PNOC EC. Taking on the Challenge
The year 2007 marks PNOC EC’s 31 st year of strong and committed existence in the Philippine energy industry. To comprehensively visualize the endeavors, achievements and plans of the Company, allow us to use as backdrop the state of the Philippine economy vis-à-vis the global petroleum environment, and look at how these conditions affect PNOC EC’s operations and plans for the future.
The year 2007 hosted a roller-coater ride for the Philippines with controversy after controversy hounding the government giving jerks and jolts to the populace even as it tried to grapple with increasing prices of commodities primarily brought about by increasing oil prices. However, despite the challenges, political or otherwise, our economy continued to expand at a rapid pace which resulted to a
stronger peso making the country a better performer than its neighboring countries. In 2007, the Philippines was ranked as the 25 th largest economy by the International Monetary Fund and is regarded as the fastest-growing economy in Southeast Asia, posting a GDP growth rate of 7.3%.
Expectedly, alongside the growth of the country’s economy is an increase in its energy consumption. The Philippine’s total energy consumption increased by 7.26 % in 2007, reaching 24. 34 Million Tons of Oil Equivalent. Oil accounts for 54 % of this figure, maintaining its position as the major energy source of the country.
Similarly, major economies all over the world continue to rely heavily on petroleum to fuel their growth. In 2006, for example, the USA accounted for 24.1% of the world’s total oil consumption, followed by China with 9%, and Japan with 6%; while the Philippines accounted for only 0.37%. This increasing demand for petroleum, coupled with the prevailing concerns on supply shortage has pushed oil prices way up the scale. This is aggravated further by the dwindling U.S. economy and the continued conflict in the Middle East.
In December 2007, oil price was nearing US$100/barrel from an already high US$60/barrel in the first quarter of the year. By the first quarter of 2008, oil price was already playing around the US$120/barrel mark. With oil prices expected to continue increasing in the coming months, countries around the world have continued to step up on their own exploration efforts, moving further and deeper into new frontiers, hoping to get as much oil as they can to sustain the growth of their respective economies.
In the home front, PNOC EC and many other exploration companies have been diligently exploring for viable petroleum resources all over the country for the past several decades. However, up to this time, the country remains to be largely underexplored with only about 557 wells drilled for the past century; a far cry from the 400 wells drilled in Indonesia in just one year during the 1980s.
It is on that note that the mandate of your Company of exploring and developing petroleum and coal resources for the country is aptly highlighted. To sustain the growing economy of the Philippines, our search for indigenous petroleum and coal must be intensified further and firmly reinforced with the support of the government, the industry and the local communities.
As we venture into our 32 nd year in petroleum exploration, your Company once again renews its commitment to explore, develop and provide energy sources that will fuel the country towards a brighter and abundant future for all Filipinos.
Aggressive Petroleum Exploration
For the past several years, PNOC EC has implemented an aggressive petroleum exploration program around the country. To date, PNOC EC holds interests in six exploration Service Contracts (SC), namely SC 43 ( Ragay Gulf), SC 47 (Offshore Mindoro), SC 57 (Calamian), SC 58 (West Calamian), SC 59 (West Balabac) and SC 63 ( East Sabina).
In 2007, PNOC EC and partner Nido Petroleum of Australia acquired a combined 8,267 kilometers of seismic data in the West Calamian and East Sabina blocks, both located in the highly prospective areas in offshore west Palawan, adjacent to the large Malampaya gas field. The newly acquired data are currently being processed by CGGVeritas in Perth, Australia. Also in 2007, Pearl Energy, our partner and operator of SC 43, acquired 320 kms of seismic data in Ragay Gulf to cover potential deeper targets that are equivalent to the prolific Nido Limestone in offshore Palawan.
In August-September 2007, Petronas Carigali, PNOC EC’s partner and operator of SC 47, drilled the Kamia-1 exploration well, located near the island of Maniguin in Antique. The well was drilled to a depth of 1,213 meters, which unfortunately did not result to an oil discovery, albeit some oil shows were encountered.
After Kamia-1, another well is scheduled to be drilled this year, this time in the Ragay Gulf. PNOC EC has assisted Pearl Energy, the operator, in its preparations for the drilling of the Monte Cristo-1, the first exploration well in SC 43. The drilling activity is expected to commence by the end of May 2008 and may take up to 45 days to complete.
Meanwhile, PNOC EC continues to evaluate the petroleum potential of SC 57 and SC 59. Follow-up seismic programs that will supplement the seismic data acquired in 2006 from these acreages are currently being prepared to enhance their prospect and lead inventories as well as to determine potential targets for future drilling campaigns. Incidentally, PNOC EC has already commenced the bidding process for its search for a joint venture partner in SC 59, subject to the provisions of EO 556. PNOC EC currently holds a 100% interest in the block which is believed to have a significant potential as it lies within the trend of recent deepwater petroleum discoveries in offshore Sabah.
Meanwhile, PNOC EC continues to spearhead the Camago-Malampaya Oil Leg (CMOL) Project, which intends to develop and produce the crude oil found beneath the Malampaya gas field in offshore northwest Palawan. The government is keen on pursuing the development of the oil leg to help reduce the country’s dependence on imported oil.
Strengthening the Coal Business
Similar to the trend of petroleum consumption, coal demand is also steadily increasing as countries around the world try to maximize all available sources of energy to fuel their economies. In 2006, China accounted for 38.6% of the world’s total coal consumption, followed by the USA with 18.4% and India with 7.7%. The Philippines, on the other hand, consumed only 0.2%. Despite a remarkably low coal consumption based on a world wide scale, the Philippines’ domestic coal production is still not enough to meet the requirements of the country’s coal users making coal importation an indispensable recourse. Then again, big coal producers like China have already reduced or even discontinued exporting coal in order to meet their own requirements.
By strengthening its position in the coal mining business, PNOC EC aims to maximize the development and utilization of indigenous coal resources thereby reducing the country’s need to import coal. After all, this is part of the Company’s mandate of providing a stable energy supply for the Philippines.
Currently, PNOC EC has four Coal Operating Contracts, namely: COC 41 in Malangas, COC 122 and 141 in Isabela and COC 140 in Surigao del Sur. COC 41, located within the Malangas Coal Reservation in the province of Zamboanga Sibugay, continues to produce high quality coal with calorific value as high as 12,000 BTU. The acreage hosts the biggest underground coal mine in the country which produced a total of 110 thousand metric tons in 2007. PNOC EC is also gearing for the implementation of its Isabela Coal Mining and Power Plant Project within the COC 122 area. The project involves the development of a coal mine and the construction of a 50MW circulating fluidized bed Power Plant that will utilize the low-rank coal in the area. Once implemented, the project will be the first of its kind in the country which will utilize a progressive strip mining and rehabilitation method to extract coal. The project is expected to augment the energy requirements of Isabela while providing a stream of benefits to the host communities in the form of coal royalties, taxes and employment opportunities.
The Company also operates coal terminals in Zamboanga Sibugay, Cebu, and Batangas and in 2007, opened a new terminal in Navotas. The coal terminals serve as PNOC EC’s handling facility for the local and imported coal that the Company supplies to the various power plants, cement factories and other coal users in the country.
Financial Strength
We are pleased to report that in 2007, PNOC EC’s total equity rose to PhP 6.75 Billion from PhP 5.28 Billion in 2006 due to the increase in retained earnings of PhP 1.45 Billion. Consequently, the book value per share of our stocks went up to PhP 3.37 in 2007 from PhP 2.64 in 2006. As a result of its remarkable performance, the Company declared dividends amounting to PhP 200 Million on December 11, 2007 to shareholders of record as of January 3, 2007.
PNOC EC’s Gross Revenue went up from PhP 6.22 Billion in 2006 to PhP 6.44 Billion in 2007. The 4% growth was brought about primarily by two major factors: First is the increase in the volume of sales of the Malampaya gas from 105.85 billion cubic feet in 2006 to 125.05 billion cubic feet in 2007 coupled with the rise in gas prices from an average of US$ 6.93 per Giga Joule in 2006 to US$ 7.15 per Giga Joule in 2007; Second is the increase in the volume of coal sold from 477.70 thousand metric tons in 2006 to 754.31 thousand metric tons in 2007 along with the rise in coal prices from an average of PhP 2,403.48 per metric ton in 2006 to PhP 2,767.51 per metric ton in 2007.
PNOC EC completed in 2007 its adoption of the Successful Efforts Method of Accounting for its petroleum exploration and production activities wherein all exploration costs, except costs of exploratory wells are expensed and not capitalized as they are incurred. Though the shift from Full Cost to Successful Efforts method was started in 2006, certain seismic data acquisition costs and other pre-drilling exploration costs incurred in prior years amounting to PhP 168.73 Million were charged as expense only in 2007.
Also in 2007, “Cost Recovery” for SC-38 has reduced significantly. Cost Recovery is an incentive granted by the Department of Energy to the contractors of Service Contract 38 to deduct certain “Approved Costs” up to a maximum of 70% of the monthly sales revenue before sharing the remainder Profit Petroleum with the Government (DOE, BIR and LGUs). In short, the reduction of Cost Recovery simply means that we have already fully recovered all pre-production costs in the Malampaya project (as early as first half of 2006), and thus we are no longer entitled to take back as much amount from the gross revenue of SC-38 as Cost Recovery funds. This has translated into lower earnings from SC-38 despite an increase in sales revenue.
The charging of pre-drilling costs of prior and current years as an expense of 2007 and the decrease in Cost Recovery for the Malampaya Project resulted in the decrease in net income of the Company from PhP 2.6 Billion in 2006 to PhP 1.77 Billion in 2007.
Moving Forward
2008 will be a very busy year for PNOC EC. For the year, the Company has earmarked a total of PhP 662.70 Million for investments in oil and gas exploration and development, another PhP 111.28 Million for natural gas development projects and PhP 842.04 Million for coal projects. Another PhP 787.33 Million is also budgeted for our participation in the Malampaya gas project.
A huge amount of work has been lined up for the men and women of PNOC EC as it embarks on an even bolder and more aggressive program to explore for oil, gas and coal for the Philippines. Indeed, energy exploration is not for the faint-hearted and PNOC EC is ready for the challenge!
http://en.wikipedia.org/wiki/Economy_of_the_Philippines
BP World Energy Statistics 2007
January 30, 2008, Hernandez, EF., 2008. Accelerating Investmens in Oil and Gas Exploration and Development Philippines Energy Summit. Unpublished
*Delivered during the Annual Stockholders’ Meeting last June 10, 2008
Jacinto V. Paras
Chairman of the Board
Rafael E. Del Pilar
President and Chief Executive Officer / Director