New petroleum service contracts unlikely – DOE

by Myrna Velasco September 25, 2016

http://www.mb.com.ph/new-petroleum-service-contracts-unlikely-doe/

The current energy leadership will not recommend the signing of any new petroleum service contracts until after the multi-billion Malampaya tax case is resolved.

The position of the Department of Energy (DOE) is for the Commission on Audit (COA) to realign first its policies with the laws governing the upstream oil and gas sector, primarily on the provisions of Presidential Decree 87 or the Oil and Gas Law on income tax treatment dangled to contractors.

The non-signing of new petroleum service contracts, according to DOE Undersecretary Felix William Fuentebella, “is a consequence of the uncertainty” – apparently referring to the differing tax treatment policy embraced by COA.

So far, even the pending qualified bids under the Philippine Energy Contracting Round 5 (PECR-5) on petroleum exploration blocks have been affected by that perceived ‘policy fickle’, thus, the service contracts have not been awarded until now.

The energy department, via a letter sent through COA Commission Secretary Nilda B. Plaras, has already firmly stipulated that its stance will be to integrate the contractor’s income tax charges into the government’s royalty share from the Malampaya project.

“With all due respect and in deference to the Honorable Commission, we feel that the provision in SC (Service Contract) 38 states that the income of the contractor shall form part of the 60 percent government share,” Energy Secretary Alfonso G. Cusi has stated.

As the DOE upholds the motion for reconsideration lodged by the previous administration to COA, Cusi indicated the irreparable damage that the Malampaya arbitration case could stir up in the global investing community if the Philippine government does not take prudent steps on upholding rules and policies on its business sector.

“May we be allowed to manifest our utmost concern on the impact of the Honorable Commission’s decision if it (COA decision) will not be reversed on the reputation of the country before the international business community, particularly the petroleum industry,” the energy chief stressed.

He expounded that “petroleum exploration involves great risk, needs huge capital and highly-technical capability and the success rate is at dismal 30% compared with other Southeast Asian countries,” citing further that just one offshore drilling program could cost on the average $1.0 million a day.

Cusi added “it is of fundamental importance that we observe and honor the sanctity of contract in our commercial transaction,” while noting that dragging the country into arbitration proceedings could also entail millions of dollars of spending.

The DOE also took its cue on the opinion set forth by former Prime Minister Cesar Virata of the Marcos administration, stating that “the concept of setting off the contractors’ tax liability against government share is based on the practice by the Indonesian government at that time.”

Having been part of the crafting of PD 87 way back in the 1970s, Virata reckoned that the 60-40 sharing arrangement was the intent and that the tax share of the contractor will be included in the government’s royalty take.