Industry Trend Analysis - Improving Bilateral Ties Enhances Upstream Outlook - NOV 2017

BMI View: Locating new crude oil and natural gas sources continues to be of paramount importance for the Philippines as output from its sole producing Malampaya field rapidly declines. Improving bilateral ties with China increases the prospect for a joint-exploration in the potentially resource-rich South China Sea, and offer upside to our long-term oil and gas production forecasts.

Finding new oil and gas sources remains crucial for the Philippines as its sole producing Malampaya gas and condensates field enters the end of its production cycle. With no new significant projects in the pipeline, the Philippines' need to explore for additional oil and gas is clear. However, exploration in its most prospective petroleum blocks, especially those in the South China Sea (West Philippine Sea) has achieved limited progress to date, due to ongoing maritime disputes with China.

Malampaya Decline To Drive Output Downfall
Philippines - Crude Oil & Natural Gas Production
f = BMI forecast. Source: JODI, BMI

However, we believe improving bilateral ties between the two countries increases the chances of a joint-exploration in the disputed waters. This view is informed by our Country Risk team that notes greater scope for cooperation between Manila and Beijing, thanks to President Rodrigo Duterte's more conciliatory approach towards China and the former's growing need for energy.

Despite the clear asymmetry in military power between the two countries, Manila will want to avoid appearing beholden or subservient to Beijing. Thus, any joint-exploration activities will need to be a win-win for both; projecting an image of co-operation will be key to persuading sceptics and the general public.

The Philippines has repeatedly stated its openness to joint-ventures in the area with foreign entities, provided that such activities comply with the Constitution of the Philippines. The Constitution states that the exploration, development and utilisation of its 'marine wealth' must be reserved for exclusive use and enjoyment by Filipino citizens. A breakthrough in the longstanding maritime stalemate could allow the likes of PXP Energy Corporation to resume drilling in Service Contract 72, which holds the Sampaguita gas discovery. Discovered in 2011, it could hold up to 4.6trn cubic feet of natural gas and 115.0mn bbls of crude oil.

Better Bilateral Ties Improves Outlook For Latest license Round

This in turn, improves our outlook on the Philippines' upcoming oil and gas licensing round. The Ministry of Energy is planning to hold the sixth edition of the Philippine Energy Contracting Round (PECR 6) in December 2017. The round will include blocks in the disputed South China Sea, along with offshore blocks in the Sulu Sea, Palawan and those that did not receive offers under the previous licensing round.

Although access to the Philippines' fast-growing consumer market may appeal to potential investors, the success of the licensing round will hinge on whether the country is able to diffuse geopolitical risks in the area. This is especially important with low oil prices weighing on firms' appetite for high-risk, frontier exploration. These same risks have previously restricted interest in PECR 5, which only attracted three bids for the 11 oil and gas blocks that were offered.