PRIVILEGE SPEECH

'LUTONG MACAU NA NGA'
Exposing the Red Flags of DOE's Approval of the Chevron-UC Malampaya Deal

February 2, 2022
Session Hall
Senate of the Philippines

Delivered by the Honorable Win Gatchalian, Senator of the 18th Congress:

Mr. President, esteemed peers, I take the floor to expose the red flags surrounding the Department of Energy's approval of the Chevron-UC Malampaya deal.

The Senate Committee on Energy spent over a year investigating the issue pursuant to Proposed Senate Resolution No. 533, authored by Senate President Vicente Sotto III, Senator Panfilo Lacson and yours truly; PSR 724, authored by this representation; and PSR No. 950, authored by Senator Risa Hontiveros. We held four hearings between November 10, 2020 and December 15, 2021. The Department of Energy was given every opportunity to sufficiently explain its side of the story.

After conducting a painstaking review of applicable laws and regulations, ample documentary evidence, and the wildly inconsistent statements of the Department of Energy and its senior officials, I have arrived at an unmistakable conclusion:

The Department of Energy violated not only the law, but even its own department circular, in railroading the approval of the transfer of a substantial participating interest in Malampaya - our country's single most important energy resource - to a company that the DOE knew to be financially unqualified to own it.

As a result, Energy Secretary Alfonso Cusi and other DOE officials involved in the evaluation and approval of this transaction have exposed themselves to administrative and criminal liability for greenlighting this deal contrary to law, regulation, and common sense.

It is my sworn duty, as a representative of the people, to inform our fellow Filipinos of the corrupt practices employed by DOE in approving the sale of our country's most precious energy resource, to the detriment of Philippine energy security. This is why I have taken the floor today.

Mr. President, this speech summarizes the Chairman's Report dated February 2, 2022, prepared by yours truly. As the Chairman's Report has been incorporated by reference in this speech, I respectfully request that the Chairman's Report be included in the Record as an annex to this speech, pursuant to the second paragraph of Section 57, Rule XX and Section 102, Rule XXXVII of the Rules of the Senate.

Mr. President, I will begin with a short summary of the facts. At the center of the controversy lies Chevron Malampaya LLC PH or CMLLC PH, now known as UC 38 LLC.

CMLLC PH was formerly the Philippine branch office of CMLLC US. Meanwhile, CMLLC US was a wholly-owned subsidiary of Chevron Philippines.

CMLLC PH is part of a three-member consortium engaged by the government under Service Contract 38. Previously, CMLLC PH owned a 45 percent participating interest in SC 38.

Shell Philippines Exploration B.V. or SPEX owns another 45 percent interest. The remaining 10 percent is owned by PNOCExploration Corporation.

Service Contract 38 authorizes the SC 38 consortium to explore and extract Philippine oil and gas resources hidden beneath a vast area of ocean northwest of Palawan on behalf of the Republic of the Philippines.

SC 38's service area is an abundant source of natural gas, held in trust by the State for the benefit of the Filipino people. This precious fuel is harvested through the Malampaya deep-water gasto-power project. The SC 38 consortium finances, manages, and operates the Malampaya project on behalf of the Filipino people.

Mr. President, Malampaya is the most important energy source of the Philippines. Ito ang kaisa-isang pinagkukunan natin ng natural gas dito sa bansa.

Malampaya powers more than four and a half million homes and businesses in Mega Manila alone. Six out of every ten lightbulbs in Meralco's franchise area are powered by Malampaya gas. It contributes almost 20 percent of the entire country's power generation mix.

Ganyan po kahalaga ang Malampaya sa ating bansa. Kung walang Malampaya, maraming mga sambahayan ngayon ang walang kuryente o anim sa sampung bahay sa franchise area ng Meralco. Kapag walang kuryente, walang mga negosyo na magpapatakbo ng ekonomiya. Marahil, baka marami ring mga estudyante ang hindi nag-aaral ngayon dahil hindi makapagdistance o online learning.

Kung walang Malampaya, mas mataas ang singil sa kuryente sa merkado. Kung naalala ninyo noong Nobyembre ng nakaraang taon ay tumaas ang bill ng kuryente dahil nag shut down ang Malampaya noong Oktubre.

Malampaya is also a lucrative revenue source for the government. Between January 2002 and June 30, 2021, the government earned PHP 290.76 billion as its share in the revenue of Malampaya operations.

Mr. President, on October 25, 2019, Chevron Philippines and UC Malampaya entered into a Share Sale and Purchase Agreement or SPA.

Under the SPA, UC Malampaya bought all the shares of Chevron Philippines in CMLLC US for the sum of 565 million US dollars. That is more than 40 billion pesos.

This transaction is what we refer to as the Chevron-UC Malampaya deal.

UC Malampaya is an indirect subsidiary of Udenna Corporation. Looking at the corporate structure chart, we could say that Udenna Corporation is the great-grandfather of UC Malampaya.

Through this transaction, UC Malampaya gained effective control over CMLLC US and its branch CMLLC PH, and its 45% participating interest in Service Contract 38. After this transaction, CMLLC PH changed its name to UC 38 LLC.

Uulitin ko po ang tatlong nagmamay-ari ng Malampaya: ang operator nito na Shell Philippines Exploration o SPEX na may 45 percent stake, ang gobyerno o PNOC-Exploration Corporation na merong 10 percent stake, at 45 percent sa UC 38 na dating CMLLC PH na binili ng UC Malampaya.

Mr. President, the Chevron-UC Malampaya deal requires prior government approval from the DOE under Presidential Decree No. 87 and DC 2007-04-0003, titled 'Prescribing the Guidelines and Procedures for the Transfer of Rights and Obligations in Petroleum Service Contracts Under Presidential Decree No. 87, As Amended'.

PD 87, otherwise known as the Oil Exploration and Development Act of 1972, regulates energy exploration and development activities. Service Contract 38 was executed in 1990 under this law.

Section 11 of PD 87 states, quote, "The rights and obligations under a contract executed under this Act shall not be assigned or transferred without the prior approval of the Petroleum Board," end quote. The Petroleum Board is now the Department of Energy.

The 2007 Department Circular was promulgated by DOE to implement Section 11 of PD 87. The circular prescribes guidelines and procedures to ensure the assignee or transferee of any right or interest in a petroleum service contract such as SC 38 possesses the requisite legal qualification, financial resources, and technical expertise and experience to undertake its obligations and commitment under the petroleum service contract.

During the November 10, 2020 hearing of the Committee on Energy, DOE confirmed the applicability of PD 87 and DC 2007 to the Chevron-UC Malampaya transaction. DOE Assistant Secretary Leonido Pulido III informed the committee that DOE had already received a formal notice from the parties regarding the Chevron-UC Malampaya deal. I will now show a video of Asec Pulido stating DOE's original position from the hearing:

[PLAY VIDEO] "The Department of Energy endorsed this letter to our legal services wherein our legal services had to determine whether or not such transfer would fall squarely within the ambit of the department circular that would require the Department of Energy's approval of the transfer. And our legal services held that it falls squarely within that department circular and it should require an evaluation of the technical, legal and financial capacity of the transferee so that the DOE may approve such transfer."

Mr. President, note that the transferee mentioned by Asec Pulido is UC Malampaya. This will be important later.

Asec Pulido's comments are consistent with DOE's August 5, 2020 letter to SPEX, wherein the agency requested SPEX to submit a formal request for approval of the transfer of CMLLC's participating interest in SC 38 to UC Malampaya pursuant to DC 2007.

ASec Pulido's comments were also confirmed by DOE in its November 17, 2020 email submission to the Energy Committee.

The email, sent by Mr. Demujin F. Antiporda of the DOE Petroleum Resource Development Division, noted that since the transferee, UC Malampaya, was stepping into the shoes of CMLLC, a non-operator member of SC 38, "primordial consideration is given to its legal and financial qualifications."

DOE then reiterated, and I quote:

"Regardless of the nomenclature, the SPA entails a transfer of rights and interest in SC 38, as such approval of the DOE is necessary before such transfer becomes effective," end quote.

Again, note that the transferee referred to is UC Malampaya. DOE Legal Service likewise confirmed, in separate memoranda dated November 23, 2020 and March 15, 2021, respectively, that the transaction was subject to prior evaluation and approval under PD 87 and DC 2007, as it involved a transfer of interest in Service Contract 38. UC Malampaya was the transferee referred to in the legal memoranda.

Secretary Cusi's March 26, 2021 letter, officially approving the share sale, explicitly stated that such approval was supposedly in accordance with PD87 and DC 2007.

During the December 15, 2021 hearing, Secretary Cusi also admitted - at least six different times - that PD 87 and the 2007 Circular apply to the transaction. For example:

[PLAY VIDEO 1] THE CHAIRPERSON. xxx Does the government need to approve the transaction before it becomes final and consummated?

MR. CUSI. xxx the DOE took the position that the same is still subject to prior approval of the DOE in accordance with PD 87 and DC 2007-04-003 xxx.

Mr. President, DOE's position had been clear from the very beginning: PD 87 and DC 2007 are applicable to this transaction. DOE is estopped from claiming otherwise.

Despite this, Mr. President, DOE has recently attempted to abandon its original position, taking the side of UC Malampaya in questioning its agency's legal duty to squarely apply PD 87 and DC 2007 to the multi-billion-peso Chevron-UC Malampaya deal. Secretary Cusi also said, during the December 15 hearing:

[PLAY VIDEO 2] MR. CUSI. Mr. Chairman, I have been saying, though there is no specific law that covers the sale of shares of stocks and for us to safeguard the interest of the government for energy security, we need to apply the circular of PD as guidance in our evaluation to see to it that the work program will be accomplished.

xxx

MR. CUSI. Now, if you are going to say--to ask me what is the legal basis for using the benchmark, I think that is an executive decision that we exercised to make sure that the work is not hampered, the industry is not compromised, no laws violated and a decision is made.

Ginoong pangulo, mismong si Secretary Cusi ang nagsabi na kailangang aprubahan ng DOE ang bentahan ng Chevron at UC Malampaya bago maisapinal ito. Pero sinabi rin niya na hindi na kailangang dumaan pa sa DOE ang kasunduan. Ang nakakapagtaka, bakit pabago-bago ang isip ng DOE sa isang transakyong kasing laki nito?

Dati rin sinabi ng DOE na ang pag-apruba nila ay batay sa batas at department circular. Pero nag-iba uli ang kanilang pahayag at sinabing base lang ito sa guidelines o benchmarks.

In response, Senator Hontiveros said she was at a loss for words after seeing, for the first time, a law and a department circular being demoted to mere guidelines or benchmarks. I agree with her.

I asked Secretary Cusi several times during the December 15 hearing to provide any legal basis whatsoever to support his decision to treat PD 87 and DC 2007 as mere guidelines or benchmarks instead of binding law and regulation. He was not able to provide a sufficient answer.

Mr. President, DOE's puzzling 180-degree change in position was first communicated to the Committee on Energy almost four months after DOE approved the transaction specifically at the July 14, 2021 hearing, when the committee asked the agency to submit documents pertaining to its evaluation and approval of the transaction. And unfortunately, Mr. President, the paper trail left by DOE regarding its evaluation of the Chevron-UC Malampaya deal raises numerous red flags.

Section 3 of DC 2007 requires the prospective transferee of any interest in a service contract to undergo evaluation to confirm it possesses the necessary legal, technical, and financial qualifications.

The SPA, the Assignment of Membership Interest in CMLLC executed by Chevron and UC Malampaya on March 11, 2020, and other documents pertaining to the sale share clearly indicate UC Malampaya as assignee or transferee.

As I have previously discussed, multiple senior officials and relevant offices of the DOE have officially confirmed, time and time again, that the transferee subject to evaluation is UC Malampaya.

However, records show that although DOE evaluated both the finances of UC 38 and UC Malampaya, it based its approval on the finances of UC 38.

According to the internal financial evaluation dated February 2, 2021, DOE Financial Services evaluated the available working capital of UC 38, not UC Malampaya, to check whether it was enough to fund a 45 percent share in the SC 38 consortium's minimum financial commitment of 143.2 million US dollars for 2020.

After finding the available working capital of UC 38 sufficient, DOE Financial Services declared UC 38 to be financially capable as transferee of the 45 percent interest in Malampaya.

The dubious findings of DOE Financial Services were adopted by the Energy Resource Development Bureau in its Memorandum to the Secretary dated March 5, 2021. The memorandum endorses UC 38 LLC, not UC Malampaya, as the financially qualified transferee and recommends approval of the transaction.

Secretary Cusi's March 26, 2021 letter approving the transaction also identifies UC 38 LLC, not UC Malampaya, as the transferee of Chevron Malampaya's participating interest.

However, DOE records show that the legal and technical evaluations were conducted with regard to UC Malampaya, not UC 38.

Remember, UC 38 is not a new company. UC 38 is the same company as CMLLC PH, which was purchased by UC Malampaya from Chevron Philippines. Only its name has been changed.

How could CMLLC transfer to itself the 45% participating interest in Malampaya it already owns?

During the December 15, 2021 hearing, we asked Secretary Cusi to explain why DOE evaluated the finances of CMLLC PH or UC 38 instead of UC Malampaya. This is what he had to say:

[PLAY VIDEO 3] MR. CUSI. UC Malampaya, the buyer, they are qualified legally, they are qualified technically. Pagdating po dito sa pera, walang pera. Anong gagawin natin dito kulang ang pera or whatever? ... But at the end of the day, we made a decision, we found it legal, and there was no problem with the sale, so we let it go.

[PLAY VIDEO 4] MR. CUSI. We went to test UC Malampaya. Legal, okay. We went to test it technical, okay din po iyon. We went to test its financial. Marami po siyang negative, ano po, iyong mga debt-equity ratio.

Isa na namang kwestiyonableng proseso ito, Ginoong pangulo. Nakasaad sa DC 2007 na bago mailipat ang interes ng isang kumpanya sa isang prospective transferee, kailangan muna itong dumaan sa legal, technical, at financial evaluation.

Noong nagsagawa ng legal at technical evaluation ang DOE, ang sinuri nila ay ang UC Malampaya, ang transferee sa naturang transaksyon. Pero ang sinuri nila pagdating sa financial evaluation ay ang UC 38. Pakiwari tuloy ng marami, mistulang nahinog sa pilit ang Chevron-UC Malampaya deal at pinalusot na lang ito dahil walang duda na wala naman talagang kakayahang pinansyal ang UC Malampaya.

Mr. President, I was under the impression that DOE had not even bothered to evaluate the finances of UC Malampaya. However, Secretary Cusi's shocking admissions put the pieces of this difficult puzzle together.

It explains the Department of Energy's post-facto characterization of its own department circular as a mere benchmark, not a binding regulation, after it had already approved the transaction.

It explains DOE's insistence on approving the transaction based on an evaluation of UC 38's finances, and not UC Malampaya's, despite having absolutely no legal basis to do so.

The reason is that DOE knew UC Malampaya was financially unqualified under law to become transferee of the 45 percent participating interest in Malampaya.

Mr. President, DOE regulations require a prospective petroleum service contractor to have available working capital equal to, or greater than, its proportionate contribution to the work program and budget under the service contract. Available working capital is Liquid Assets less Current Liabilities.

As mentioned earlier, DOE erroneously applied this standard to UC 38, instead of UC Malampaya, to support its finding of financial qualification in approving the Chevron-UC Malampaya deal.

According to Paragraph 8 of the DOE financial evaluation, the available working capital of UC Malampaya is negative 137.2 million US dollars. That is negative 6.9 billion in Philippine pesos.

When DOE's financial evaluation standard is correctly applied to UC Malampaya, it is immediately apparent that the Udenna subsidiary is financially unqualified because it has negative working capital.

Maliwanag na wala talagang kakayahang pinansyal ang UC Malampaya na humawak ng isang napakaimportanteng investment ng bansa. Paano mo naman isusugal sa isang kumpanyang walang pera ang seguridad ng enerhiya natin?

Yun lang yun, Ginoong Pangulo. It's not rocket science.

However, instead of disapproving the transaction as it should have, DOE bent over backwards to find a way to approve the transfer to UC Malampaya - an entity it already knew was financially unqualified based on the agency's own standards. Thus, the DOE based its finding of financial capability on the alleged financial position of CMLLC PH or UC 38, the target company, instead of transferee UC Malampaya. In Secretary Cusi's own words:

[PLAY VIDEO 5]: MR. CUSI. "Kaya ang nangyari po doon sa application natin ng intent of the law naging mestizo, ano po, na pumunta kami dito sa Chevron Malampaya for the financial."

As Senator Pimentel pointed out during the hearing, this socalled mestizo application of the law has no legal basis. Secretary Cusi was unable to provide any legal basis for the questionable misapplication of his own department circular. Significantly, the unauthorized mestizo application of DOE's financial test is what allowed UC Malampaya to acquire its participating interest in Malampaya despite flunking the financial evaluation. In other words, the only way for DOE to approve the Chevron-UC Malampaya transaction was to violate its own circular.

Unfortunately, Mr. President, this is not the only violation of DC 2007 committed by DOE.

As pointed out by Senator Binay during the September 28, 2021 hearing, the DOE evaluation was based on unaudited financial statements submitted by UC Malampaya and UC 38. In fact, the financial statements were not only unaudited, but also unsigned.

Section 2(e) of DC 2007 expressly requires the submission of audited financial statements by the transferee to prove its financial capability. An unaudited, unsigned financial statement does not provide a fair and credible snapshot of the working capital available to a service contractor to comply with its obligations to the consortium.

During the December 15 hearing, Secretary Cusi admitted that UC 38, the alleged transferee, did not submit the required financial documents:

[PLAY VIDEO 6] MR. CUSI. Let me check it with the finance people to get all the correct information. Mr. Chairman, if I will read it to answer the question. UC 38 LLC did not submit the requested, required particulars for financial resources available to the prospective transferee or assignee including capital credit facility, guarantees to undertake its publication under the Service Contract.

Therefore, even if there was a proper legal basis for DOE's so-called mestizo evaluation - and just to be clear, there is none - the agency's approval of the transaction without any credible financial documents on hand is nonetheless a clear violation of its own department circular. The failure of the transferee to submit audited financial statements and other documents proving its financial capability should have resulted in the disapproval of its application.

Maliwanag pa sa sikat ng araw, lutong macau ang nangyaring transakyon.

Mr. President, allowing a company in financial turmoil to own a large stake in Malampaya gravely endangers our country's energy security.

Ownership of a 45 percent stake in SC 38 requires funding 45 percent of the consortium's 163.45-million-dollar Work Program and Budget as of 2021.

Oil and gas exploration and extraction is an expensive, highrisk industry. However, UC Malampaya is reliant on its earnings from Malampaya's gas operations to pay its 45 percent share.

If operations slow down, UC Malampaya would not be financially capable of paying its fair share of Malampaya's operating budget. When this happens, the consortium's operation will collapse. Malampaya will stop producing gas. Six out of ten lightbulbs in Metro Manila will go dark.

Eventually, Malampaya's existing wells will run out of gas. The SC 38 consortium needs to drill deep into the seabed to discover new oil and gas deposits to power our homes and businesses.

But when Malampaya's wells dry up, UC Malampaya will have no means of funding exploration activities within the SC area.

Mahalaga na may pinansyal na kapasidad ang UC Malampaya para una, makatuklas ng mga bagong mapagkukunan ng langis sa ilalim ng ating karagatan at pangalawa, mapatakbo nang maayos ang Malampaya.

Ginoong Pangulo, mabigat ang kahihinatnan ng bentahang ito na sinelyohan ng DOE dahil itinataya natin ang suplay at presyo ng enerhiya ng bansa sa mga darating na panahon.

Ang Malampaya ang nagpapailaw sa higit apat at kalahating milyong kabahayan sa Mega Manila. Anim sa sampung mga bahay sa franchise area ng Meralco ang umaasa sa kuryenteng isinusuplay ng Malampaya. At kapag tuluyan na itong natuyo, malaki ang posibilidad na magka-brownout o lalo ring tataas ang presyo ng kuryente sa bansa.

PD 87 and DC 2007 were meant to safeguard our country's energy security from this kind of precarious situation. This is why strict enforcement of these laws is vital to protecting the interests of the Filipino people.

Mr. President, the law is the law. Anyone who violates it must be punished to its full extent. This is true, even more so, with regard to the public officials responsible for selling out our country's energy security.

Mr. President, I call on the Office of the Ombudsman and the Civil Service Commission to promptly file administrative and criminal cases against Secretary Alfonso Cusi, who approved the deal, and other DOE officials who evaluated the Chevron-UC Malampaya deal and recommended its approval.

Secretary Cusi and his subordinates are liable for gross neglect of duty and grave misconduct in evaluating and approving this transaction, pursuant to the Revised Administrative Code of 1987. Those found guilty will face dismissal from public service.

Secretary Cusi, as the final approving authority, is also criminally liable under Section 3(j) of the Anti-Graft and Corrupt Practices Act for knowingly granting the privilege of a participating interest in Service Contract 38 to UC Malampaya - an entity that is clearly not qualified to own it.

Secretary Cusi and his subordinates are also liable under Section 3(e) of RA 3019, for providing UC Malampaya with unwarranted benefits, advantage, or preference through manifest partiality, evident bad faith, or gross inexcusable negligence in evaluating and approving the deal.

Ginoong Pangulo, ito po ang kinalabasan ng mga serye ng pagdinig namin sa Committee on Energy hinggil sa kasunduan ng Chevron Philippines at UC Malampaya. Kailangang managot ang mga opisyal ng DOE, sa pangunguna ni Secretary Cusi, dahil sa paglapastangan nila sa batas. Inaprubahan nila ang paglipat ng 45% participating interest ng Malampaya sa isang kumpaya na maliwanag na wala namang kakayahang humawak ng isang mahalagang imprastraktura ng bansa. Sinira nila ang tiwala ng taong bayan na umaasa na mapapangalagan ang suplay ng kuryente.

If convicted, they could face between six years and one month to fifteen years of imprisonment, and perpetual disqualification from public office.

I will provide the proper authorities with a detailed report on our findings. I sincerely hope they will take swift action to hold these DOE officials accountable for their wrongdoing.

At the same time, Mr. President, I am aware that many people have speculated as to the motive behind the preferential treatment accorded to UC Malampaya by Secretary Cusi and the Department of Energy. I will leave that to the courts of law and public opinion to decide. As far as I am concerned, what is clear is that Secretary Cusi and his subordinates have violated the law in evaluating and approving the Chevron-UC Malampaya deal. That is as far as my conclusion goes.

In light of what has transpired, Mr. President, it is also clear that certain amendments are required to strengthen PD 87.

These amendments should incorporate the effect on the service contract of the service contractor's failure to comply with the prior approval requirement of Section 11 of PD 87, as well as the effect of a transferee who is not legally, technically, or financially qualified.

I am likewise proposing an amendment to impose criminal and, when applicable, administrative penalties against:

Service contractors who fail to comply with the prior approval requirement under Section 11 of PD 87;

DOE officials who approve a transfer or assignment of rights and obligations in a service contract which did not go through the prior approval requirement; and,

DOE officials who approve a transfer or assignment of rights and obligations in a service contract to unqualified transferees or assignees.

This will ensure that future service contractors and DOE officials will not repeat the same mistakes as those involved in the Chevron-UC Malampaya deal.

Lastly Mr. President, I call on Secretary Cusi and his erring subordinates to immediately resign. With all that has happened, the Filipino people can no longer trust you to faithfully safeguard our country's precious energy resources.

Hindi niyo na muling maloloko ang taong bayan. Nananawagan ako kay Secretary Cusi at sa labing-isa na mga opisyal ng DOE na kasama sa pag-apruba ng Chevron-UC Malampaya deal, magbitiw na kayo!

That is all for now, Mr. President, distinguished colleagues. Thank you.