SPONSORSHIP SPEECH Senate Bill No. 2203 / Committee Report No. 255
Midstream Natural Gas Industry Development Act
Tuesday, May 18, 2021
Delivered by the Honorable Win Gatchalian, Senator of the 18th Congress:

Mr. President, distinguished colleagues, the legislation we are sponsoring today aims to develop a critical component of one of the Philippines' most important energy industries - natural gas. 19% of the country's power is generated from natural gas, making it the third-most utilized source after coal at 57% and renewable energy at 21%. The importance of natural gas is even more pronounced in Luzon, where more than a quarter of the island's power is sourced from natural gas plants. This is second only to coal. Significantly, natural gas plants generated 56% of the 2.5-billion-kilowatt-hours purchased by MERALCO in April 2021, making natural gas the single most impactful electric power source in Metro Manila - the national center of economic productivity and wealth creation. In a nutshell, we can say that Philippine energy security largely depends on the available supply of natural gas.

Despite the prominence of natural gas in the Philippine energy mix, there is only one natural gas field operating in the country to supply our energy needs: the Malampaya Gas Field located off the coast of Palawan. Unfortunately, the Malampaya service contract is set to expire in 2024. Even if the service contract is extended, the Department of Energy projects that the estimated 858,834 million standard cubic feet remaining in the Malampaya field as of September 30, 2020 would be completely exhausted by the first quarter of 2027. This implies that we could be facing a major energy crisis less than six years from now unless we find alternative sources to supply Philippine demand for natural gas.

Sa madaling salita Ginoong Pangulo, ang kinatatakutan nating malawakang brownout sa Luzon ay maaaring mangyari kung tuluyan nang masaid ang isinusuplay ng Malampaya. Apektado dito hindi lang ang mga sambahayan, kundi pati ang mga industriya na maaaring mag-iwan ng malaking puwang sa ekonomiya ng bansa.

Another point to consider is the understated role of natural gas in promoting Philippine energy sustainability. Natural gas plays an important role in our energy mix as a complementary fuel to variable renewable energy sources. Model scenarios contained in the draft National Renewable Energy Plan or NREP 2021-2040 show that meeting the country's target of 35% share for renewables in the power generation mix by 2030 would involve utilizing an increasing share of natural gas. The draft NREP envisions the building of an additional 5,505 MW of natural gas capacity by 2030, increasing to a total of 9,801 additional installed capacity by 2040. This would require increasing the total installed capacity of natural gas at an average annual growth rate of more than 15% between 2022 and 2040. It should also be noted that, generally speaking, natural gas produces only one-third of the emissions of coal.

Additionally, research indicates that investing in natural gas today will result in long-term consumer savings tomorrow. While coal technology still produces a significantly lower global Levelized Cost of Electricity or LCOE compared to combined cycle gas turbine or CCGT technology, BloombergNEF estimates the LCOE of CCGT will catch up to coal by the first half of 2028. After that point, it is expected that CCGT technology will produce consistently cheaper electricity than coal moving forward.

However, the results of MERALCO's recent competitive selection process for a 1,800 MW power supply agreement expected to deliver electricity by 2024 suggest that cost parity between natural gas and coal might come earlier than expected. Natural gas-based Excellent Energy Resources Inc. beat out five other coal-based bids with the lowest LCOE at 4.1462 Php/kWh. The LCOE of the five coal projects ranged from 4.2605 to 5.4426 Php/kWh.

As we can see, Mr. President, natural gas is poised to play an important role in promoting Philippine energy security, sustainability, and consumer savings in the coming years and decades. However, the question remains: How will we be able to source our natural gas needs after Malampaya meets its inevitable end? Part of the solution, of course, lies in exploring and extracting new natural gas fields found in Philippine waters and the Exclusive Economic Zone. In our experience, however, it may take several years for new gas fields to become commercially viable. Thus, it would be wise of us to diversify and complement our natural gas supply through alternative means while continuing to develop potential indigenous sources.

This is where liquified natural gas or LNG comes in. LNG is natural gas which has been cooled to a cryogenic temperature, thus converting it into a liquid state. From a logistical standpoint, LNG is much easier to convey to power plants and other midstream end- users because it can be shipped on ships and trucks, while natural gas in its original form can only be transported via pipeline. LNG is already a high-demand energy source worldwide, with an expected global demand of more than 300 million metric tons per annum in 2021. Demand is steadily growing with an average annual growth rate of 3%. The vast majority of demand comes from the Asian market, especially high-consumption powerhouses Japan, Korea, Taiwan, and China.

From the Philippine perspective, the main drawback of LNG at the moment is that it requires a complex infrastructure which have yet to be developed in-country. LNG must be received at an LNG terminal and regasified into its original state before it is transported via pipeline to midstream end-users such as power plants. It also requires bunkering facilities for marine vessel fuel. LNG can also be transported through virtual pipelines using trucks and vessels to transport it throughout the Philippines. All these are part of the Midstream Natural Gas Industry: aggregation, supply, importation, exportation, onloading/offloading, processing, storage, regasification, transmission, bunkering, and transportation of natural gas, whether in its original or liquified form. It covers LNG terminals, dedicated natural gas pipelines, natural gas transmission systems, storage facilities, bunkering facilities, virtual pipelines, and motor vehicles and marine vessels transporting natural gas. Essentially, the midstream industry encompasses everything between the extraction of gas upstream and its delivery downstream to retail users. The gross underdevelopment of this important NatGas sub-industry needs to be addressed as soon as possible so that the Philippines can begin supplementing its indigenous supply with LNG imports.

Mr. President, the legislation we are sponsoring today will foster the development of the Midstream Natural Gas Industry in a bid to strengthen Philippine energy security by diversifying our primary sources of energy and promoting the role of natural gas, especially LNG, as a complementary fuel to variable renewable energy. The Midstream Natural Gas Industry Development Act seeks to create a legal and regulatory framework that would govern the promotion and development of the NatGas industry, foster a competitive market for NatGas, encourage the flow of investments for industry development, and protect midstream end users by mandating transparent and fair rates, fees, and charges. Allow me to discuss the important features of the industry framework established by this legislation.

The first thrust of this legislation is to develop an infrastructure of LNG terminals nationwide. LNG terminals are all facilities, whether onshore or offshore, used to import, receive, unload, load, process, store, and regasify natural gas in any form from local or foreign sources. The Department of Energy will be the main agency in charge of LNG terminals. However, LNG terminals are not public utilities under this Act, consistent with the treatment of comparable facilities in other energy industries. Therefore, the fee for their use is not regulated.

While LNG terminals are not public utilities, their use and access shall be regulated by DOE rules concerning Third Party Access or TPA. TPA allows additional industry players to use natural gas facilities which are owned or operated by other players. This will inject more competition into the midstream industry by allowing for the participation of smaller firms that may not yet have LNG facilities of their own. Third party rights will be determined through a competitive selection process to minimize the risk of potential sweetheart deals between industry players as well as other anti-competitive behavior.

Another salient feature of this bill is its treatment of transmission pipelines. Natural gas can be conveyed either through a dedicated natural gas pipeline or through natural gas transmission systems known as NGTS. A dedicated pipeline is used exclusively by a single player to transport natural gas between various facilities. Meanwhile, an NGTS is a network of pipelines and other facilities used by multiple industry players to transport natural gas to power plants and other industrial or commercial establishments that use them. Natural gas transmission systems are considered public utilities under this bill, while dedicated pipelines are not.

Transmission systems shall be operated by utility companies which shall also require congressional franchises to construct, own, and operate an NGTS. They shall also be subject to third party access according to rules to be promulgated by the ERC. After some time, the growth of NGTS will allow for their interconnection. At that point, this bill provides that the DOE will select a single independent NGTS operator or NGTSO to operate and manage the interconnected transmission system. The bill prohibits cross- ownership of the NGTSO by any existing midstream industry player, thus guarding against monopolies and other anti-competitive behavior among industry players.

This legislation also contains provisions to foster transparency and fairness in the operation of major components of the midstream industry. One important aspect of this bill is the enforcement of provisions attempting to curb anti-competitive behavior. The Philippine Competition Commission will be tasked to decide competition cases arising from this bill, subject to complementary powers of investigation and recommendation exercised by the DOE and ERC, respectively. LNG terminals with regulated third party access, NatGas transmission utilities, and the eventual NGTSO shall be required to publish an unbundled breakdown of their fees online.

Mr. President, the Midstream Natural Gas Industry Development Act is an important piece of the legislative agenda of the Senate Committee on Energy three years in the making. It was drafted in close consultation with public and private industry stakeholders over a series of 10 formal technical working groups as well as numerous other consultation sessions and meetings. I would like to thank all of the stakeholders and members of the Senate who contributed to the crafting and refining of this bill.

To reiterate, Mr. President, the legal and regulatory framework to be established by the Midstream Natural Gas Industry Development Act is necessary to unlock the untapped potential of natural gas, especially LNG, in line with the overarching 3S vision of the Committee on Energy to achieve greater Philippine energy stability, sustainability, and savings. Increasing our supply of natural gas from LNG sources will help prevent an energy security crisis from happening when Malampaya operations close for good in the near future. As discussed earlier, LNG will also play an important role in bridging the gap for variable renewables as we build a more sustainable power generation mix. Last, but certainly not least, LNG will unlock new potential for consumer power savings as natural gas steadily catches up to coal as the most cost-efficient dispatchable power source.

Panahon na para kumilos at isantabi ang lahat ng pag- aalinlangan. Ang higit na mahalaga ngayon at sa hinaharap ay ang mabigyan ng sapat na suplay at murang halaga ng kuryente ang ating mga kababayan.

Mr. President, nothing less than the future of the Philippine energy sector is at stake here. Therefore, I am respectfully soliciting the support of this esteemed chamber for the swift passage of this landmark energy legislation.

Thank you, Mr. President, distinguished colleagues.