Petron sues state-owned PNOC for contract breach

By Lenie Lectura - October 23, 2017

https://businessmirror.com.ph/petron-sues-state-owned-pnoc-for-contract-breach/

PETRON Corp. has brought state firm Philippine National Oil Co. (PNOC) to court for breach of a binding and compulsory sale-leaseback contract, saying such act threatens to hurt Petron’s operations, shareholders and a petroleum-dependent economy.

Petron lawyers asked the Regional Trial Court in Mandaluyong to issue a temporary restraining order (TRO) against the PNOC to stop the latter from performing acts aimed at ousting Petron of its leased properties.

The oil firm has existing lease agreements with the PNOC for the sites of its $3-billion refinery in Bataan, 24 bulk plants and 67 gasoline stations.

The company supplies more than a third of the country’s petroleum requirements.

The contracts will expire in August next year.

There is a provision for renegotiation in the contract that, in case of failure to come to an agreement, the same terms and conditions shall apply. However, PNOC claims these conditions are disadvantageous to the government.

Petron said it offered to negotiate the agreement with PNOC as early as 2016. However, it was constrained to seek judicial intervention when PNOC president Reuben Lista communicated early this year that it will terminate the lease agreement with Petron, citing provisions in the contract that are allegedly “onerous, burdensome and disadvantageous” to the government.

“If PNOC will continue to disregard its reciprocal obligations on the conveyance of our land, then they should return the properties to us,” Petron said. “Petron has invested billions of dollars on these properties. PNOC’s actions clearly jeopardize the country’s fuel supply security and government’s thrust to develop key industries.”

Petron also cited two follow- up letters from Lista dated August 1 and 31, demanding “to nullify certain provisions of the lease agreements that pose a stumbling block before we can proceed to negotiate the renewal.” In the letters, Lista called for the abandonment and cleanup of the contested sites on or before expiration of the lease.

The leased properties are originally owned by Petron and acquired over several years to be used for its refinery, distribution and sales operations.

Petron, however, was compelled to give up its land to the PNOC in 1993 to comply with the requirements of its privatization. To secure foreign and local investments in Petron and ensure stability of its operations, the transfer of the properties was enabled through a deed of conveyance and lease agreements that guaranteed its long-term and continuous use by Petron.

The oil firm said the conveyance with lease-back transaction between Petron and the PNOC involves a reciprocal obligation: a) Petron conveyed to PNOC the leased properties at book value; b) in consideration of PNOC leasing the properties back to Petron on a long-term basis and according to its operational requirements. Hence, among the principal considerations for Petron’s conveyance of its properties to PNOC was PNOC’s obligation to lease back the same properties to Petron.

“By unilaterally setting aside the renewal clauses of the Lease Agreements and by categorically declaring its refusal to honor them, PNOC committed a fundamental breach of its Lease Agreements with Petron,” the company stressed.

“PNOC disregarded the true consideration for the leasehold rights acquired by Petron over the properties, which included not only the rental payments but the properties themselves, which Petron had conveyed to PNOC pursuant to privatization,” Petron added.

The government, for its part, said last Friday night that it has formed a negotiating team.

“The board appointed a negotiating team,” Energy Secretary Alfonso G. Cusi said. “It is composed of three directors and, I think, another three from the management side.

Cusi, who is also the PNOC chairman, said the newly formed team’s marching order is to “find a win-win solution.”

“Petron being also a responsible company, I’m sure they will be willing to resolve.

PNOC, from its perspective, sees something in the contract that is not fair, it is not equitable, so what they have to do is bring it, discuss it with Petron,” Cusi said. “They have to go back to negotiation, then they report back. A negotiation can bring a positive result.”

Cusi, however, said there is a need to clarify what the motion for a TRO is for.

“I understand PNOC has not issued any order, and what has been expressed in their letter is desire to set aside a provision,” he said. “If Petron finds the position expressed by PNOC unacceptable, then parties should talk.”

The energy chief agreed that the contract should be honored.

“We cannot arbitrarily…unilaterally remove a provision. After negotiations and exhausting administrative processes, we will see if there are options available.”

Section 2 of the lease agreements for service-stations properties, as well as the lease agreement for the bulk plant properties between PNOC and Petron provides that, “in case the parties fail to come to an agreement, the same terms and conditions shall apply, except the initial rental rate for the renewal period shall be the rental rate at the time
of expiration plus 2 percentthereof, and subsequent rental rate shall be escalating by 2 percent per annum.”

Meanwhile, Section 3 provides that, “should the lessee decide to reduce the area of the leased premises due to business or operational reasons, the rentals shall be reduced correspondingly on a per square meter per location basis.”

“The reduction of rental for each affected property shall be effective on the succeeding month following the receipt by lessor of a written notice regarding the reduction of the leased properties”, the provision stated.