it would shoulder the greater part of the financing, technical and exploration work. The 60-40 arrangement is in accordance with Section 2, Article XII of the Constitution, and the Philippines did not oppose it, for the fact that the area lies mostly within the country’s exclusive economic zone.
We have to take it that there is politics in the joint venture. Without stating the obvious, it is doubtful whether China would allow the entry of foreign private corporations to benefit from the undertaking by way of assignment of contact. The 60-40 arrangement envisions a service contract that is exclusive to the Philippine government through the PNOC, and to China’s CNOOC.
Many could smell something fishy, for normally, private oil companies could only act after the Committee had worked out the mechanism outlined in the MOU. The PXP Energy Corp. cannot pre-empt the Department of Energy and PNOC-EC. Other corporations like Shell, Chevron or EDC could only act on that portion allocated to it by the country. Neither can they be allowed to decide on areas which have yet to be explored.
To put it bluntly, private oil companies are licensed and are allowed to operate only in the Philippines and can only act on the rights and benefits given by the government. It cannot exercise those rights and benefits outside of what has been allocated to it by the government.
This has to be clarified because the 60-40 sharing is based on the presumption that what will prevail is a service contract. This now explains why Executive Order Nos. 20, 131,171, 193, 211 and 279 ordered the transfer of functions of the Department of Energy and that of PNOC to the Department of Natural Resources and Environment to purposely revive the royalty fee to private concessionaires paying only a minimal amount of income tax which is saddled with many exemptions. As explained by Atty. Dodo Dulay on how Shell Corp. benefitted in the Executive Orders crafted by Buenaventura, to quote:
“THERE are five years left before Shell Philippines Exploration’s (SPEX) service contract for the Malampaya deep-water natural gas project expires but this early, the British-Dutch oil and gas company and its consortium partners Chevron Malampaya LLC and PNOC Exploration Corp., are pulling out all the stops to have its operating monopoly over the Palawan gas field extended for another 10 years, or up to 2034. If that happens, the Philippine government and, ultimately, the Filipino people will again be placed at a considerable disadvantage.
“x x x. For the past 17 years since the Shell consortium began commercial operations in the Malampaya gas field, it has enjoyed a slew of incentives and benefits not available to other foreign investors such as a 40 percent share (a.k.a. “service fee”) of the net production, the reimbursement of up to 70 percent of the gross production to recover its investment costs, and an exemption from all taxes and duties for importation of materials and equipment for petroleum operations.
“As if that wasn’t enough, the Shell consortium was also exempted from all taxes except income taxes. But for almost two decades now, the Malampaya operator has not paid a single centavo in income tax because under its service contract with the government, its income taxes are to be taken out of the share of the Philippine government. Effectively, therefore, it is Filipino taxpayers like you and me who end up subsidizing and paying for Shell’s income taxes. This absurd tax-dodging scheme certainly gives new meaning to the Filipino idiom “iginisa sa sarili mantika” (to be fried in one’s own lard).
X x x.
“By law, 60 percent of the income (or so-called “royalties”) from the net production of the Malampaya gas field is supposed to go to the Philippine government while the remaining 40 percent is to be allocated to the Shell consortium.
“Based on data from the Department of Energy (DOE), however, the actual royalty share of the government has been cut down to a mere 37.7 percent (of its 60 percent allotment) after deducting the incentives and benefits claimed by Shell like income taxes and branch profit remittance taxes, which amount to billions of pesos.
“X x x. Throughout the Malampaya field’s 17-year gas production, the total proceeds from the reservoir reached approximately $22.9 billion. Of that amount, the Shell consortium was reimbursed $6.2 billion supposedly for the recovery of its investment costs, reducing the gross revenue to around $16.7 billion, as of the end of 2017. With the 60-40 split, the service fee income of the Malampaya contractor reached an aggregate sum of $7 billion while the total royalties due the government reportedly amounted to some $9.7 billion.
“Perhaps to justify the extension of its contract, Shell has been pushing the narrative that the Philippine government’s share from the Malampaya deep-water gas-to-power project will soon breach the $10-billion mark. That, however, is grossly misleading and inaccurate.
“What the Shell consortium failed to mention is that its income taxes over the past 17 years amounting to around $3 billion were taken out of the government’s royalties. This is on top of the deductions for the Malampaya contractor’s branch profit remittance taxes of $870 million and the assistance to LGUs amounting to roughly $2.4 billion, which whittled down the total royalty share of the government to a measly $3.4 billion, or just US$200 million annually since 2001.
“The bulk of the revenue from the Malampaya operations—a staggering $12.7 billion (consisting of service fees and reimbursements alone)—went to the pockets of the Shell and its partners.
“Compared to the $28.1 billion foreign currency remittance of overseas Filipino workers (OFWs) in 2017 alone, the annual royalties paid by the Shell consortium to the government is a mere pittance. Even the business process outsourcing (BPO) industry’s foreign exchange earnings—$24.5 billion in 2017—dwarfs Shell’s annual payment to our national coffers.
“With the expiration of the Malampaya contract in the horizon, there’s a move by the current DOE leadership to place the operations of the Malampaya gas field in the hands of state-run PNOC Exploration Corp., which will then enter into farm-in deals (or an arrangement where it sells a stake in the service contract) with other energy companies, supposedly to enable the government to corner 100 percent of the royalties on gas production.”
Thanks to the role played by Cesar Buenaventura for completely defanging the Department of Energy and the PNOC for which he together with Jaime Zobel de Ayala, were subsequently knighted the Order of the British Empire (OBE) for their most disgraceful betrayal of the country’s interest to UK government.
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