Recto Bank: Petroleum Discovery’s Gateway?

MANILA, Philippines --- To the energy secretary, if the estimated huge reserves at the Recto Bank will be realized - it can redeem the country on its long-term quest for new gas finds.

"The potential (at the Recto Bank, which is also called the Reed Bank) is bigger than Malampaya," Energy Secretary Rene D. Almendras has told media, way before service contractor Forum Energy plc, a listed firm in the United Kingdom, came out with its own numbers as to the scale of gas repository at its exploration area.

This is the hitch. The block is not necessarily sitting on "a path of least resistance." That even before the contractor-firm can jumpstart its planned drilling of three wells this year, tensions are escalating anew between China and the Philippines on territorial claims at the South China Sea.

This then prompted the Department of Energy (DoE) to drop hints that Forum Energy may be given an extended deadline if circumstances would warrant so. The planned well drillings will form part of the second sub-phase of Forum Energy's submitted work program for Service Contract 72, for the block located along northwest coast of Palawan and southwest of the Shell-operated Malampaya field. The contractor-company said it is scheduled to plough in $75-$80 million for the drillings.

Going back to President Aquino's SONA, he averred that "whoever steps on Recto Bank will be likened to someone who is stepping on Recto Avenue." So far, it was his way of solidly claiming that the Reed Bank is a Philippine territory.

Brave words! But has that been enough to calm and assure investors that they would not be spending sleepless nights pondering if their drilling plans will proceed seamlessly as the government would want to portray? Not much success on that aspect yet, I guess; and as they say, courage does not always roar.

Aside from SC 72 (which was converted from GSEC 101 in February 2010); three more contract areas were previously awarded within the Reed Bank area - including Service Contract 15; as well as GSECs (geophysical survey and exploration contracts) 63 and 97.

In several media interviews, Philex Mining Corporation chairman Manuel V. Pangilinan asserted that "we should be allowed to proceed with our programmed drillings. We have to validate if there's really something in there," inferring that at the end of the day, the skirmish may just be proven futile if the fields would not yield commercial quantity. Philex Mining, via its subsidiaries FEC Resources and Philex Petroleum, holds the majority interest of 64.45% in Forum Energy.

Before the farm-in deals made with Philex Mining, Forum Energy originally listed FEC Resources Inc. of Canada as its major interest-holder with 30.65% equity; and by UK's Sterling Energy Plc with 13.94%. The rest of the shareholders were investment banks Moore Credit Fund (now James Caird Asset Management); Rathbone Unit Trust Management Ltd.; Morgan Stanley Securities Ltd.; Fidelity Int'l Ltd. and FMR Corp.; and the local partner then was Basic Petroleum Corporation of the De Venecia group.

Since then, several farm-in agreements were made with Philex Petroleum under the watch of businessman Walter Brown buying into the equity shares of FEC Resources, Sterling and Basic Petroleum. Brown's group eventually sold majority of the shares to Pangilinan's group, while Monte Oro Resources Energy (wherein Brown is also affiliated with in the group of tycoon Enrique Razon) maintained the minority stake of 30%.

SC 72 reserves; Scaled up or scaled down?

At its recent announcements, Forum Energy indicated that the Recto Bank shows potential of up to 16 trillion cubic feet (TCF) of gas, which could be roughly five times the estimated proven of serves at the Malampaya field. Purportedly, this was jacked up from the initial 3.4 TCF potential reserves earlier indicated by the company.

Mr. Almendras was also quick to add that such scale of reserves would be able to meet the country's demand for natural gas for the next 100 years.

But wait, before these statements would ignite needless euphoria, there are some numbers and previous circumstances that have to be closely examined.

First, on the reserves assessment at SC 72, had it really been scaled up or down? In an announcement made in September 2006, Forum Energy noted that "the results of the interpretation of its 3D seismic programme at the Sampaguita gas discovery indicated a world class gas accumulation with potential reserves of 20 trillion cubic feet."

It added that "the results from the 3D seismic programme and its interpretation performed by independent consultants, Count Geophysics Ltd., confirmed a minimum 3.4 TCF proven gas-in-place from sands tested in the 3 wells drilled and the extension of the structure to a possible closure of 290 sq km giving an upside reserves in these sands alone of 10 TCF."

Dropping hints of purported "huge oil and gas reserves" in petroleum exploration acreages are not necessarily new in the industry. It was something that the Philippine National Oil Company (PNOC) did also for the Fuga Island prospect in northern Luzon back in the 1990s; as well as the reported Victoria gas finds in central Luzon which even made headlines in the newspapers. Both, however, were found to be "dry wells."

The latest "gas discovery" to have stirred enormous excitement was in Sulu basin; wherein multinational oil giant ExxonMobil and co-interest holders BHP Billiton of Australia and Malaysia's Mitra Energy spent $400 million to drill four wells to validate the extent of extractable reserves. At the initial show of hydrocarbon potential, the energy department has flown in media to the site. But after concluding their drilling program, Exxon Mobil came up with a not-so-positive statement: the drilled wells were not able yield commercial quantity to merit commercial development for the field.

Given such previous announcement fumbles, the energy department and service area-contractors may need to exercise more caution in giving statements on reserves estimates. For the Recto Bank prospect, for example, follow-up drillings are still highly necessary to validate if the gas reserves can really be extracted on commercial scale.

At seismic and drilling phases, the DOE itself admitted that it is not qualifying yet if these are just "possible reserves", probable reserves or if these are proven reserves. In industry-speak, possible reserves are less certain to be recovered and may just portend a recovery rate of 10%; while probable reserves have higher rate of extraction, with 50% expected recovery being factored into the assessment of total reserves. Once reserves are declared "proven" or proved (and of huge quantity) that is the time when contractor-firms declare "commerciality" and move forward to field development phase - and that will already include the installation of gas production infrastructures and tapping markets for the gas output.

Joint exploration

With the unabated "encounters" at the South China Sea, lawmakers like Senator Ralph Recto, are proposing anew that claimant-countries, especially China and the Philippines, would better pursue joint exploration activities within the contested territories.

Have we not been through that path back in March 2005 when the joint marine seismic undertaking (JMSU) was signed between the Philippine National Oil Company (PNOC), PetroVietnam and China National Offshore Oil Corporation (CNOOC)?

Apparently, the bid on turning portions of the conflicted territories into an "area of cooperation via the JMSU" was a formula that had not worked because some politicians contended that the Philippines was given the short end of the stick in that arrangement. Some even rapped that the country has been forfeiting sovereign claims because the covered areas/blocks in the JMSU were mostly within its territory.

Until October 2006, the JMSU team comprising of two representatives each from CNOOC and PNOC and one from PetroVietman were working on the seismic interpretation of data gathered from the covered blocks of the joint exploration. However, extreme political pressure had finally given the "tripartite deal" its death blow in 2008, with the parties not being able to agree on the renewal of the pact after its expiration.

If we dangle the same deal with China now, what is the probability that they will bite the bait for the second time? And under what parameters can we make parties to agree?

Given recent developments in the SCS, it is also apparent that the country's invitations for upstream oil and gas investments have been wobbling due to uncertainties.

Both the energy department and the Department of Foreign Affairs (DFA) were bombarded with questions as to the implications of the "diplomatic correspondence" lodged by China claiming that it owns part of Service Areas 3 and 4 which are being offered by the government via the energy contracting round.

"They (Chinese) filed a request to the DFA to clarify because they feel that areas 3 and 4 are part of Spratlys," Mr. Almendras has told media, adding that "it is up to the DFA to discuss that, the DOE has no comment on that. As agreed, the DFA will take the lead on all diplomatic issues ... that's strictly for the DFA and China. That's not for the DoE to settle."

When asked how prospective investors in these service areas would be able to hedge on future geopolitical risks, the energy chief was non-committal and conceded that it is tough case to discuss for now. Nevertheless, he assured investors that the matter is already being settled by the DFA with its Chinese counterparts, stressing further that as to the apprehensions on China's claims, "there's no uncertainty as far as the Republic of the Philippines is concerned."

The Reed Bank is seen as another critical area, that since it is being lumped into the Kalayaan island group, it is considered to be in the "regime of islands", which may also be contested by claimant-countries.

Needed fixes in the policy regime

Apart from the intervening external factors, the DOE is also called upon to focus on much-needed policy fixes to improve capital flows in petroleum exploration investments.

Oil-man Rufino B. Bomasang, who was former president of the state-run Philippine National Oil Company-Exploration Corporation (PNOC) and currently chairman of NorAsian Energy Ltd., pointed out that the Philippines' set of incentives for oil and gas are no longer attractive as compared to what Asean neighbors have been putting in to the negotiating tables."The need to further improve the Philippine contractual regime has become more imperative because our neighbors in Southeast Asia, particularly Indonesia and Malaysia, as well as Vietnam, have already been making their own policies more attractive," he enthused.

The Petroleum Association of the Philippines (PAP) has long been lobbying for amendments into Presidential Decree 87 (or the Oil and Gas Law). In the past, Mr. Bomasang noted that utmost efforts were exerted to convince policymakers on the much-needed fortifications on the policies that will underpin investments in the sector - but all these fizzled out because of oppositions from some sectors, including Congress. In the Aquino administration, they are pinning their hopes that something will finally be done.

The key amendments to PD 87 they have been batting for include: the lifting of ring fencing around service contracts, which simply means "allowing costs incurred within a contract area to be recovered in another contract area."

Mr. Bomasang explained that the "immediate impact of this is for contractors in producing areas (i.e. Malampaya and Galoc fields) getting enticed to drill more wells, especially in frontier areas."

The other concerns of investors is for the government to ensure expedited processing of documents required to be submitted by contractors, including those on tax exemption certificates; to lessen, if not curtail the usually-complained about delays in the approval of farm-in documents; to harmonize the often different requirements set by various government agencies relative to the regulation of the petroleum industry; and to streamline approval processes within the DOE itself.