Press Release
February 2, 2022

SUMMARY OF THE REPORT OF THE CHAIRMAN OF THE SENATE COMMITTEE ON ENERGY ON THE CHEVRON PHILIPPINES - UC MALAMPAYA TRANSACTION
BASED ON PROPOSED SENATE RESOLUTION NO. 533,1 PROPOSED SENATE RESOLUTION NO. 724,2 and PROPOSED SENATE RESOLUTION NO. 950 3

I. INTRODUCTION

The Malampaya Deepwater Gas-to-Power Project (“Malampaya”), which operates under Service Contract No. 38 (“SC 38”), supplies natural gas to five (5) power plants with a total capacity of 3,211 megawatts (MW).4 These natural gas power plants provide 19.16% of electric power to the entire country, and 26.92% of the total electricity of electricity Luzon in the year 2020 alone.5 It supplies 64.03% of the total households in the Meralco franchise area in 2021.6 This means 6 out of every 10 households is powered by Malampaya. Malampaya has also provided significant income to the government, totaling Php 290.76 billion from January 2002 until 30 June 2021.7 Of this amount, Php 208 billion has been earmarked to pay for the remaining stranded contract costs and stranded debts,8 which should redound to a total savings for consumers of Php 0.86 per kilowatt-hour (kWh).9 Given the significance of Malampaya, it is imperative that its operators are legally, technically, and financially qualified.

II. FACTS

On 2 October 1972, Presidential Decree No. 879 ("PD 87") was issued providing the rules and regulations for the exploration, exploitation, and development of the country's oil and gas reserves. Within the framework provided by PD 87, SC 38 was signed on 11 December 1990 with a total contract period of 35 years ending on 23 February 2024.11 The original parties to SC 38 were the Philippine Government, Occidental Philippines, Inc. ("OPI"), and Shell Exploration B.V. Philippine representative office ("SPEX"). OPI and SPEX each had 50% participating interest in SC 38.10

Section 11 of PD 87 requires the prior approval of the DOE before the rights and obligations under a service contract can be assigned or transferred. Between 1998 and 2003, the rights and obligations in SC 38 were assigned or transferred among various entities, in three (3) separate instances.11 All three transactions were approved by the DOE.

On 23 March 2007, the DOE issued Department Circular No. DC2007-04-000312 ("DC2007-04-0003") implementing Section 11 of PD 87 by prescribing the requirements and procedures for the transfer of rights and obligations in a service contract.

As of 2019, the participating interests in SC 38 were distributed as follows: SPEX with 45%, Chevron Malampaya LLC Philippine branch (CMLLC PH) with 45%, and Philippine National Oil Company Exploration Corporation (PNOC-EC) with 10%.13 Note that CMLLC PH is the Philippine branch of CMLLC US, and CMLLC US is in turn wholly-owned by Chevron Philippines.

On 25 October 2019, Chevron Philippines and UC Malampaya Philippines Pte Ltd ("UC Malampaya") entered into a Share Sale and Purchase Agreement ("SPA") wherein Chevron Philippines sold its entire interest in CMLLC US to UC Malampaya.14 On 11 March 2020, Chevron Philippines and UC Malampaya executed an Assignment of Membership Interests in CMLLC US ("Assignment") whereby Chevron Philippines assigned and transferred all of its ownership interest in CMLLC US and its Philippine branch office, CMLLC PH, to UC Malampaya.15 This shall hereafter be referred to as the Chevron Philippines - UC Malamapaya transaction. On 26 March 2021, the DOE, through a letter from Secretary Alfonso Cusi ("Secretary Cusi") to the SPEX Managing Director, approved this transaction.16

A total of three (3) resolutions were filed concerning Malampaya and the Chevron Philippines - UC Malampaya transaction: Proposed Senate Resolution No. (PSR) 53317 filed by Senator Sotto, Senator Lacson, and Senator Gatchalian, PSR 72418 filed by Senator Gatchalian, and PSR 95019 filed by Senator Hontiveros. A total of four hearings were conducted on these Proposed Senate Resolutions: 10 November 2020, 14 July 2021, 28 September 2021, and 15 December 2021.20

III. ISSUES

A. Whether Section 11 of Presidential Decree No. 87 and DC2007-04-003 apply to the Chevron Philippines - UC Malampaya transaction;

B. Whether DOE complied with DC2007-04-0003 in the financial, technical, and legal evaluation of the Chevron Philippines - UC Malampaya transaction; and

C. Whether there is a violation of law and/or regulation by the DOE in its evaluation of the Chevron Philippines - UC Malampaya transaction.

IV. FINDINGS

A. Section 11 of Presidential Decree No. 87 and DC2007-04-0003 apply to the Chevron Philippines - UC Malampaya transaction

Section 11 of PD 87 applies to any kind of transfer or assignment of rights and obligations under a service contract including transfer or assignment of shares that amount of control. The applicability of Section 11 to the Chevron Philippines - UC Malampaya transaction was admitted by the DOE during the 10 November 2020 Senate Committee on Energy hearing as well as DOE's internal and external correspondence such as the 23 November 2020 Legal Service ("LS") Memorandum for the Energy Resource Development Bureau ("ERDB"),21 the 15 March 2021 LS Memorandum for the Secretary,22 and the 26 March 2021 Letter of Secretary Cusi to SPEX approving the transaction.23

B. DOE did not comply with DC2007-04-0003 in its financial, technical, and legal evaluation of the Chevron Philippines - UC Malampaya transaction

DC2007-04-0003 requires specific documentary requirements to determine the legal, technical, and financial qualifications of the transferee or assignee. UC Malampaya is the transferee in the transaction as indicated in the Assignment24 and the internal correspondence of the DOE while evaluating the transaction. Yet, DOE in its financial evaluation, evaluated the wrong entity, UC38, instead of UC Malampaya.25 It failed to evaluate UC Malampaya which was, based on the DOE's own admission, not financially qualified as it has a negative working capital of USD 137.156 million, which is clearly insufficient to meet its proportionate share in the Work Program and Budget ("WP&B") for 2020 amounting to USD 64.455 million. 28

The DOE also failed to comply with the standards laid down by DC2007-04-0003 as to how the financial evaluation is to be undertaken. First, DOE evaluated the transaction even though UC Malampaya failed to submit audited financial statements and particulars of financial resources available to the prospective transferee or assignee including capital, credit facilities, and guarantees to undertake its obligations under the service contract. Second, DOE used unaudited and unsigned financial statements in its financial evaluation29 contrary to the requirement of audited financial statements in DC2007-04-0003. Third and last, DOE used a draft WP&B in evaluating the financial capability of the transferee.

The DOE's technical evaluation30 also did not include the material fact the UC Malampaya and its ultimate mother company, Udenna Corporation, have no prior experience in oil and gas exploration.31 The DOE's legal evaluation,32 on the other hand, failed to raise other legal issues and implications of the transaction such as the status of the SPA when the parties proceeded to consummate the assignment or transfer without the prior approval of the DOE.

C. DOE officials have violated Section 3(j) 33 and 3(e) of Republic Act No. (RA) 3019, PD 87, DC2007-04-0003, and Executive Order No. (EO) 292 Series of 1987

Secretary Cusi has satisfied the following elements necessary to constitute a violation of Section 3(j) of RA 3019: (1) being a public officer, (2) approving the Chevron Philippines - UC Malampaya transaction last 26 March 2021, and (3) approving the transaction even though UC Malampaya is not entitled to the approval because it failed to submit the required documents and it is not qualified because it has a negative working capital.

Secretary Cusi and other DOE officials34 have likewise satisfied the following elements necessary to show a violation of Section 3(e)35 of RA 3019: (1) being public officers, (2) having acted with manifest partiality, evident bad faith, and/or gross inexcusable negligence in approving or recommending approval of the transaction despite the financial evaluation of the wrong entity, UC Malampaya's negative working capital, the failure to submit the required documents, and the use of unaudited financial statements - all in violation of DC2007-04-0003, and (3) causing undue injury to the government and giving UC Malampaya unwarranted benefits, advantage, or preference in the form of a 45% participating interest in the SC38 consortium and income from the operation of Malampaya by approving or recommending approval of the Chevron Malampaya - UC Malampaya transaction despite non-compliance with DC2007-04-0003 and UC Malampaya's negative working capital.

Further, Secretary Cusi and other DOE officials,36 are likewise culpable of gross neglect of duty and gross misconduct under EO 292 Series of 1987, or the Administrative Code of 1987, and conduct prejudicial to the best interest of the service, by approving or recommending approval of the Chevron Malampaya - UC Malampaya transaction even though it is clear from the documents that: (1) two different entities were evaluated, (2) UC Malampaya was not the entity upon which the recommendation of the financial evaluation was based upon, (3) UC Malampaya has a negative working capital, (4) UC Malampaya failed to submit audited financial statements and particulars of financial resources contrary to the requirement under DC200704-0003, and (5) the financial evaluation was based on unaudited financial statements and a draft WP&B.

Finally, Secretary Cusi, and other DOE officials who are presidential appointees37 may be held administratively liable by the Office of the Ombudsman. On the other hand, DOE officials who are not presidential appointees38 may be held administratively liable by the Civil Service Commission.

V. RECOMMENDATIONS

First, recommend to the following government agencies the actions stated below:

1. The Office of the Ombudsman to file criminal cases against:

a. Secretary Cusi for violation of Sections 3(j) and 3(e) of RA 3019, and

b. Usec. Marcos, OIC Usec. Uy, Asec. Pulido, Asec. Erguiza, Director Dela Fuente, Director Tenazas, Director Soluta, OIC Assistant Director Ansay, Chief Delos Santos, Chief Cerdeña, and Mr. Antiporda for violation of Section 3(e) of RA 3019;

2. The Office of the Ombudsman to file administrative charges against Secretary Cusi, OIC Usec. Uy, Asec. Pulido, and Asec Erquiza for their gross neglect of duty and grave misconduct pursuant to EO 292 Series of 1987; and

3. The Civil Service Commission to investigate, and where appropriate to file administrative charges against Director Dela Fuente, Director Tenazas, Director Soluta, OIC Assistant Director Ansay, Chief Delos Santos, Chief Cerdeña, and Mr. Antiporda for their gross neglect of duty and grave misconduct pursuant to EO 292 Series of 1987.

Second, amend PD 87 to incorporate the following:

1. The effect on the service contract of:

a. The failure to comply by the service contractor with the prior approval requirement of Section 11 of PD 87.

b. A transferee or assignee who is not legally, technically, or financially qualified.

2. The penalties for the following:

c. The service contractor for non-compliance with the prior approval requirement of Section 11 of PD 87.

d. 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.

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

____________________________

1 filed by Senator Vicente C. Sotto III, Senator Panfilo M. Lacson, and Senator Sherwin T. Gatchalian entitled A Resolution Directing the Senate Committee on Energy to Conduct an Inquiry in Aid of Legislation on the Issues Surrounding Service Contract 38 or the Malampaya Deep Water Gas-to-Power Project, and its Compliance with Presidential Decree No. 87 otherwise known as the Oil Exploration and Development Act of 1972, with the end in view of Safeguarding the Country's Energy Security;

2 filed by Senator Sherwin T. Gatchalian entitled A Resolution Directing the Senate Committee on Energy to Conduct an Inquiry in Aid of Legislation on the Plans and Programs of the Department of Energy in light of the Impending Expiration of Petroleum Service Contract No. 38 or the Malampaya Deep Water Gas-to-Power Project to Ensure Continuous Energy Supply in the Country

3 filed by Senator Risa Hontiveros entitled Resolution Calling for the Senate Committee on Energy to Conduct an Inquiry into the Propriety of Allowing a Single Private Entity to Control Almost All of the Nation's Strategic Fossil Energy Assets in the West Philippine Sea.

4 Department of Energy (DOE) (2021).

5 DOE Power Statistics (2021).

6 Meralco 2020 Annual Report.

7 DOE (2021).

8 Republic Act (RA) 11371 - AN ACT REDUCING ELECTRICITY RATES BY ALLOXATING A PORTION OF THE NET NATIONAL GOVERNMENT SHARE FROM THE MALAMPAYA NATURAL GAS PROJECT FOR THE PAYTMNET OF THE STRANDED CONTRACT COSTS AND STRANDED DEBTS. (2019)

9 PSALM (2019)

10 Otherwise known as the Oil Exploration and Development Act of 1972

11 Section 3.1. SC 38.

12 SC 38.

13 First, is the 1998 share sale transaction between Occidental International Exploration and Production Company ("OIEPC") and Pecten Yemen Masila ("PYM"); Second is the 1999 farm-in transaction between SPEX and Shell Philippines, and Texaco Philippines, Inc. ("Texaco Philippines"); and Third is the 1999 farm-in transaction between SPEX and Philippine National Oil Company Exploration Corporation ("PNOC-EC").

14 Entitled "Prescribing the guidelines and procedures for the transfer of rights and obligations in petroleum service contracts under Presidential Decree No. 87, as amended." Issued on 23 March 2007.

15 Page 24. Philippine National Oil Company 2019 Annual Report. (2019).

16 DOE submission on 27 May 2021 with the following file name: Document C. Annex A-1. Share Sale and Purchase Agreement dated 25 October 2019.

17 DOE submission on 27 May 2021 with the following file name: Document C. Annex A-2. Assignment.

18 With the subject "Transfer of Participating of Chevron Malampaya LLC to UC Malampaya PPL under Service Contract No. 38". Reference: DOE submission on 27 May 2021 with the following file name: Document G. DOE Letter to SPEX.

19 Entitled A Resolution Directing the Senate Committee on Energy to Conduct an Inquiry in Aid of Legislation on the Issues Surrounding Service Contract 38 or the Malampaya Deep Water Gas-toPower Project, and its Compliance with Presidential Decree No. 87 otherwise known as the Oil Exploration and Development Act of 1972, with the end in view of Safeguarding the Country's Energy Security.

20 Entitled A Resolution Directing the Senate Committee on Energy to Conduct an Inquiry in Aid of Legislation on the Plans and Programs of the Department of Energy in light of the Impending Expiration of Petroleum Service Contract No. 38 or the Malampaya Deep Water Gas-to-Power Project to Ensure Continuous Energy Supply in the Country.

21 Entitled Resolution Calling for the Senate Committee on Energy to Conduct an Inquiry into the Propriety of Allowing a Single Private Entity to Control Almost All of the Nation's Strategic Fossil Energy Assets in the West Philippine Sea.

22 Transcripts of Stenographic Notes (TSNs) for hearings conducted by the Senate Committee on Energy on 10 November 2020, 14 July 2021, 28 September 2021, and 15 December 2021.

23 DOE submission on 14 July 2021 with the following file name: Annex A - Memorandum to the Secretary. Annex N. LS Memo - further Evaluation of the Transfer.

24 DOE submission on 14 July 2021 with the following file name: Annex A - Memorandum to the Secretary.

25 With the subject "Transfer of Participating of Chevron Malampaya LLC to UC Malampaya PPL under Service Contract No. 38". Reference: DOE submission on 27 May 2021 with the following file name: Document G. DOE Letter to SPEX.

26 The Assignment provides the following: "CHEVRON PHILIPPINES LTD., an exempted company limited by shares registered in Bermuda ("Assignor"), and UC MALAMPAYA PHILIPPINES PTE. LTD., a company incorporated in Singapore ("Assignee")."

27 DOE submission on 14 July 2021 with the following file name: Annex A - Memorandum to the Secretary. Annex T-CERCD Memo-Recommendation of the Financial Capability of UC 38.

28 Based on 2 February 2021 Memorandum of CERCD and the statement made by Secretary Cusi during the 15 December 2021 Senate Committee on Energy hearing that UC Malampaya has no money and had a deficit. Reference: Pages 119-121, TSN, Committee on Energy Hearing dated 15 December 2021.

29 2 February 2021 Memorandum of CERD for ERDB.

30 19 November 2021 Memorandum of PRDD for ERDB.

31 DOE submission on 14 July 2021 with the following file name: Annex A - Memorandum to the Secretary. Annex M. Technical Evaluation-Approval of the Transfer

32 19 Nov 2020. November 2021 Memorandum of LS for ERDB.

33 Section 3(j) of RA 3019 states:
Section 3. Corrupt practices of public officers. In addition to acts or omissions of public officers already penalized by existing law, the following shall constitute corrupt practices of any public officer and are hereby declared to be unlawful: XXX(j) Knowingly approving or granting any license, permit, privilege or benefit in favor of any person not qualified for or not legally entitled to such license, permit, privilege or advantage, or of a mere representative or dummy of one who is not so qualified or entitled. (Emphasis supplied)

34 Usec. Marcos, OIC Usec. Uy, Asec Pulido, Asec Erguiza, Director Dela Fuente Director Tenazas, Director Soluta, OIC Assistant Director Ansay, Chief delos Santos, Chief Cerdeña, and Mr. Antiporda

35 Section 3(e) of RA 3019 states:
Section 3. Corrupt practices of public officers. In addition to acts or omissions of public officers already penalized by existing law, the following shall constitute corrupt practices of any public officer and are hereby declared to be unlawful: XXX(e) Causing any undue injury to any party, including the Government, or giving any private party any unwarranted benefits, advantage or preference in the discharge of his official administrative or judicial functions through manifest partiality, evident bad faith or gross inexcusable negligence. This provision shall apply to officers and employees of offices or government corporations charged with the grant of licenses or permits or other concessions. (Emphasis supplied)

36 Usec. Marcos, OIC Usec. Uy, Asec Pulido, Asec Erguiza, Director Dela Fuente, Director Tenazas, Director Soluta, OIC Assistant Director Ansay, Chief delos Santos, Chief Cerdeña, and Mr. Antiporda

37 Usec. Marcos, OIC Usec. Uy, Asec. Pulido, and Asec. Erguiza.

38 Director Dela Fuente, Director Tenazas, Director Soluta, OIC Assistant Director Ansay, Chief delos Santos, Chief Cerdeña, and Mr. Antiporda,

News Latest News Feed