DOE opts to ‘honor sanctity of contracts’ in Malampaya arbitration case

by Myrna Velasco September 21, 2016

http://www.mb.com.ph/doe-opts-to-honor-sanctity-of-contracts-in-malampaya-arbitration-case/

The “nationalistic approach” sounded off by the Department of Energy (DOE) on the multi-billion Malampaya arbitration tax case signifies honoring sanctity of contracts so it could guarantee continuous flow of investments in the upstream petroleum sector.

This has been the overall tone of the correspondence sent by the DOE this week to the Commission on Audit (COA) formally stating its position on the issue – a diversion from the position being taken by the State audit agency.

It was gathered from sources at COA that the letter of Energy Secretary Alfonso G. Cusi was formally transmitted and received by the agency on Tuesday (September 20).

The DOE, in its letter to COA, reportedly stipulated that it opted to take the previous position already taken by the department, which entails that income tax of the contractor shall be part of the royalty share of the Philippine government.

In fact, aside from the Service Contract 38 of the Malampaya project, all other petroleum exploration and development contracts carry the same provision.

If the Philippine government would commit the mistake of changing the investment rule mid-game in the upstream oil and gas sector, the next episode that the DOE must anticipate would be exodus of investors in the sector – primarily the deep-pocketed and technically-equipped foreign players.

The energy department is a relevant counter party in existing service contracts in petroleum exploration ventures, hence, industry players have sought a firmer action from it relative to the Malampaya case.

By far, industry players in the upstream petroleum sector have already raised serious concerns about “policy uncertainties” that may interrupt business model, and could subsequently halt investment flows in the sector.

The other point raised by the DOE, according to highly placed sources, would be the magnitude of cost that the Philippine government will have to spend just to go through adjudication process on the Malampaya case.

Presently, the income tax amount being pursued against the Malampaya contractors – collectively the Shell Philippines Exploration B.V. (SPEX), Chevron Malampaya LLC and Philippine National Oil Company-Exploration Corporation (PNOC-EC) – stands at more than P100 billion. It already swelled from the original tax claims of P53.14 billion.

Additional P77.2 billion had been lodged later on by the COA – as reckoned from years 2010 to 2014 levied against the operation of the Malampaya gas field.

The case was elevated to international arbitration proceedings by the Malampaya contractor, but relevant Philippine government agencies have yet to get their acts together as to what common stand they will pursue. The DOE’s move though is seen as a critical starting point.