We are in the middle of an oil crisis and we are letting go of our own oil company, PETRON. Ashmore,a Lond0n-based investment fund group is buying ARAMCO’s 40 % share. With PNOC having the right of first refusal, now is the most opportune time to buy back Petron. Petron is a CASH COW. Ashmore is an investment fund firm. It is interested only in profits. But Petron should be more than a profitable firm. The country needs its OWN oil company to protect it from the vicissitudes of the oil industry and to compete against other oil majors just as what PETRONAS and PTT is doing for Malaysia and Thailand respectively.

Strangely, according to reports, President Arroyo thinks that "Ashomore’s decision to buy Petron shares is a ‘vote of confidence’".

Below is a report I did in the late 1990s/2000 about Oil Deregulation and PNOC. I think I submitted a copy to Pres. Arroyo when she first became President in early 2001. It is titled "Probable Solutions to the Oil Price Crisis." Since we are in the midst of another oil price crisis, I am publishing it here:

                        PROBABLE SOLUTION TO OIL PRICE CRISIS

OIL  DEREGULATION

In March 1996, Congress passed the Downstream Oil Industry Deregulation Act of 1996 or R.A. No. 8180. There was not much public protest since the concept of a deregulated oil industry is not well understood. But a few gentlemen questioned the constitutionality of the law, and brought it up to the Supreme Court. The petitioners zeroed in on the three allegedly prejudicial provisions; namely: tariff differential, the inventory requirement and the predatory pricing clauses. The petitioners averred that the law ran counter to its objective: "to foster a truly competitive market".

On November 5, 1997, in a move that surprised many, the SC declared RA 8180 unconstitutional and ordered the legislature to create another law, but this time adhering to the tenets of the Constitution.

In its decision, the SC declared :

Again, we underline in scarlet that the fundamental principle espoused by section 19, Article XII of the Constitution is competition; for, it alone can release the creative forces of the market. But the competition that can unleash these creative forces is competition that is fighting yet fair. Ideally, this kind of competition requires the preserve of not one, not just a few but several players. A market controlled by one player (monopoly) or dominated by a handful of players (oligopoly) is hardly the market where honest-to-goodness competition will prevail. Monopolistic or oligopolistic markets deserve our careful scrutiny…."

 

It went on to emphasize that:

"…the perpetuation of RA No. 8180 threatens to multiply the number of our people with bent backs and begging bowls.  R.A. No. 8180 …cannot be allowed by this court to stand even while Congress is working to remedy its effects."

And it concluded with rhetorical flourish:

"…the Constitution is a covenant that grants and guarantees both the political and  economic rights of the people." The Constitution mandates this Court to be the guardian not only of the people’s political rights but their economic rights as well. The protection of the economic rights of the poor and the powerless is of greater importance to them for they are concerned more with the exoterics of living and less with the esoterics of liberty. Hence, for as long as the Constitution reigns supreme, so long will this court be vigilant in upholding the economic rights of our people especially from the onslaught of the powerful. Our defense of people’s economic rights may appear heartless because it cannot be half-hearted."

(Amen.)

Congress immediately cobbled another law, R. A. 8479, which is actually just RA 8180 without the provisions that the Court found "odious" and "offensive." Some enterprising gentlemen again petitioned the Supreme Court, this time zeroing in on the transition period.

Three years after RA 8479, the kind of competition the SC envisioned still is nowhere in sight. The arguments cited for declaring RA 8180 unconstitutional appears to be as valid against RA 8479, the present oil downstream deregulation law.

There were, and still are, calls for a repeal of the law. But this would just bring us back to regulation. Regulation is the mechanism for controlling consumer prices; however, there is a price to it. The government is forced to give subsidies, but the government gets its money from the people. It’s a Catch-22 situation. Regulation also stagnates growth, inspires complacency and promotes inefficiency.

If one were to take heed of the zeitgeist, it is very clear that regulation is now out of the question. De-regulation is simply the order of the day, not only in the oil industry, but also in practically all industries.

The main function of deregulation is to give a freer reign to market forces. It opens up the market. Even if there were many and huge barriers to entry, the mere threat of entry would stimulate the industry. Existing firms, be they monopolistic or oligopolistic, would be forced to innovate, streamline and be efficient. Otherwise, the mere threat (of entry) would translate to new entrants. Or, other existing firms, which heeded the call of deregulation (i.e., modernization, streamlining, efficiency, etc.) would eat up the market share.

Theoretically speaking, in the long run, efficiency and growth of the industry would translate into better quality goods and services, higher tax revenues for the government and even lower prices for the consumers.

What’s the catch ?

The Philippines was fortunate to have a national oil company like the ones in Malaysia, Indonesia and Thailand, which have had quite an experience competing with multinationals. Such experience would have proved valuable for the country when deregulation of the industry came. However, for some reasons, PNOC’s refining and distribution arm, Petron, was privatized some years ago. This left the Filipino public purely at the hands of “market forces.” And the oil downstream market is far from perfect.

***(It is interesting to note that Petron was sold to Saudi Aramco for about 14 Billion pesos, most of which were easily recouped by Aramco after the IPO which had the stocks’ price soaring almost three times as much as the buying price of Aramco. And just a year later, PNOC was ordered to infuse 10 billion pesos (of people’s money) to the OPSF so that it can be distributed among the three oil companies. In effect, the Philippine government, and by extension the Filipino people, got only 4 Billion pesos for 40 % of Petron!!!)***

Coupled with the fact that the Filipino people do not have an oil company that could compete with the transnationals is the presence of an oil deregulation law that promotes the perpetuity of the existing oligopoly.

CONTROVERSIAL PROVISIONS

The tariff differential created a big fuss and was one of the reasons for the Supreme Court’s junking of the first Oil Deregulation law. But it is just another barrier to entry. The existing barriers to entry are already too numerous for the tariff differential to be significant. In fact, the three companies are better off without it as they can gain more in terms of goodwill rather than get all the bad publicity because of it.

Another controversial provision of the first deregulation law is the “predatory pricing” clause. Any price “lower than the industry average” is prohibited. With all the formidable forces against a new entrant, lower price would be its only weapon to attract customers and earn profits. But before being able to exercise "predatory pricing", one has to enter the industry first and must have huge resources to be able to challenge the so-called Big Three. Shell, Petron and Caltex cannot possibly be expected to sit back while a new entrant would come in with lower prices.

And as for the existence of a cartel, it must be re-iterated that this should not be the point of contention. One will only encounter the sophistry of company lawyers, paid apologists, jargon-loving bureaucrats and media consultants The fact is that the present market structure is, by definition, a STRICT OLIGOPOLY. And in such a situation, one cannot expect healthy competition.

All the reasons cited by the Supreme Court for declaring the first Oil Deregulation law unconstitutional remain valid. The provisions cited by the Supreme Court (predatory prices, oil inventory and differential tariff) affect only ONE of the FIVE basic competitive forces of an industry. (Porter, Michael E., “The Structural Analysis of Industries”, Competitive Strategy, New York, Free Press 1989, p.3). And even in that one (potential entrants), the existing barriers to entry are numerous enough to protect the interests of the existing oligopoly.

However, in the imperfect real world, it would have been a miracle for the Supreme Court to declare the new oil deregulation law unconstitutional for the following reasons: First, when the SC declared the first oil deregulation law unconstitutional, it was not as popular as it should have been. One popular economist / TV personality even chided the SC’s decision and said that it was the cause of the oil price increase then. If the so-called progressive and well-known economists came out against the SC ruling, who was left to defend the SC justices?

Second, the alternative being espoused for the deregulation law is a return to regulation or Price Control. The leftists’ call for price control would be hard to defend in this age of globalization, deregulation, and free trade zones.

Third, some petitioners were merely questioning the length of the transition period. How would the justices know how much time would be enough? Moreover, with the market forces obtaining in the oil industry, the transition period can be extended to 20 years yet not much will change. A new entrant cannot possibly compete with the Big Three unless it is ready to use huge amount of resources that would force the Big Three to welcome it to the club. It will then be called the Big Four. The market would remain an oligopoly.

Fourth, and most importantly, oil deregulation remains an IMF "conditionality".

Probable Solutions

 A new Supreme Court ruling

De-regulation, as already pointed out, has many advantages, especially in this age of globalization. And it would be to the advantage of the country to have a real deregulation and not, in the words of a Supreme Court justice, "pseudo-deregulation." Real deregulation promotes competition. It does not tend to protect existing oligopolistic market structures.

A new petition to the Supreme Court to declare R.A. 8479 unconstitutional for the simple reason that the present law will not change the present market structure; i.e., an oligopoly, even for a hundred years. The SC should order the legislature to frame a new law that would give a freer reign to the other competitive forces in order to have real competition in a truly deregulated environment.

For example, for the "BUYERS forces" to be competitive, all gasoline stations and other retailers must be free to buy from any supplier, domestic or international. All the thousands of existing franchisees of Shell, Petron and Caltex must be free to buy from any supplier they choose. This would mean that the law must force the Big Three to re-negotiate their contracts with the retailers so as to give the latter freedom to choose their suppliers. This would be a tall order indeed. But if it were done, it would free not only the "Buyers forces" but also the "Sellers forces" as all oil companies in the world would now have a market for their products in the Philippines. The suppliers would then have reason to set up trading posts here so they can sell to both wholesalers and retailers. Only the Supreme Court can order this, and this needs nothing short of a miracle.

There are many others ways that the government can do to encourage competition in the Buyers and Sellers groups. For example, the government can help set up huge cooperatives, such as a national fisherfolk’s (including big-time tuna fishing companies) cooperative that would buy and maintain its own diesel fuel depot. This cooperative can then hunt for bargain diesel fuel in the world market and sell the product to its members. This would give the Big Three competition.

(Note: I forgot to include a big factor in the equation – SMUGGLED OIL)

Oil Exchange

Rep. Enrique Garcia’s proposal for the creation of an Oil Exchange is quite a novel idea. No other country does it, no country ever will (except maybe the Philippines). He patterned it after the power (electricity) industry or the US natural gas industry where such "exchange" entities were created as a result of unbundling the power and natural gas industries. The characteristics of the electricity and natural gas markets are very very different from that of the oil industry.

First, how can the government declare full deregulation on the one hand and have an Oil Exchange on the other?

Second, no sane exiting oil company with a refinery or storage facilities would agree to it.  Would any company simply sit back and allow a government entity to sequester its warehouse, import new stocks and simply allow this company to bid for the new stocks?

Third, even if there were such an Oil Exchange, all the gasoline stations are not allowed by their contracts to buy oil products from companies other than its principals. Contractual obligations are protected by law and even by the Constitution.

If it could be done, it would be immensely easier if Congress would make a law that would free all gasoline stations and other retailers from their contractual obligation of buying only from the principals. This will open the oil retail market to the world’s players (There are hundreds of them, not just 40 as asserted by Rep. Garcia.) There would then be no need for a state-run Oil Exchange. All oil products suppliers can directly sell to the retailers, thus creating good competition that is necessary for lower prices.

Fourth, nobody can force the Big Three to bid. They could very well refuse to bid and simply sell their oil products in the world market. These companies are transnationals, vertically integrated and have huge resources. In fact, they are even richer than the Philippines.

Fifth, the oil exchange would be run by Government bureaucrats, and therefore would again be under bureaucratic red tape not to mention probable graft and corruption.

Sixth, there are very very few Filipino bureaucrats who are knowledgeable in the practices of the world oil industry. Operating an oil exchange would need expertise in arbitrage, hedging and other financial analytical tools in order to insure profitability. Philippine oil company officers never gained experience in oil products financial markets because the government gave them OPSF and foreign exchange cover incentives. Besides, the mother companies usually handle all financial market dealings.

Another option :     Regain control of PETRON

Petron has a contract to buy 90% (recently changed to 70%) of its oil exclusively from Saudi Aramco. In exchange, Petron should demand substantial discounts on its crude prices. Contracts discount is ordinary practice, esp. in government-to-government contracts.  Petron can then afford to sell its products cheaper than the other transnationals.

It would be a great move on the part of the government to regain control of Petron either through a change of its representatives in the Petron Board or buy back from the market (i.e., through the Stock Exchange) five to ten percent (5% - 10%) of the shares in order to gain majority control. It is highly unlikely for Aramco to protest such moves. In fact, in the contract with Saudi Aramco, Petron has the right to buy back from Aramco up to 10% of the shares.

*** (Note: Ashmore is buying the ARAMCO shares. PNOC has the right of first refusal. This is the greatest opportunity to buy back Petron.) ***

Still another option:    a new  PNOC

Incidentally, the Supreme Court noted that on "November 9, 1973, President Ferdinand E. Marcos boldly created the Philippine National Oil Corporation (PNOC) to break the control by foreigners of our oil industry." It is quite interesting to note that by its Charter, PNOC is mandated "to provide and maintain an adequate and stable supply of oil and petroleum products for the domestic requirement" and "to foster oil or petroleum operation conditions conducive to a balanced and sustainable growth of the economy." However, PNOC today does not appear to want to have anything to do with its mandate.

However, if PNOC would want to live by its Charter, it can sell all its shares in Petron (i.e., totally privatize Petron.) It will then be free of its obligation to buy oil from Saudi Aramco.

The best and fastest way for the Filipino consumers to be protected in a deregulated oil industry is to have one of its leading players on its side just as State-owned PETRONAS, and PTT of Malaysia, and Thailand respectively are competing very well in their own deregulated environment.

PNOC can re-establish itself as a state-owned refinery and oil distribution corporation. The proceeds from the sale of the Petron shares can finance the revitalized PNOC. It can start by building several gasoline stations in strategic locations, especially in places where it has real estate property.

*** (Note: But since ARAMCO is selling its shares, this is the biggest opportunity to buy Petron back. Petron is a CASH COW. The investment can easily be recouped) ***

PNOC can scout for discounts from friendly Muslim countries. Or the government can exempt PNOC from some duties/taxes.  In this way, the government will not be forced to reduce oil taxes for all oil companies like what some sectors are now demanding.

PNOC can then afford to sell oil products AT A CHEAPER PRICE (during times of oil price crises).  This would have GREAT IMPACT on the people and would win a lot of GOODWILL for the government

Eventually, PNOC will establish a refinery or two, probably in Mindanao or the Visayas. A Mindanao refinery can also sell its products to neighboring areas in Indonesia and Malaysia (yes, they also buy petroleum (refined) products).

The new PNOC option does not violate the Oil Deregulation Law and therefore would get the nod of the IMF. There would be no need for controversial legislative measures. There would be no need to create new and unique institutions (like an Oil Exchange), whose exact functions and characteristics are only vaguely imagined by its proponent.

An active and thriving national oil company can even drum up patriotic fervor.

CONCLUSION

In sum, the "fundamental principle espoused by section 19, Article XII of the Constitution", i.e. — "competition that is fighting yet fair" is still absent from the industry. An oligopoly of three foreign firms controls the oil downstream industry and RA  8479 insures the perpetuation of this market structure.

A State-controlled oil company manned by knowledgeable foreign-trained technocrats, who can compete, at least in this country, against multinational oil giants while protecting the interests of the Filipino people would be ideal.

But this is just a short-term solution. The nature of the oil industry is such that an oil price crisis can come anytime, esp. since practically all the oil is imported. There must be a serious long-term strategy on oil and gas exploration, renewable energy research demonstration and development (RD&D), and development of an oil downstream industry that would give a free reign to market forces.

The fate of the Philippine downstream oil industry is not in the hands of the big multinationals. It lies in the hands of the Filipino people; or rather, its leadership.

 ——

See related post:  GOVT SHOULD BUY BACK PETRON

 
Now, the Arroyo government realized that the Metro Manila people are being overcharged by MERALCO.  Manila Electric Company (MERALCO) is owned by the Lopezes who also own the country’s largest media network – ABS-CBN. And ABS-CBN is critical of the Arroyo administration. So, the advisers of Ms. Arroyo must have thought that exposing Meralco’s over-charging would make the President popular among Metro Manilans.

But MERALCO could not have overcharged the consumers without the approval of government entities – the Department of Energy (DOE), the National Power Corporation (NPC) or the Energy Regulatory Commission (ERC). Either these agencies were in cahoots with Meralco or they are simply manned by incompetents. Or both.

Funny thing is, Meralco defends itself with industry jargon like TAKE-OR-PAY and even claims that NPC is to blame because of their failure to dispatch and the Government itself for taking in royalty payments for the indigenous natural gas.

And the funnier thing is, some people believe in Meralco’s brazen propaganda.

ROYALTIES

Some misguided people are calling for the removal of royalties on Natural Gas. These people equate royalties with TAXES. They compare the taxes levied on coal and are aghast at the disparity.

Coal is usually imported and taxes are levied upon it like all other commodities.

Natural gas is a natural resource of the country (like local coal). Because of the Regalian doctrine which the Philippines adheres to, the gas is owned by the State. Royalties are therefore payments to the state in exchange for its natural resource.

If the royalties are removed, then that means the State is giving the power plants (First Gas and NPC) the natural gas FOR FREE. Unless it is a communist country where everything belongs to the State, that is an absolute NO-NO.

And why should First Gas be so lucky to be given the use of natural gas freely? It is already EXTREMELY LUCKY that DOE gave it HALF of the production of Malampaya-Camago gas WITHOUT even asking for it!

If it was not given to First Gas, other companies (especially foreign ones) would have gladly taken it, even paying a premium for it. As I mentioned in a previous post, other companies gave the DOE immensely better proposals to utilize the natural gas.

Royalties are not taxes. When my team proposed the Gas Price the government should follow, the royalties were not extravagant. I cannot find my files right now, but I am sure that royalty figures we suggested were not unreasonable. I was the Philippine Team Leader who went to the East-West Center in Hawaii to create the Gas Pricing computer models, which was submitted the then President Ramos and became the basis for the gas negotiations.

If additional taxes were added, then that is another matter. But royalties are not taxes, in the strict sense of the word.

IPPs ARE EXTREMELY PROFITABLE

Independent power plants in the Philippines are EXTREMELY profitable. During the 1990s’ Power Crisis, the IPPs made HUGE profits. Why? Because of the stupidity of the government people.

My brother’s company made a bid for a 90-megawatt power barge. The American partners were willing to bid around 85 centavos per kilowatt-hour. To my shock, NPC opened the bid with a FLOOR price of ONE PESO per kilowatt-hour. My goodness (!), that should have been the CEILING price. The foreigners were so happy! My brother got a big commission (five figures in US dollars) per quarter for 5 years! His partners got around the same, too! And all these commissions were paid for by the Filipino people because of the stupidity of NPC!

And how many IPPs producing thousands of megwatts were established during that time?!

Just look at MIRANT. It was not doing well in the US but it made such huge profits here that the whole company was turned around. When they thought they had more than enough, they sold their power plant here and went back to the US to concentrate on their operations there.

NATURAL GAS IS GOOD FOR THE COUNTRY

It is very strange indeed that because of the overpricing and machinations of MERALCO, FIRST GAS, NPC, DOE and ERC, some people are practically condemning the indigenous natural gas as giving more burden to the Filipino public.

First of all, the natural gas brings in money to the government and prevents more dollars going out. Without the natural gas, First Gas and NPC would have bought coal or diesel from outside – precious drain on dollar reserves.

Second, the natural gas from Malampaya-Camago fields comes with oil. The high quality oil produced is sold directly abroad, bringing in more dollars. (I don’t know if there’s still oil left, but for several years, oil was being produced and sold abroad).

Third, natural gas is clean fuel unlike highly polluting COAL which is the favorite of the government.

It is only in the Philippines that a good thing can be turned into a bad thing.

In my own small way, I helped bring forth the natural gas industry in the Philippines.

”In late 1995 The Energy Secretary asked me if I knew about Natural Gas Pricing because of the negotiations going on about the gas field discovered by Shell and Occidental. I answered in the affirmative.

Meanwhile, the gas negotiations were going on and I realized from what I had read in the newspapers that the DOE and National Power Corp (NPC) officials did not seem to know much about oil and gas. So, I took the initiative and gave the Secretary a report. I explained some basics in gas pricing to aid the government negotiators.

I was then asked to attend a Press Conference given by the Secretary. I was dumbfounded when the Secretary could not answer a reporter’s question and passed it on to the Undersecretary in charge of the negotiations. The undersecretary hemmed and hawed until I blurted out the answer. The official next to me repeated what I said and the undersecretary picked up on it.

I then realized that I had to make a complete report that would explain to the Secretary the very basics of Natural Gas.

The DOE officials, especially the undersecretary who now calls himself the “father of the natural gas industry in the Philippines,” kept on repeating that the DOE would not interfere in the negotiations. They swallowed Shell/Oxy’s argument that since state-owned NPC was one of the buyers of the gas and the government co-owned the gas field, the government could not participate in the negotiations because it was both the buyer and the seller.

In my report, I showed the fallacy of the oil companies’ argument by reviewing the experience of European governments’ oil and gas experience. I also criticized the previous studies done by a Japanese and an American consultant.

The Secretary, a UP professor, must have been quite impressed with my long report. He immediately asked President Ramos to issue an Executive Order creating the Philippine Gas Task Force to be composed of several government agencies. The DOE then changed its stance from being a disinterested observer in the negotiations into being an active and “hands-on” negotiator.

Instead of promoting me, the Secretary seemed to prefer that nobody would know about me. When the Undersecretary still persisted in giving wrong information to the press, I made a Memo to the Secretary, cc the undersecretary about some technical points. It was then that I met USAID’s consultant at DOE.

The American consultant expressed surprise that somebody else knew something about oil and gas at DOE. He told me that he did ALL the research, studies, and everything else that DOE claimed to have done regarding natural gas.

To make a long story short, I was made the head of the Secretariat of the Gas Task Force, but on an unofficial basis (no honorarium whatsoever) and later Team Leader (The Philippine Counterpart team was composed of DOE, PNOC and NPC people) that went to Hawaii to create computer models on Gas Pricing, which became the core of the DOE recommendation to President Ramos.

When the term of Ramos ended, I had to leave DOE because I was co-terminus with the Secretary. The new Secretary replaced me with a clerk who had absolutely no technical experience.”

 

The undersecretary who called himself “the father of the natural gas industry” was actually a COAL man and knew very little about petroleum – oil and gas. When DOE and USAID created the Gas Office, I thought they would put the most knowledgeable man there (meaning myself). Instead, the undersecretary resigned as Undersecretary so he could be made head of the Gas Office and paid generously by USAID. Later, he was made president of a PNOC subsidiary, again with a generous pay.

The present NPC president, Cyril del Callar, came to DOE almost the same time as I did. He was made assistant secretary. He is a lawyer who was somehow connected with the Bataan Nuclear Plant when he was with Sen. Saguisag. He had absolutely no substantive background in energy. He quickly became an undersecretary. And now he is head of NPC. Incredible!!

(During our first months at DOE, del Callar sat in front of my desk to make small talk. He noticed the books on my table, especially the big book on petroleum, which was in French. I needed to be updated on the world oil and gas industry but could not find anything in the Philippines. I asked my girlfriend who was then taking her Masters in France. Naturally, she only found books in French. Del Callar asked me if I was reading that book. When I said yes, he said: "Wow, you must really be serious!"  I did not bother to tell him that I take whatever job I have seriously. Unfortunately, many of our bureaucrats don’t.)

And worse, the Energy Secretaries who came after knew absolutely nothing of the technical aspects of energy: Corporate executives Tiaoqui , Camacho, and Perez; lawyer Lotilla; and, General Angelo Reyes.

It is OK to put in good managers to lead agencies IF and only IF they can be supported ably by lower-ranking bureaucrats. But if the underling bureaucrats themselves are groping in the dark, what good would the boss’s managerial skills be?

If I was not at DOE at that time, the foreigners – Shell, Oxy and USAID – would have dictated everything. And everyone else knew only one response to the foreigners – Amen!   The fact that the Energy Secretary at that time  had technical experience in energy was a big factor, too.  He understood my reports and sometimes went along with my recommendations.

I still have copies of all my reports to the Energy Secretary. I pushed for the birth of the natural gas industry, but with DOE’s leadership and guidance and not upon the say so of foreigners. Unfortunately, the government and the local private sector seemed to have managed to corrupt the industry to the detriment of the Filipino people.

When the Arroyo administration started accusing MERALCO of shortchanging and overcharging the Filipino people, I found it quite amusing. MERALCO has been doing that for ages with nary a complaint from the government because it (or at least its energy company, NPC and its energy department, DOE) is colluding with MERALCO. It was obvious that the administration merely wants to have a deal with the Lopezes so that the Lopez media network would go easy on the administration.

CONGRESSIONAL HEARING

Some weeks ago, I caught on TV a congressional hearing on this matter. Congress invited NPC head Cyril Del Callar and Richard Tantoco of First Gas, among others. I was astounded by what I heard.

First Gas admitted several times the following:

            From July to Dec 2000, First Gas was paid P 3 Billion pesos by MERALCO but delivered only TWENTY PERCENT (20%) of that amount. That is, First Gas delivered only 20 % of Meralco’s order but got paid in full (100 %).

            In 2001, First Gas was paid P 7.9 Billion pesos by MERALCO but delivered only P 840 Million worth. First Gas delivered only 12% of the quantity ordered by Meralco but got paid in full.

            In 2002, Meralco paid P7.4 Billion for gas delivered that was worth only half that much.

TAKE OR PAY

First Gas and Meralco claim that this is all legal and proper because of the TAKE-OR-PAY clause in their contract.

This is the MOST ABSURD THING THAT I HAVE EVER HEARD.

Take-or-pay clauses are there to insure that the buyer TAKES the amount it had specified. Otherwise, they would pay a penalty.

But in the Meralco-First Gas scenario, the Buyer (meralco) TOOK all the seller could deliver. Therefore, there is NO Penalty. If somebody pays a penalty, it is the SELLER (FIRST GAS) who should pay for FAILING TO DELIVER. This is called Deliver-or-Pay. There is hardly any deliver-or-pay clause included in gas contracts because it very rarely happens. If it does happen, it probably could be blamed on force majeure.

The take-or-pay clause is necessary in the contract between the gas field developer (in this case, Shell) and the buyers because of the huge project cost of developing the M-C field.

The take-or-pay clause is unnecessary in a contract between First Gas, a power plant and Meralco, a distributor of electricity. First, they are sister companies. In fact, the right to half of the gas production of the M-C field was first given to MERALCO since First Gas did not exist yet. 

It is but natural to assume that the sister companies would always see to it that only their operations are complementary. One would produce what the other would take. In this case, they decided that one would NOT produce yet the other would pay for the gas that was NOT produced. Of course, such payments would be later billed to the poor end-users. 

LOPEZES OWN MERALCO AND FIRST GAS

The fact that Meralco and First Gas are owned by the same people means that both companies are merely making more money out of the Filipino people. By claiming take-or-pay clauses, Meralco and First Gas earn HUGE HUGE money by SELLING non-existent gas which is eventually paid by the CONSUMERS.

NPC COLLUSION

Because MERALCO could buy only portions of what they needed from First Gas, they then bought the remaining quantity (80 % in 2000, 88% in 2001 and 50 % in 2002) from NATIONAL POWER CORPORATION.  This certainly gave NPC a big boost in their revenues, which usually translates to much bigger bonuses to the extremely highly-paid NPC officers.

MERALCO BLAMES NPC

According to Meralco, NPC or TRANSCO dispatched to them only a portion of what they ordered from First Gas. Thus, it was NPC/TRANSCO who was to blame, and not Meralco / First Gas.

Del Callar defended the government by emphatically saying that according to the natural gas contracts, it was very clearly stated that natural gas from Malampaya-Camago would become available only in 2002. In other words, the pipeline was not finished until that time. Therefore, it was not NPC’s fault if Meralco decided to buy gas as early as 2000.

This is really a dubious defense. If the distribution network was not yet operational in 2000 to 2002, then why did NPC not notify Meralco? Instead, NPC made money by selling its own gas to Meralco.

And why did the Department of Energy not do anything about it? And what about the Energy Regulation Commission? ERC would have easily seen that the electricity price was unreasonably increased because of the payment of Meralco to First Gas of gas that was NOT delivered but must be nonetheless paid for allegedly because of the take-or-pay clause.

There is only one conclusion for all of these – MERALCO, FIRST GAS, NPC, DOE and ERC colluded against the Filipino people. So what else is new?

GAS PRICE INDEXED TO OIL

It was also revealed in the Congressional hearing that the cost of gas was INDEXED TO OIL. Now why would any right-thinking natural gas buyer agree to that? No one, of course. Unless FIRST GAS and MERALCO, who are SISTER COMPANIES, want to put one over the Filipino consumers again. Good God, such greed!

In the first place, I doubt very much if First Gas agreed to buy its natural gas indexed to oil.

During the natural gas negotiations among NPC, Meralco, Shell, OXY and DOE, I was the Philippine Team Leader (composed of people from DOE, PNOC and NPC) who went to Hawaii to study and create the Gas Price computer models. Our Final Report was submitted to President Ramos. This became the basis for the natural gas negotiations.

And in our computer models, we certainly DID NOT index the gas price to oil. Nobody in his right mind would do that, knowing the volatility of the price of oil.

In fact, our suggested price was only about US$ 3.50 per million cubic feet. But for some reasons, I later read that First Gas agreed to pay more than US$ 5 per million cubic feet.

MERALCO – DOE’s SWEETHEART

 
When the natural gas discovery from the Malampaya-Camago (M-C) fields were confirmed, the Department of Energy, without any bidding whatsoever, declared that half of the natural gas production would be sold to NPC and the other half to MERALCO. MERALCO, a private company, was so lucky to be given the gas on a silver platter, as it were, without even having any concrete plans on how to utilize the gas.

Not a single congressman, senator or politician complained. I, at least, managed to insert some sarcastic remarks in my reports to the Energy Secretary.

Other companies which gave superb proposals on how to use the Malampaya-Camago natural gas were simply turned down. One proposal was to convert the Bataan Nuclear plant into a Gas-powered plant. The proposal included payments of the nuclear debts, buying the engines, etc.

While other proposals to use the natural gas included rehabilitation of old or unused power plants like the Bataan nuclear power plant, payment for old equipment and even paying the debts, the Department of Energy preferred to give the right to purchase and utilize the M-C natural gas to MERALCO whose only plan was to put up a sister company, First Gas, who would eventually sell the gas to it (MERALCO) which would be paid in full even if only 12% of the quantity ordered was delivered.

HIGHEST ELECTRICITY RATES IN ASIA 

Sometime in 1996 or 1997, I reported to the Energy Secretary that the Philippines’ electricity rates are the second-highest in Asia, next only to Japan.  I expected the Secretary to form teams to study the causes and perhaps give recommendations. Instead, I saw him on TV exclaiming to all and sundry that our electricity rates are next only to Japan in Asia. He said it as if it were a Badge of Honor! And again, not a pipsqueak from anyone.

As the Filipinos are wont to say, "only in the Philippines"!!!

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China, Vietnam and the Philippines have signed “joint seismic monitoring agreements” where they agreed to undertake “pre-exploration study” of the area, which contains most of the islands in the Spratly Islands Group but also includes a wide swathe of Philippine territorial waters – 24,000 square kilometers of Philippine maritime territory.

EXPLORATION / PRE-EXPLORATION

The Philippine government officials, again resorting to their ridiculous sophisms, argued that the agreements were merely for “pre-exploration” studies and not for exploration.

I am a Petroleum Engineer and I find the government sophistry terribly funny. In 2005, Energy Secretary Raphael Lotilla told journalist Ellen Tordesillas that “It’s really a pre-exploratory activity that is taking place.” When lawyers head our energy agencies and institutions, we cannot really expect much from them, except if these agencies become embroiled in legal entanglements.

First of all, one either explores or not explore. When the Portuguese and Spanish explorers like Ferdinand Magellan went out to sea to seek their fortunes, they did not tell their sponsors (usually the monarchs), “Your Majesty, I will first pre-explore so I need just one ship.”

When the first oil explorers went to the desert to find oil, they did not bring with them sophisticated instruments. All they needed were their eyes, brain and instinct. They went out looking for outcrops or geological formations like synclines or anticlines. These pioneering oilmen discovered the vast oil reservoirs in the US, Europe and the Middle East.

The sophistry of government officials reminds me of the stories about the oil pioneers in the Middle East. To get the support of the local sheikhs, the Europeans told the Arabs that they were looking for water. The locals, who regarded water as more precious than oil, gave their all-out support.

Fortunately, the Filipino people today know better than the Arab sheikhs of old. Even when the Chinese and their Filipino counterparts tell us that they are not looking for oil, we know that oil (and gas) is exactly what they are looking for.

Ashmore Group, a London-based investment fund is offering to buy 40 % of Petron shares held by Saudi Aramco.

PNOC, which owns the other 40%, holds the right of first refusal. And it should exercise that right.

With rising oil prices, this is the best opportunity for the country to take back its only oil company.

It is very important for an emerging economy like the Philippines to have some control over its oil downstream industry. Malaysia has PETRONAS, Thailand has PTT. Both are huge factors in their countries’ progress.

SOCIAL ISSUE 

Ashmore is an investment group and is only interested in profits. The country cannot expect to get anything from it, save for taxes, perhaps.

With Saudi Aramco, the country could ask for a supply guarranty. And being state-owned, there is room for diplomatic negotiations.

CASH COW

Petron is a cash cow. And the government needs a cash cow. If it own 80% of it, then there will be more cash.

GOVERNMENT-TO-GOVERNMENT DEALS

If Petron will become Government-controlled, it could negotiate for better oil deals with oil-producing countries. Then, it could even give greater competition to the two oil majors in the country as well as the so-called new players.

For those clamoring for a repeal of the de-regulation law, the buy-back of Petron will be just as good, if not better.

Regulation is ALWAYS bad in a corrupt regime. De-regulation gives the market forces a chance. Although the Philippine style de-regulation is actually only a semi-deregulation or even an anti-deregulation. It merely strengthens the status quo; i.e., maintains the power of the majors.

If the government buys back Petron, there will still be room for the private oil companies and at the same time, the government can act through Petron in ways that would best serve the needs of the Filipinos.

Ashmore to buy stake in Manila’s Petron