Philippine Resources Mining, Petroleum & Energy Journal Issue 2 2011, May-July
Chinese bending the ‘small miner’ rules
Is Philippine mining still competitive?
Go-ahead for BHP farm-in with Otto
Where does Fukushima leave RE?
Debut for Philippine Mining Club
Current Resources May - July 2011 www.philippine-resources.com
Headlines in this issue
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Resources Viewpoint
Mineral Resources
6 8 18 20 20 21 22 22 23 24 24 24
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Gina Lopez vs Mining Inc.
The China factor: Bending the ‘small-scale’ mining rules Philex, Manila Mining, Lepanto team up Milestones targeted for King-King Cascade acquiring Nalesbitan project Taysan getting its own port MBMI fighting for canceled permits Atlas to reopen Berong Nickel operation Philippine Metals blocked at Dilong Mining people on the move Cadan excited about Comval Davao deal for MRC allied
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Oil and Gas Resources
Supply Resources
International Resources
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Resources Events
Successful debut for new mining club
40 40 42
Renewable Resources
Legal Resources
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Ayala widens its renewable energy focus New venture targets small rural biomass plants Oil firm eyeing biomass power Where does Fukushima leave RE? Is Philippine mining still competitive?
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After spudding Gindara, Nido now eyes Pawikan Trans-Asia in China deal Philex sees new revenue in oil Go-ahead for BHP farm-in with Otto New permits promised – plus security PNOC doing very well out of Malampaya Environmental solutions specialists restructure ownership, operations Integration and new people for QED Supply specialist ‘excited about growth’ Regulation of offshore oil rigs is still only a ‘work in progress’
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Resources Viewpoint May - July 2011 www.philippine-resources.com
Gina Lopez vs Mining Inc. Philippine Resources Mining, Petroleum & Energy Journal Issue 2 2011, May-July
Philippine Resources Journal is published independently for executives in the Philippine mining and petroleum industry and associated business sectors. Publisher Elizabeth Galura Charismatic (WA) Pty Limited Consulting Publisher Greg Brimble Consulting Editor Simon Halley Advertising Sales Cora A. Laureano Design/Production Edrick Bruel Contributors Mars Buan Patricia A.O. Bunye Fernando Penarroyo ___ Manila publishing office Paseo de Roxas Bldg, 3rd Floor 111 Paseo de Roxas Legaspi Village Makati, Metro Manila Philippines Phone +632 815 8836 ___ Individual contacts Greg Brimble greg@philippine-resources.com Australia: +614 172 20759 Manila: +63949 338 3664 Simon Halley edit@philippine-resources.com Phone +63917 833 1656 Cora Laureano resources.ads@myPH.com.ph +63928 251 7280 Edrick Bruel luovoolagallina@gmail.com Phone +63905 2684656 ___ Philippine Resources Journal is printed in Manila by IPrint. Digital online edition www.Philippine-Resources.com
6 Philippine Resources
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he coming weeks promise to be interesting for both miners and antiminers. There are threatened new royalties and other fees which are awaiting President Ninoy Aquino’s finalization and signature as an Executive Order, and the widening network of provincial governments who have unilaterally imposed bans or tight restrictions on mining, particularly open pit mining, within their turfs. Now we have the escalation of the case Gina Lopez vs Mining Inc. Lopez is trying to elevate her case to the “People’s Court,” so to speak, with her 10 Million Signatures campaign. As of mid-May, she had about 1.1 million signatures after several months of campaigning, which is still a long way short of the 10 million she needs to block mining in Palawan. But she is a feisty prosecutor and not one to give up easily. After canvassing the social networking catchment area with her pass-on email campaign, Lopez is now going the face-to-face campaign route, crisscrossing the country meeting people affecting by mining. She is organizing discussions and forums trying to swing public opinion. She has been mobilizing the substantial Lopez resources in TV and media to generate favorable publicity for her antimining cause. There was that aborted attempt at a panel discussion “forum” on mining in Palawan to be broadcast live on Lopez-controlled ABS-CBN TV – aborted by Lopez at the last minute when she arrived at the studio to find her fellow panelists would be Leo Jasareno of the Mining and Geosciences Bureau and Carlo Arcillo of the University of the Philippines National Institute of Geological Sciences – two real experts on mining who may not have lent their expertise to Lopez’s cause. Undeterred, Lopez has followed up with more meetings, seminars and forums. In the meantime, she has learned from experience, garnered more knowledge of the subject and fine-tuned her prosecution arguments. She now focuses specifically on largescale mining in Palawan and limits her anti-mining arguments to those involving the effects of deforestation on biodiversity, the economics of mining compared to other sectors, and its effects on food security. Some of her
arguments and her evidence are persuasive. Lopez is intelligent, can be charming, she is persuasive and she has considerable resources to call on. She is a driven lady who has done good work for good causes through the ABS-CBN Foundation, including trying to clean up Manila’s Pasig River. She appears to thrive on difficult causes. I enjoyed the opportunity recently of hearing and watching her in action at a “forum” on “Mining: Its adverse effects on biodiversity, economy and food security” held at the Asian Institute of Management Center for Development Management in Makati. It wasn’t really a forum, more a presentation by Lopez with very limited participation allowed by her audience members. Although it was open to all interested, the event was sparsely attended by AIM people and a handful of miners. A couple of them – one an Australian miner and the other from one of the Palawan mines she criticized – questioned aspects of her presentation. She reacted very sharply and emotionally, in fact almost lost her temper in her rebuttal. Gina Lopez clearly does not like being queried and is used to getting her way. Interestingly, the Chamber of Mines of the Philippines – the bastion of Miners Inc. – was not officially present, in contrast to its strong presence at Lopez’s previous presentation a few weeks earlier where there were 30-40 chamber members. According to the AIM associate dean who moderated the event, the chamber did ask to attend to make its rebuttal, then declined an invitation to attend if the forum was switched to a debate format. Now the chamber is making its case at a subsequent separate forum at the AIM, to be followed by a full-scale debate between the pro- and anti-mining factions planned for the third week of June. That may be one of the “People’s Court” opportunities that the chief prosecutor is waiting for in the case Gina Lopez vs Mining Inc. ■
Simon Halley Consulting Editor
Mineral Resources May - July 2011 www.philippine-resources.com
The China factor: Bending the ‘small-scale’ mining rules An investigative report by Philippine Strategies & Assessments
C
hina continues to scan the globe for the minerals needed to fuel its dramatic economic growth and most believe the country will only become more aggressive in its pursuit of mining deals. Due largely to the Philippines’ proximity to the mainland as well as its estimated US$1 trillion in untapped mineral reserves, there has been an observable spike in Chinese mining investments across the country. The incursion of Chinese mining firms in the mineral-rich Philippines thus presents significant challenges for a government trying desperately to attract foreign investment. While few are surprised over the assertiveness and penetration of Chinese mining investors, there is substantial evidence of unaccountability, misconduct and corruption in many Chinese mining deals which have created an unfair playing field. Specifically, Chinese firms continue to exploit and abuse the People’s SmallScale Mining Act of 1991 by hiding under the cover of domestic small-scale miners, so to bypass Philippine mining laws and protocols as well as avoid the large capital requirements, fees and taxes associated with large-scale mining. Very simply, many Chinese firms circumvent the enormous expense and time of complying with largescale mining requirements by co-opting a
Philippine proxy and purchasing a smallscale mining permit directly from local government units for a minimal fee that can be US$227 or less. Environmental permits can be purchased similarly at the provincial level for US$340. The sheer amount of minerals being exported from the Philippines to China is further evidence of this exploitation and abuse. Indeed, while small-scale mining regulations restrict certain methods and equipment used in large-scale mining and place caps on the amount of ore extracted from designated small-scale sites, there is substantial evidence that Chinese firms commonly use explosives and heavy equipment and drastically exceed the extracted mineral volumes permitted by law. Small-scale mining regulations in the Philippines are designed for small local mining operations using small crushers, hand picks and shovels incapable of achieving the economies of scale required to meet China’s gargantuan mineral needs. The Philippines is already the largest provider of nickel ore imported into China and few experts believe this volume of nickel ore could be achieved by legitimate small scale mining operations. These activities can also lead to major environmental degradation as Chinese firms rarely acknowledge or enforce global environmental protection standards. Chinese mining firms are also exploiting corruptible local politicians, which
Small-scale mining regulations are designed for small local mining operations using hand picks, shovels and small crushers incapable of achieving the economies of scale required to meet China’s gargantuan mineral needs. 8 Philippine Resources
commonly results in illegal exportation and misdeclaration of minerals. Indeed, Chinese firms offering the right price and with the right local connections in place are able to avoid paying essential taxes and operate with utter disregard for mining tax provisions. The local governments justify these deals by contending that little or none of the tax and permit revenue paid by large Western mining firms to the national government is ever remitted to local government units in violation of the law. The massive export smuggling of minerals to China results in major tax losses to the cash-strapped Philippine treasury. In 2008, the government Department of Environment and Natural Resources disclosed that an estimated three million metric tons of Philippines mineral ores processed in China were unaccounted for by the Philippines, which deprived the national and local governments of billions of pesos in tax revenues. The reality is Chinese mining firms are not playing by the same business ethics, rules, and practices which Western mining firms are expected to follow, nor is the Philippine government holding China to the same benchmarks chiseled into law and applied to Western firms. At the same time, and largely due to local protection, the Catholic Church, environmentalists and other activists choose to direct little ire at Chinese mining practices in the Philippines. The dynamics do not bode well for a sector already damaged by shortsightedness, local government rapaciousness and overall inconsistent policies. There is no denying that China has become one of the world’s most aggressive mineral buyers and consumers as the country continues to forge mining deals globally. Reportedly, China closes approximately 75 percent of the large-scale mineral deals it pursues each year. Global industry statistics show that China accounted for 33 percent of the total value of all cross-border mining mergers and acquisitions in 2009, up from just 7.4 percent in 2007 and less than one percent in 2004. In 2010, Chinese firms participated in Continued on page 10 >
Mineral Resources May - July 2011 www.philippine-resources.com
China one of worst safety violators < Continued from page 8 $12 billion worth of mining deals and accounted for 10.6 percent of the mining deals across the globe which totaled $113 billion. Unsurprisingly, China has become the world’s largest consumer of copper, second in aluminum, third in nickel and fourth in gold. China is also among the world’s top consumers of tin, zinc, petroleum, steel and iron ore. The country’s consumption patterns show no sign of abatement. PricewaterhouseCoopers released a report in March this year projecting China to be more aggressive in its foreign mining investment in 2011. China Iron and Steel Association vice chairman Luo Bingsheng confirmed this at a recent industry conference, saying China aims to derive 40 percent of its ore imports from overseas investment by 2015. With China’s seemingly insatiable hunger for metals and minerals, the nation is expected to invest approximately US$100 billion in overseas mines per year through 2014. Bank of China International, the investment arm of the state-owned Bank of China, attributes China’s foreign investment success to more creative business strategies and deals. At the same time, China is often cited as among the world’s worst violators of occupational health and safety standards in mining, amidst regular instances of worker deaths across Chinese mine sites. In fact, Chinese mines are now considered the most dangerous in the world. Recent figures show that accidents in Chinese mines killed 2,631 people, compared to just 34 mine site deaths in the United States, in 2009. China’s acquisition of a large stake in Africa’s mining industry exacerbated China’s negative global reputation for low safety standards, corruption, illicit practices, and environmental degradation, resulting in community-based protests in several Chinese mine sites across Africa and other parts of the developing world. China has targeted mine sites in the Philippines to help guarantee its stock of mineral resources. With the Philippines’ estimated $1 trillion worth of unexplored copper, gold, nickel and zinc reserves and located relatively close to the mainland, there is little surprise that China would look to the Philippines to meet its mineral 10 Philippine Resources
needs. For the Philippines, Chinese money has been a welcome respite for a deteriorating mining industry impacted by fleeing Western mining giants and frozen projects. Zijin Mining Group Company, one of China’s largest gold producers, has signed a deal with the Philippine government to invest $1 billion in gold and cooper exploration in the Philippines over the next five years. Other recent major Chinese mining deals include Wei-Wei Group’s $100 million nickel processing plant in Masinloc, Zambales province, and Jiangxi Rare Earth and Rare Metals Tungsten Group Company’s US$150 million nickel exploration and cobalt processing project in Botolan, also in Zambales province. Officials with the government’s Mines and Geosciences Bureau, MGB, have confirmed that there has been an observable spike in Chinese mining investments across
the Philippines. The investment comes in various forms. For example, the MGB admits that some Chinese investors are buying local companies with mines still in their early stages of development. Chinese companies are also increasingly partnering with other Chinese firms which want to invest in the same mine site, thus eliminating the competition and bringing more resources to bear to accelerate the project. While 100 percent foreign-owned companies are allowed to obtain mineral processing permits (MPPs), mineral exploration permits (MEPs) and financial technical assistance agreements (FTAAs), mineral production sharing agreements (MPSAs) must adhere to the constitutional requirement of 60-40 percent ownership in favor of a Filipino company. Juxtaposing the table above with MGB data, only two Chinese firms have MPPs, two have MEPs and five Continued on page 12 >
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Mineral Resources May - July 2011 www.philippine-resources.com
Chinese firms violate mining laws chromite mining operations of Cambayas Mining in Eastern Samar and the magnetite mining operations of Vincent Tan Tiong in Leyte. Both have their own MPSAs, but there are media reports that the Chinese firm Peng Cheng Metallic Farmers and fishermen complain that chemicals used at Resources is actunearby mines, especially at inadequately supervised operations, are poisoning their crops and killing their harvests. ally wholly operating the Cambayas < Continued from page 10 project, while Nicua Mining Corporation will reportedly soon operate Vincent Tan have MPSAs. No Chinese companies have Tiong’s project in Leyte. Small-scale mining takes place in FTAAs with the Philippine government. Industry sources both within and out- more than 30 provinces across the Philipside the Philippines contend there are more pines and many have begun to question Chinese mining investors in the Philippines the participation of Chinese firms in these than have been formally recognized by the activities. Indeed, MGB officials have also Philippine government via official permits confirmed that recent Chinese investments and licenses. In some cases, Chinese min- were mostly in small-scale mining, as oping firms operate under the names and posed to the large-scale mining operations licenses of their Filipino counterparts or of most Western mining firms in the counsubsidiaries. For instance, Oriental Synergy try. According to the People’s Small-Scale has its own MPSA in Surigao del Norte, but has also partnered with another Chinese Mining Act of 1991, small-scale mining refirm, Macao Quanta, in a separate MPSA fers to mining activities which rely heavily assigned to Filipino partner Minahang on manual labor, using simple implements Bayan ng Mamamayang ng Dinagat Island and methods. The use of explosive, heavy Cooperative. Jiangxi’s mining venture in or sophisticated equipment, such as drillZambales province is in cooperation with ing machines, payloaders and excavators, Filipino-owned Nihao Mineral Resources, is absolutely prohibited. A small-scale which in turn is operating under the MPSA mining contract can be obtained through of Mina Tierra Gracia. Nihao has appar- a Mineral Production Sharing Agreement ently bought 100 percent of Mina Tierra between the contractors and state for the small-scale utilization of a plot of mineral Gracia. The MGB asserts that permits are non- land at a maximum of 50,000 tons of ore. transferable, but large mining companies More importantly, small-scale miners refer have learned to co-opt domestic small-scale to Filipino citizens who, individually or in miners to serve as the official claimants. the company of other Filipino citizens, volMeanwhile, the better resourced Chinese untarily form a duly licensed local cooperafirm serves as the actual mine site operator. tive to engage in mining within the memIn other cases, a small-scale mining permit bers’ local community. Chinese firms reportedly engage in holder totally surrenders its site to a major mining company for a fixed fee. There are small-scale mining in order to circumvent allegations that a number of mining proj- circuitous Philippine mining laws, strinects, particularly small-scale mining proj- gent safety and environmental standards, ects, are being operated entirely by Chinese large capital and operating fund requirefirms in violation of Philippine mining laws ments, and the costly fees and taxes that and regulations. Two such examples are the come with large-scale mining in the Philip12 Philippine Resources
pines. Operating under a Filipino partner’s name or as a small-scale miner helps avoid the scrutiny of the country’s vigorous and media savvy anti-mining community that includes the influential Catholic Church, leftists groups, communist insurgents, indigenous peoples and foreign and local environmental NGOs, and even national and local politicians. Moreover, while on average it takes at least five to 10 years before the state grants a foreign mining firm the rights, via an official permit, to merely explore a designated large-scale mining area, permits for small-scale mining are easily obtained from a pro-mining local government unit for a mere 10,000 pesos. One local mayor admitted that there have been several cases in which small-scale miners bypass the mayor’s office and go directly to the local barangay (village) to obtain a mining permit. Consequently, there are cases of overlapping claims between large-scale mining companies with permits issued by the national government and small-scale miners whose permits were issued by the local government. Industry sources claim there is no shortage of anecdotal evidence to invalidate the small-scale claims of Chinese mining firms in the Philippines, suggesting instead that these firms are engaged in larger-scale projects. There is information that some Chinese mining firms operating in Zambales, the Zamboanga peninsula and Camarines Sur province are using heavy equipment and explosives to extract ore from the ground contrary to national mining laws. Particularly in Camarines Sur, authorities are investigating the death in February 2011 of a Chinese national at a mine site. Chinese national Chen Te Hao, an engineer for Chinese firm Prime Rock Mining, was killed after a huge boulder crushed his head during a clearing operation at the mine site. Prior to the accident, Prime Rock was accused of using explosives in its mine operations which is prohibited under smallscale mining laws. The local government of Camarines Sur issued Prime Rock a smallscale mining permit, but under the name of Benito Salandanan of Bicol Chromite. The MGB maintains that Prime Rock’s Continued on page 14 >
Mineral Resources May - July 2011 www.philippine-resources.com
Zambales pollution is killing crops < Continued from page 12 operations were illegal since the company did not obtain a permit directly from the government. Authorities are also allegedly investigating health and safety violations at the mine site. There are corresponding allegations that these small-scale miners go beyond the tonnage and land area limits of the law. Philippine Strategies & Assessments sources assert that in some cases smallscale miners haul off 50,000 tons of ore in one-month from a five-hectare area, after which they simply renew their small-scale mining permit issued by the local government. After the second renewal, the smallscale miner simply needs to show proof of active extraction in order to secure a longer-term permit. Indeed, these types of permit have apparently become a venue for larger firms which simply want to speed up mineral collection. With mining practices such as these, it is no surprise that operations leave the land scarred with ecological
Rescuers dig frantically searching for victims of the landslide which hit a mining area in Pantukan, Compostela Valley, in April. The tragedy is being blamed on the small-scale miners who operate in the area, usually without proper equipment and inadequate safety precautions.
Locals in Zambales province have complained of “blood-colored” water breaching riverbanks and inundating rice fields since mining began in the area, killing their crops. Stained water suggests that mining upstream is being carried out without the required safety engineering. 14 Philippine Resources
devastation. Chinese mining companies have a reputation for poor adherence to environment standards, especially with regard to small-scale mining projects. There have been reports of fast-rising floods during heavy rains, landslides, poisoned water bodies, soil erosion, deforestation and even a decline in farm output in areas where there has been a surge in questionable small-scale mining projects in the Philippines. Locals in Zambales province, where the Chinese firms Wei-Wei, Jiangxi and Nihao operate more than three small-scale mines, have complained of “blood-colored” water breaching riverbanks and inundating rice fields since mining began in the area. They claim that once the contaminated water reached their crops, no grains are produced. Stained water suggests that mining upstream is being carried out without the required safety engineering. Locals also accuse mining firms of denuding their forests and operating in watersheds, adding that some of those supposed small-scale miners even bulldozed their way through government restricted community forest management areas. In another instance, one mining firm reportedly leveled a portion of the hill for a road and disposed of boulders and dirt in the reservoir. In Eastern Samar, hundreds of residents raided Cambayas Mining Corporation, which is actually reportedly owned by Chinese mining firm Peng Cheng Metallic Resources. The farmers claimed the company was illegally operating on land awarded to them by the Department of Environment and Natural Resources through a certificate of stewardship agreement that is effective through 2017. The mining firm prevailed, and now runs extractive operations on 3,516.2 hectares involving chromite and other associated mineral deposits. Technically, all miners are required to secure a DENR clearance prior to operating a mine site. There are reports that in some provinces, however, small-scale miners can easily avail themselves of a provincial environmental clearance certificate for approximately 15,000 pesos. With just a handful of local staff at the DENR offices, rarely are applicant claims checked for compliance with mining rules and regulations. Compared to large-scale miners,
small-scale miners also tend to be isolated from one another and harder to locate. And because small-scale miners are granted as short as a one-month permit, it is very difficult for authorities to investigate and hold them accountable for any environmental damage. The DENR has admitted that the Philippine mining business is plagued with rampant undervaluation, misdeclaration and illegal exportation of minerals from the Philippines to China. Department officials acknowledge that large-scale operators have been hiding under small-scale mining permits to skirt paying their full tax obligations. In 2008, DENR disclosed that an estimated three million metric tons of mineral ores processed in China were unaccounted for by the Philippines which deprived the national and local governments of billions of pesos in tax revenues. Furthermore, with the huge amount of Philippine mineral exports going to China, there are valid concerns that Chinese firms are increasingly setting the price trends in the sale of minerals in the country. Philippine exports to China posted a 94.32 percent increase from 2009 to 2010 to reach $5.7 billion. Foreign trade statistics for 2010 also show that China has become the Philippines’ fourth largest export market, accounting for 11.09 percent of the country’s total exports. The surge was largely attributed to China’s increasing demand for minerals and metals such as iron ore, copper and nickel, from the Philippines. Notably, while approximately 65-70 percent of Philippine exports to China are typically electronic products, refined copper, cooper concentrates and various metal components account for 10-11 percent of the total exports. Mineral import-export data from the China’s General Administration of Customs show that in 2010 China imported a total of 12,338,221 metric tons of nickel ore from the Philippines, making the country its top source of nickel ore. The figure represented a 41.5 percent increase from 2009. Philippine exports of copper ore and concentrate to China also surged by 99.22 percent to 244,186 metric tons in 2010, making the Philippines its 7th leading source of copper ore and concentrate. The Philippines is Continued on page 16 >
Mineral Resources May - July 2011 www.philippine-resources.com
Officials are helping with permits < Continued from page 14 also one of China’s top ten source countries for refined cooper, exporting 69,398 metric tons in 2010, and a major source for scrap copper with 33,028 metric tons. There are now Filipino mining companies, such as Nihao Mineral Resources, which make no secret of their goal to export all of their mined metals and minerals to China. Nihao, backed by its major Chinese partners, has become one of the country’s top mining firms. At the end of 2010, the company was operating in five provinces – North Cotabato, Antique, Misamis Oriental, Isabela and Zambales. Its operations cover 20,841 hectares. Its main buyers are trading companies and smelter operations in China. It also has long-term supply contracts through joint venture partnerships with Chinese nickel smelting and refining companies. Chinese mining investors are generally met with suspicion in the Philippines. Several botched deals with China and alleged corruption charges have plagued investment activity between the two countries in the past years. The most notorious example to date has been the ZTE national broadband network fiasco, which implicated both former Philippine president Gloria Arroyo and her husband. The $329 million deal was reportedly overpriced by $200 million with the excess funds allegedly diverted to serve Arroyo’s personal interests. The controversy resulted in the cancellation of other corruption-tainted projects with China. An insider from the contractor China National Machinery and Equipment Group asserted that the $150 million advance payment for the project served almost solely as a bribe to Filipino officials. The influx of Chinese mining firms in the mineral-rich Philippines thus presents a delicate challenge and balancing act for a government desperate for foreign investment. In the absence of any real responsibility to comply with anti-corruption laws similar to the United States Foreign Corrupt Practices Act, Chinese firms certainly have the opportunity to exploit a poorly governed and corruptible country such as the Philippines. Considering the regulatory implications and licensing requirements for conducting mining operations, corrupt 16 Philippine Resources
officials view the mining industry as an opportunity to advance special interests. Specifically, there are reports that local government officials and known political heavyweights with interests and investments in mining have helped Chinese firms win contracts and obtain permits. For example, former president Gloria Arroyo’s presence at the 2008 private contract-signing between Nihao Mineral Resources International-Geograce and the Chinese firm Jiangxi Rare Earth and Rare Metals Tungsten Group triggered speculation of another shady government deal. Further fueling rumors of illegal facilitation is the fact that Nihao’s chairman is Michael Defensor, former Philippine senator and cabinet secretary and one of Arroyo’s most trusted acolytes. Critics of the deal questioned how Defensor’s small company, which had no track record in mining at that time, could easily back multi-million mining deals with a big foreign mining firm. Arroyo’s connections to Nihao and Geograce do not stop there. Nihao president Jerry Angping is the brother of Arroyo-appointed Philippines Special Envoy to China for Trade and Investments Harry Angping, while Geograce chairman Renato Puno is the brother of former interior secretary Ronaldo Puno. Both Puno and Angping are also well-known Arroyo allies. Even the most basic analysis of how Nihao and Geograce reached their current standing in the Philippines mining industry suggests impropriety.
Local officials admit there is indeed a tendency to dodge non-compliance or even infractions of small-scale miners, especially if local government chief executives are pro-mining in general. This has resulted in abusive mining practices whereby mine firms offering the right price and with the right connections are able to operate with utter disregard for Philippine mining, labor and environmental laws and regulations. In other cases, pro-mining local politicians brazenly enact local mining policies and regulations that directly contradict national mining laws. Former Zambales governor Amor Deloso, criticized for wanton issuance of small-scale mining permits in Zambales during his term, argued that nobody could stop a governor from giving a special permit in any line of business. Deloso said mining was akin to a battleground between big and small interests as well as national against local officials. Local governments tend to favor applicants for small-scale mining, in which it exercises influence and authority, and whose fee permits are remitted to the local government coffers, over large-scale mining which is directly contracted and supervised by the national authorities. Corruption and the manipulation of the laws has rendered agencies such as the DENR inutile, with provincial mining and regulatory bodies becoming rubber stamp institutions of local politicians in cahoots with unscrupulous mining companies. ■
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Mineral Resources May - July 2011 www.philippine-resources.com
Philex, Manila Mining, Lepanto team up
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hilex Mining is acquiring 60 percent of a copper and gold exploration project in Mindanao through a joint venture deal with Manila Mining that involves Lepanto Consolidated Mining. In separate disclosures to the Philippine Stock Exchange, Philex and Manila Mining confirmed they have agreed to explore and jointly develop the Kalayaan copper and gold project in Placer, Surigao del Norte. The project is covered by an exploration permit issued to Manila Mining’s unit Kalayaan Copper Gold Resources. Philex has bought 125,000 shares of Kalayaan Copper for US$25 million, representing a five percent interest in the project. It will get an additional 55 percent interest in Kalayaan when it pays for all pre-development expenses, including a final feasibility study. The 280-hectare Kalayaan property (also known as Bayugo) has already been drilled by Anglo American and is contiguous to the Boyongan property which Philex has already drilled. In early May, Philex, which partly owned by the Hong Kong-based First Pacific group, acquired a five percent interest in Lepanto for 1.43 billion pesos, giving it an indirect interest in the Far Southeast Gold Project in the northern province of Benguet, where Lepanto has a 40 percent stake. Lepanto in turn has a 20 percent interest in Manila Mining. • Financially, meanwhile, 2011 looks
like it will be a good year for Philex. After healthy first-quarter results, the company “is on its way potentially to generating record earnings for the year,” forecast Philex chairman Manuel V. Pangilinan. Its net income for the first quarter of the year rose 151 percent to 1.31 billion pesos from 521.3 million pesos in the same 2010 quarter. First quarter core net income reached 1.33 billion pesos, up 156 percent from 520.1 million pesos a year earlier. Pangilinan attributed the boost to higher price levels and metal output as well as improved grades from its Padcal mine. Gold revenue rose 88 percent to 2.1 billion pesos from 1.11 billion pesos. Copper revenue improved by 31 percent to 1.65 billion pesos from 1.26 billion pesos. Gold accounted for 54 percent of total revenue, with copper accounting for 43 percent with the balance of three percent coming from silver, petroleum and coal. Realized prices for the company’s metal production output last quarter averaged US$1,315 per ounce for gold and $4.13 per pound for copper, compared with $1,003 per ounce and $3.37 per pound respectively a year ago. In the northern Philippines, the high metal prices are encouraging Philex to extend by another three years operations at its Padcal copper-gold mine in Tuba, Benguet. “Seven years ago, Padcal’s mine life was only until 2011, but it was extended
Manila Mining’s Kalayaan property has already been drilled by Anglo American and is contiguous to the Boyongan property which Philex has itself already drilled. 18 Philippine Resources
until 2014 in 2007. This was further extended to 2017, and now we’re looking at possibly extending Padcal operations until 2020,” explained Philex president Jose Ernesto Villaluna. The investment budget for this extension program would be between 700 million pesos and one billion pesos, most of which is earmarked for waste handling. Philex is also heading for the operation of its 100 percent owned Silangan project in northern Surigao in 2016, with a target of starting the development program there by the end of 2012. Company estimates put the potential of Silangan at least equal to and probably greater than to the existing Padcal. Forecasts for Silangan are about 30,000 tons a day of ore with target annual production in the range of 107 million pounds of copper and 165,000 ounces of gold for the next 20 years. Capital expenditure for the development phase of the project would be in the range of $600 million to $800 million. • Lepanto Consolidated Mining has posted a net income of 29 million pesos in the first quarter of 2011, which it attributes to high gold prices and improved output from its Victoria mine in Benguet. This is a turnaround from a net loss of 110.9 million pesos reported for the same 2010 period last year. The company produced 7,000 ounces of gold and 12,000 ounces of silver in the first quarter of 2011, compared to 6,176 ounces of gold and 10,278 ounces of silver. For full year 2011, Lepanto now expects to produce 25,000 ounces of gold. This should translate into net income of 100 million pesos compared to a loss of 21 million pesos a year ago, forecasts company president and chief operating officer Bryan U. Yap. Upcoming expansion by Lepanto centers on production for the next two years on the upper levels of the Victoria ore body, which has given better gold grades than the lower levels. The mine has remaining gold reserves of about 400,000 ounces. Yap said Lepanto is prepared to spend 700 million pesos on mine development and other capital expenditure for 2011 using proceeds from its stock rights offering and operating revenue. ■
Mineral Resources May - July 2011 www.philippine-resources.com
Milestones targeted for King-King
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ey upcoming milestones targeted for the King-King copper and gold mine project in Mindanao have been set by its developer, St Augustine Gold and Copper. King-King, currently in its feasibility stage of development, is already shaping up as one of the world’s largest undeveloped, advanced stage copper-gold deposits. The specific stages programmed for the coming 12 months include the preliminary economic assessment earmarked for the 2011 third quarter, application for declaration of mine project feasibility in the 2012 first quarter, application for environmental compliance certificate in the 2012 first quarter, and completion of feasibility study in the 2012 second quarter. The important feasibility study has already been a work in progress for about five months, worked on by a team including M3 Engineering and Technology of Tucson, AMEC Engineering of Australia, Independent Mining Consultants of Tucson and AATA International
of Denver. United States-headquartered St Augustine has an exclusive 60 percent earn-in option for the King-king project, which is a goldrich, copper-gold porphyry deposit located about 92 kilometers northwest of Davao City. King-King has a measured and indicated copper-gold resource of 791.5 Mt at 0.28 percent copper and 0.37 g/t gold. The current plan is to mine 100,000 tonnes of ore per day by open pit methods and process it through concentration by flotation producing copper concentrate
containing gold for outside smelting. The mine life is projected to be 22 years. ■
Cascade acquiring Nalesbitan project
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he Nalesbitan gold-copper project in Camarines Norte, Bicol, is being acquired by Cascade Resources. The deal involves an initial 80 percent interest with an option on the remaining 20 percent, and 100 percent of the ore processing arrangements. The Nalesbitan project combines a shallow epithermal gold deposit with a large copper-gold porphyry target at depth. The gold deposit has a welldefined core of measured, indicated and inferred resources, combined with numerous advanced exploration targets nearby. The related copper-gold porphyry mineralization at depth is at an earlier stage, but Cascade believes it provides an “attractive bulk-tonnage target.” Under the terms of the deal, Vancouver-listed Cascade acquires an 80 percent interest by funding C$1 million of development capital and issuing C$5 million in new shares. Cascade has an option to acquire the remaining 20 percent interest by
20 Philippine Resources
spending C$2 million in direct project costs within three years; as well obtaining an independent estimate of the project’s net present value and issuing shares at the then market price equivalent to 20 percent of this value subject to a minimum value of C$5 million. Upon closing, Timothy E. Collver will be appointed president and chief operating officer of the company. Collver has 33 years of professional experience in the natural resource and banking industries in North America, Australia and the South-east Asian and Pacific region both as a geologist and investment banker and advisor. The Nalesbitan property encompasses 14 mining claims that cover 1,134 hectares in all. Its main features are a surface epithermal gold system that has been mined previously and an associated, deeper copper-gold porphyry target. The Cascade acquisition comes after completion of mineral resource studies by Simon Gatehouse of Hell-
man & Schofield and Crystal Sun Consulting. Cascade Resources president Peter Russell-Jones said the Nalesbitan project is at an accelerated stage with clearly defined advancement milestones identified. Increasing the quantity of gold resources will be an early task. The discovery of a large porphyry copper-gold system, which is postulated by a number of leading international geologists and indicated by geophysical surveys to underlay the project, is also an obvious goal. “By acquiring this project, Cascade also obtains an experienced management team that is well equipped to rapidly achieve the advancement milestones. This is a technically robust and world class exploration project, with substantial upside potential on a number of fronts, and we look forward to working with the Philippine management team to greatly enhance its potential and value,” Russell-Jones said. ■
Mineral Resources May - July 2011 www.philippine-resources.com
Taysan getting its own port C razy Horse Resources, which is developing the Taysan copper gold project in Batangas, has finalized the purchase of a full-scale port facility nearby. The company is buying the 16-hectare port terminal next to the Shell Malampaya onshore gas plant for 600 million pesos. The facility comprises a 6m x 147m T-pier with two dolphins, licensed foreshore lease, administrative buildings, security fencing and site services including power and water. Access from Crazy Horse’s Taysan project is via a 20 kilometer paved road. According to Crazy Horse president Johan Raadsma, its advantages are that it is “well positioned near a substantial gas supply for power requirements, with existing port facilities to ship the Taysan copper/gold/
silver concentrate as well as magnetite product and ample room for construction and operating logistics.” Under the port sale and purchase agreement, Crazy Horse has already paid 150 million pesos of the purchase price with the balance of 450 million payable by October 27, 2012 deferrable for six months at an interest rate of 8 percent on any balance. At Taysan, the company has completed a SEDAR filing of a technical report on the mineral resource estimate and preliminary economic assessment of the project. The 18-months combined pre-feasibility and bankable feasibility study has commenced and is ahead of schedule. The preliminary economic assessment managed by AMEC Minproc of Australia indicates the Taysan Project
has a net present value at a 10 percent discount rate of US$526 million for the base case of US$3/lb copper and US$1,000/oz gold – not including any credit for silver or magnetite. The project is estimated to produce payable 3,100 Mlb copper and 1.5 M oz gold over the 24-year mine life. Annual average production for years 1-4 is estimated at 173 Mlb copper and 79,400 oz gold. Average annual payable production over the life of mine is 129 Mlb copper and 62,000 oz gold. The current capital cost estimate of US$1.01 billion is slightly higher than originally estimated $914 million, which the company attributes to an aggressive pre-strip plan, additional mining fleet and a general increase in cost of materials. ■
Philippine Resources 21
Mineral Resources May - July 2011 www.philippine-resources.com
MBMI fighting for canceled permits
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BMI Resources is to “vigorously fight” the recent cancellation of mining Financial and Technical Assistance Agreements issued a year ago to the company and its affiliates for projects in Palawan. MBMI’s legal team in the Philippines was notified by the Office of the President about the cancellation of the FTAAs just on a year after the permits were signed in April 2010 by the authority of the President. They were then registered with the Department of Environment and Natural Resources on May 31, 2010, and formally issued on June 2, 2010, to affiliates of MBMI – Narra Nickel Mining & Development, Tesoro Mining and Development and McArthur Nickel Mining. MBMI notes that “this decision is in connection with a case filed by Redmont Consolidated Mines” which apparently questioned the basis for the granting of the FTAAs. Following the cancellation, MBMI quickly issued an announcement that, on advice of its legal counsel, it believes that the decision is not in accordance with legal actions of a similar nature previously settled by the Supreme Court of the Philippines. A company announcement said MBMI has instructed its legal counsel to immediately file a Motion for Reconsideration with the Office of the President. “The company will also file immediate actions with the appropriate courts seek-
ing to overturn the decision. MBMI will vigorously fight this decision and defend the company’s affiliates legally issued FTAAs,” it said. MBMI president and chief executive Michael T. Mason said the company has begun curtailing non-essential activities but “will continue activities that conform to Philippine law while defending its rights and legally issued permits.” The company operates the Rio Tuba nickel project in Palawan in partnership with Olympic Mines and Development. The FTAAs in question cover the Alpha, Bethlehem and Rio Tuba mining properties. FTAAs allow full foreign ownership of large-scale mining projects and are designed to attract investors to the capital intensive business. In this case, the company said, they allow MBMI and its partners “to progress toward development of full-scale operational programs at each property.” The cancellation of the FTAAs came shortly after MBMI announced that it had started a drilling program at its Alpha property in Palawan to confirm data needed to expand and define priority areas for continued mining. “This first phase of drilling is designed as an intensive and systematic exploration program to develop and confirm results to expand the independent mineral resource on Alpha,” Mason had said in a report on the drilling program. “In addition, the grade control drilling
Cancellation of MBMI’s FTAA permits may have been linked to legal issues, but Palawan’s hard-line environmentalists are seeing it as a victory in their battle against mining.
will provide the company and our partners with the required data to continue mining and development of this project.” Earlier exploration activities identified accessible high grade, exposed nickel and chrome zones within the 3,200hectare property. MBMI is focused on the exploration and development of nickel mineral properties and with its Philippine partners maintained FTAAs with the Philippine government with respect to the Alpha, Bethlehem and Rio Tuba properties. MBMI and its partners have interests in nine nickel laterite projects in the Philippines, covering a total area of over 22,000 hectares. The company aims to become a major supplier of high-grade nickel products to industrial customers in Asia. ■
Atlas to reopen Berong Nickel operation
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tlas Consolidated Mining and Development will go ahead with reopening of its subsidiary Berong Nickel mine in Palawan. Berong will fund the reopening with money it is raising from the sale of its existing nickel ore stockpile. “Berong will use the proceeds from the sale of the stockpile to provide working capital to support the resumption of operations at the Berong nickel mine,” Atlas said in a stock exchange disclosure. “The main aspects of the mining plan have already been determined by Atlas
22 Philippine Resources
and its joint venture partners.” Berong is a unit of London-based Toledo Mining. Atlas, Toledo’s local partner, has a 25 percent interest in the nickel project, which was put on care and maintenance in 2009 in the face of then depressed metal prices. The Berong nickel ore stockpile – about 150,000 wet metric tons with an average grade of 1.45 percent nickel – is being shipped to Shaanxi Energy Metals and Minerals Resources in China. Meanwhile, Atlas Consolidated has reported consolidated net income for the
2011 first quarter of 1.34 billion pesos, soaring 5.7 times the 233 million pesos it made in the same period last year. The company attributes the boost to the performance of its 54.46 percent owned subsidiary Carmen Copper, which in turn reported a first quarter net income of 1.37 billion pesos, nearly 5.3 times its net income during the same period last year. Carmen Copper reported how higher metal prices in the first quarter enabled the company to sell copper at an average US$9,190 per ton. ■
Mineral Resources May - July 2011 www.philippine-resources.com
Philippine Metals blocked at Dilong
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opper and gold specialist Philippine Metals is adopting a conciliatory approach in its bid to overturn the recent cancellation of its Exploration Permit Application at Dilong in Abra, northern Philippines. While asserting that its EPA “has not been cancelled legally,” the company is focusing its efforts to overturn the cancellation on winning the support of local communities in the area, as well as the government’s Mines and Geosciences Bureau. “Since the date of the local elections in Tubo, Abra last October, the company has accelerated its constructive efforts to work with the new local government and community leaders to gain their support for its Exploration Permit Application at Dilong,” Philippine Metals chief executive Feisal Somji said in a statement on the issue.
“Negotiations with the rightful indigenous peoples to acquire free and prior informed consent have been initiated and are progressing positively and consultation with the local government unit’s Sanggunian has been ongoing, both key aspects of the EPA process.” But Somji continued: “As a result of the Philippine government Mines and Geosciences Bureau’s ‘use it or lose it policy,’ which it has now taken steps to enforce, the company has recently received formal notification from the MGB that its Dilong EPA has been cancelled. The company believes that its permit has not been cancelled legally and it is currently in discussions with the MGB to resolve this matter and has filed with the MGB central office the appropriate objection notice, supported by documentation already filed with the MGB regional office
demonstrating that the company has been actively progressing its permit application and complying with all of the requirements set by the government, as described above. “In addition, the company notes that in its case, the MGB appears not to have observed its ‘three-letter-policy’ of notification in exacting compliance in respect of its Dilong EPA. Somji said Philippine Metals “will continue to engage with the MBG to rectify this situation and expects that its Dilong EPA will be reinstated in due course. The company is supportive of the MGB’s efforts to drive reform in the Philippines mining industry and will continue to engage with and support the government in its efforts to implement its reform program.” In addition to Dilong, Canadalisted Philippine Metals also has projects at Taurus and Malitao. ■
Philippine Resources 23
Mineral Resources May - July 2011 www.philippine-resources.com
Mining people on the move Charlent joins Toledo ierre Charlent has been appointed chief operating officer at Toledo Mining. Based in Manila, Charlent is responsible for managing the company’s assets in the Philippines effective June 1 and reports to chief executive officer Victor Kolesnikov. At Toledo, he takes over from Ken Stein who has returned to Australia for personal reasons. Charlent, aged 51, is a geologist and mining engineer with over 25 years of experience in the business including 14 years’ involvement with nickel laterite exploration, mine development and mining in New Caledonia. He joins Toledo from Austral Resources where he was managing director for five years. He is a member of the Australasian Institute of Mining & Metallurgy and a member of the Society of Economic Geologists in the United States. He is a competent person for reporting to the Joint Ore Reserves Committee standard. Charlent joins Toledo at a time when the joint venture partners of Berong Nickel are moving towards recommencing full-scale
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mining at Berong and Ipilan Nickel enters the final stages in the permitting process to develop the Ipilan deposit. TVI signs McKibben VI Pacific has named Joseph Paul McKibben as the company’s new head of exploration. He heads up TVI’s exploration team from the company’s Manila office. McKibben has over 40 years’ experience in mineral exploration in Australia, Southeast Asia, New Zealand, Fiji, Vanuatu, and Papua New Guinea. About 36 of those years have been spent in exploration in the Philippines, where he has lived about 27 years. His work has involved mainly the search for porphyry copper-gold and epithermal gold - mainly as regional exploration manager for RGC Exploration, the exploration subsidiary of Renison Goldfields Consolidated. In the Philippines, he was a consulting economic geologist, served as president of a Manilabased contract core drilling company, and worked on a nickel laterite project in
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Palawan and exploration of a copper-gold deposit in Luzon. Paul was a trustee of the Philippine Mineral Exploration Association for 10 years and currently serves as PMEA’s executive director in an honorary capacity. He is a 35-year member of the Geological Society of the Philippines. Pastorino VP at MBMI BMI Resources has appointed Frank Pastorino vice president operations. Pastorino, a graduate of the University of Louisville, has worked in senior administrative and operational positions with mining projects in the former Soviet Union and the Philippines. His responsibilities at MBMI now include the resolution of matters involving recent licensing issues as well oversight of strategic plans and implementation of corporate initiatives focusing on the transition from small scale exploration and development towards full scale and efficient mining and processing.id. ■
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Cadan excited about Comval
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adan Resources is “very excited” about its Comval copper-gold property in eastern Mindanao, following completion of resource definition drilling at its Tagpura porphyry skarn on the property. “The Comval property continues to deliver great exploration results,” said Cadan president and chief executive Robert Butchart. “The Tagpura porphyry located on the eastern portion of the property becomes more attractive with the continued gold and copper assays we are
receiving on the skarn.” The company will now increase drilling on the Tagpura porphyry and also follow up with a district-sized exploration strategy on Comval, Butchart said. The drilling program is within the zone where a potential tonnage of 10 to 15 million tonnes has been reported. Completion of this program, together with previous drilling and open pit bench sampling, provide a data base of sufficient density to allow the upgrading of the potential tonnage to that of a measured resource, he said.
Davao deal for MRC allied
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RC Allied has acquired its fourth gold and copper project. The Manila-listed firm told the stock exchange it has signed a mining operations agreement with Alberto Mining and Pensons Mining, which own the rights to the 9,720-hectare Boston-Cateel property in Davao Oriental, for a price tag of 620 million pesos. MRC Allied, which is owned by a group led by businessmen Benjamin Bi24 Philippine Resources
tanga and Lucio Tan Jr, already has mine projects in Sultan Kudarat, Davao del Sur and Surigao del Sur. In the new contract, MRC Allied has agreed to undertake the exploration and development of Boston-Cateel. MRC aims to raise 1.5 billion pesos via private placement and also plans to undertake an initial public offering for subsidiary MRC Tampakan Mines late this year. ■
Cadan currently has two properties in Mindanao – its 9,000 hectare Comval property as well as the T’Boli gold and silver mine currently in final development of small-scale production. At T’boli, underground development continues with the North Vein A Lode structure having been intersected in the advancing decline. Mapping and sampling have defined a vein width of 10 meters, assaying 12.5 grams/tonne of gold. Lateral development on North Vein A is proceeding westward to define stoping blocks for mill feed. Surface gold values extend 300 meters west of the decline intersection point. Decline advance is now progressing at a more satisfactory rate, and a crosscut to intersect the South Vein System is under way. The company says the capital expenditure on lateral development is more than offset by the gold inventory being created in the development material stockpile. About 4,000 tonnes of diluted development material is surface stockpiled. This stockpile has an estimated grade of 3 grams/tonne gold and will be used for commissioning the CIP plant. ■
Resources Events May - July 2011 www.philippine-resources.com
Successful debut for new mining club
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eople in the mining business in the Philippines have a new forum for sharing knowledge and ideas as well as networking, in the shape of the Philippine Mining Club. The club made its debut in Manila in early April with a well attended lunch at the Makati Shangri-La hotel. Participants heard from guest speaker Fernando Moya, exploration manager with Vale Exploration Philippines, together with stock market expert Sandy Gilles and mining consultant Leo Dominguez. The club has been organized by Kevin Lewis and focuses on providing access to leaders in the minerals business and organizing regular lunches and other events as knowledge sharing and networking opportunities. It will also use funds generated from events and functions help the scholarships scheme of the Philippine-Australian Resources Education Excellence Program. The club is an affiliate of the big Melbourne Mining Club in Australia. The club’s next lunch is scheduled for June 10 at the Makati Shangri-La. Guest speaker there will be Ian Holzberger, executive chairman of Metals Exploration and project director for the Runruno gold and molybdenum project. ■
The Philippine Mining Club’s debut event was a full house.
Philippine Mining Club’s Kevin Lewis.
John Cuthbertson (left) of Infratex and Simon Halley of Philippine Resources Journal.
Photos by: Dean Homer, www.Chromagraphic-Images.com
Lawyer and mining consultant Leo Dominguez.
Orica’s Ian Winter (second from left) with Philippine Resources Journal’s Cora A. Laureano, Greg Brimble and Elizabeth Galura.
Stock market expert Sandy Gilles of First Metro Securities Brokerage.
Alan Blackley of Quest Exploration Drilling (left) and Damien Blyth of GXD Supply.
Guest speaker Fernando Moya of Vale Exploration Philippines. Philippine Resources 25
Renewable Resources May - July 2011 www.philippine-resources.com
Ayala widens its renewable energy focus
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“Santa Clara Power is one of the few companies with the expertise and focus on run-of-the-river hydropower,” Francia said. “Its mother company is one of the few construction companies in the country experienced in building hydro power infrastructure,” he said. Run-of-the-river hydroelectric power plant operation involves “borrowing” river water and converting its kinetic energy into electricity before returning the same unpolluted water back into the river. “It is considered as green because it does not produce harmful emissions. Like other renewable power technologies, it is economical as it depends on the free energy of nature as fuel,” Francia said. The Ayala group, which has so far shied away from businesses where pricing involves regulatory risks, now sees power generation as a an important area for growth. It is focusing on establishing partnerships with companies that already have expertise in their operations. • Ayala’s subsidiary Michigan Power acquired a 50 percent stake in NorthWind for just on 512 million pesos. NorthWind operates the 33 megawatt Bangui wind farm in Ilocos Norte with 20 wind turbines in operation. Bangui is understood to be the biggest wind farm in South-east Asia and cost about US$50 million to put into operation. NorthWind hopes Ayala’s infusion will allow it to go ahead with plans for two more wind farms in the Philippines – a 40 MW farm in Aparri earmarked for a 2013 debut and a 40 MW operation in Pamplona in the Cagayan Valley scheduled for about 2015. The envisaged structure is that NorthWind’s subsidiary Northpoint Wind Power will develop the Aparri wind farm with 20 to 25 turbines costing about $95 million; while the Pamplona farm will be built by another subsidiary, NorthEast Wind Systems, with about 16 turAyala’s partner NorthWind Power has 20 wind-powered bines generating turbines in operation at its Bangui wind farm in Ilocos Norte, where it wants government approval to increase power rates. 1.65 MW each. he Ayala group is expanding into hydroelectric power in partnership with Santa Clara Power, an independent power producer specializing in “runof-the-river” hydroelectric power plants. The move is the latest in Ayala’s program of planned power generation operations that will include both renewable and conventional power generation. It follows the company’s recent partnership deal with the Mitsubishi subsidiary Diamond Generating Asia involving solar power, as well as its acquisition of 50 percent of the Ilocos Norte wind farm specialist NorthWind Power Development. Ayala’s ambition to provide total capacity of about 1,000 megawatts over the next five years. “These are all in line with Ayala’s campaign to augment the country’s power supply primarily through renewable and clean energy,” said Ayala managing director John Eric Francia. The new hydroelectric power venture is through its subsidiary Michigan Power and is envisaged as including “mini-hydro power” projects across the Philippines. “Mini-hydro” operations generally involve plants with capacity of under 100 MW. Michigan Power has a 70 percent stake in the venture and has committed an initial equity infusion of 600 million pesos. Santa Clara Power is majority owned by Santa Clara International, a construction company with local and overseas projects. Santa Clara Power’s current projects include the 1.2 MW Loboc hydropower plant in Bohol and the 0.8 MW Amlan hydro plant in Negros Oriental.
26 Philippine Resources
Ayala partner Santa Clara Power is a pioneer in run-of-the-river mini-hydropower operations like the 1.2 MW Loboc plant.
However, NorthWind Power is having problems with revenue and is seeking the government’s permission to charge higher fees for its electricity. The company’s financial records “would readily show that it is difficult to generate positive cash flows even under an energy sales agreement regime with the Ilocos Norte Electric Cooperative,” NorthWind said in a recent petition to the government Energy Regulatory Commission. It noted that it had to restructure its mixed credit facility in 2009 because it could not generate sufficient cash flow to service its debt, and had to borrow additional loans for working capital amounting to 100 million pesos to cover “the shortfall from the unpaid billing invoices… that have remained unpaid to date.” NorthWind has asked for a specific feed-in tariff of 9.30 pesos per kilowatt-hour instead of the 5.20 pesos per kilowatt hour it has collected on average from the Ilocos Norte Electric Cooperative. • The Ayala-LED electronics manufacturing firm Integrated Micro-Electronics is expanding into renewable energy with mass production of solar panels planned to start within 2011. The venture will base its units on prototypes made by IMI Energy Solutions, a company set up a year ago by IMI in Fremont, California. IMI last year developed a grid-connected solar panel inverter platform. Designed for high reliability and efficiency, the inverter is suitable for homes and small establishments in a variety of locations, the company says. ■
Renewable Resources May - July 2011 www.philippine-resources.com
New venture targets small rural biomass plants
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he biomass energy specialist firm Clenergen Philippines is teaming up with PowerSource Philippines in a bid to install up to 30 megawatts of rural “off grid” renewable electricity to Philippine island communities and mining companies over the next three years. Powersource has been granted a 10-15 year exclusive franchise to generate and distribute power in specified rural areas, and is the first Qualified Third Party certified under the Philippine Power Industry Reform Act. The venture hopes to fill a gap wherein the majority of island communities are currently supplied electricity from diesel generators at an average cost of 23 cents per kilowatt hour and in some areas are facing up to 12-hour blackouts. PowerSource says it enjoys strong
financial support from Credit Suisse with US$25 million already invested, the US private equity fund E+Co with $3.35 million in project financing facilities, and the Overseas Private Investment Corporation of the United States government. Clenergen and PowerSource project income in excess of $35 million per year from their biomass operations in the Philippines. The partnership will combine Clenergen’s proprietary plant science for the cultivation of energy crops to supply small biomass power plants that will be financed by PowerSource and then distributed through PowerSource’s
transmission network. The partners will share the revenue generated from the cultivation of biomass and from each party’s sale of electricity to both captive end users and the Philippine government. Clenergen Philippines non-executive chairman Miguel Patolot said the partnership “will bring into synergy the extensive experience of off-grid power generation of PowerSource and the cutting edge plant science technology of Clenergen. This partnership will provide infrastructure and equipment financing to support the commercial rollout of energy crop plantations throughout the island communities.” ■
Oil firm eyeing biomass power
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he oil company Eastern Petroleum plans to expand into the renewable energy sector in the Philippines through acquisition of a biomass power plant. The United Kingdom-based company looking at a 40 megawatt capacity operation in Nueva Ecija. However the plan depends on the Philippine government’s Renewable Energy Board setting the applicable feedin tariff (FiT) rates, according Eastern Petroleum chairman and chief executive Fernando Martinez. “We are exploring renewable energy but we are still studying the entry point and reliability, especially the FiT,” Martinez said. “We are looking at biomass. Biomass has promise. The question is the feedstock. How fast can it grow?” Eastern Petroleum is also considering investment in a coal-fired power plant in Bataan. At this stage the capacity is still under study but the envisaged range is. between 200 and 300 MW. “Eastern Petroleum is thinking of crossing over to the power sector. We are now looking to be a total energy company,” Martinez said. ■ Philippine Resources 27
Renewable Resources May - July 2011 www.philippine-resources.com
Where does Fukushima leave RE? States and parts of Europe, “Wind and solar power (alone) are not viable choicn the aftermath of Japan’s nuclear cri- es for large-scale base-load electricity sis, investor confidence in renewable generation,” she commented. energy rose as the public and inves- Japan’s nuclear disaster will make tors recoiled from nuclear power. Public nuclear power politically unacceptable perception of the events has tainted the for many and intensify the global race reputation of nuclear energy and signifi- for fossil fuels, with most future energy cant investments in nuclear plants are ex- research and development going into pected to be deferred. The tragedy came nuclear safety. European governments on top of rising oil prices amidst indus- are already stepping up efforts to assess trialization in China and India, the BP nuclear safety and agreeing in principle disaster in the Gulf of Mexico and unrest to “stress tests” for nuclear power stain the Middle East and North Africa—all tions. Nuclear power may be hit hardest of which have made renewable energy by rising safety and insurance costs after more attractive. Fukushima. But doubts remain whether the ac- In early April, the New York Times cident in Japan will really benefit RE. In newspaper published an article about her recent analysis, Scotiabank econo- the new pragmatism that is influencing mist Patricia Mohr suggested the “more energy policy. The report cited Richard lasting impact of the incident at the Heinberg’s theory of “peak everything,” Fukushima-Daiichi nuclear power plant which suggests that the world is running ... will be to trigger a re-examination of short of vital assets like clean water, carnuclear safety procedures and reactor bon-free air, some minerals, fish stocks technologies around the world and to and the cheap fossil fuels that have powslow the development of nuclear power.” ered the world economy and helped rein Over the medium term, Mohr anticipates in the price of food. However, alternasome shift from nuclear energy to im- tive energy sources, as well as renewable ported liquefied natural gas in Japan and energy, are more expensive and would gas-fired power generation in the United force the world into a more frugal future according to Heinberg. The 2007-2035 Philippine Energy Plan of the government Department of Energy urges the reconsideration of a nuclear power program amidst rising oil prices. The Philippines has gained a new record – that of having the most expensive electricity in Asia as reported by the Manila Electric Company to the power and energy committee of the Philippine ChamFernando Penarroyo is the managing partner of Puno and ber of Commerce Penarroyo Law Offices (www.punopenalaw.com). He specializes in energy and resources law, project finance and business development. and Industry in By Fernando Penarroyo
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28 Philippine Resources
February this year. With an average retail rate of electricity of 18.1 US cents per kilowatt hour, the Philippines tops Japan where the average rate is 17.9 US cents per kilowatt hour. The high price of electricity is blamed on the fact that all costs – from producing power to distribution and taxes – are passed on to consumers in the absence of state subsidies. DoE Secretary Rene Almendras has commissioned a study to assess the benefits of the mothballed Bataan Nuclear Power Plant. For Almendras, the biggest issue has always involved seismic considerations and lessons learned from the disaster in Japan are to incorporated into any policy decision. While the disaster will not stop the ongoing Bataan technical study, Malacañang insists it is standing firm on its decision to sideline the revival of the nuclear plant. On the renewable energy front, regulators grapple with commercial viability issues affecting the sector, as wind and solar power remain prohibitively expensive to produce. Environmental advocates and RE developers are pushing the government to expedite the implementation of the mandated regulations on renewable portfolio standards and feedin tariff (FiT) rates. The developers are proposing an installation target totaling 1,482 megawatts from 442 MW biomass plants, 420 MW solar power plants, 340 MW for wind power plants, 30 MW for ocean and 250 MW hydropower plants. The DoE Renewable Energy Management Bureau, however, can confirm only a total of 790 megawatts of generating capacity from 170 MW run-of-river hydropower plants, 370 MW biomass, 20 MW solar photovoltaic systems, 220 MW of wind generating capacity and 10 MW of ocean power generation. Power plant investments targeted for RE projects could only reach 830 MW in the next three years, as the National Renewable Energy Board (NREB) has set a cap to meet the national grid’s absorptive capacity. According to the NREB, approval of the 830 MW installation targets is also conditional and could be adjusted depending on a grid impact study to be Continued on page 29 >
Renewable Resources May - July 2011 www.philippine-resources.com
RE at the crossroads after Japan’s near-meltdown < Continued from page 28 submitted by the National Grid Corporation of the Philippines. The grid must have enough buffers to absorb and cover any sudden losses of power supply from RE sources, and thus the NREB cannot recommend installation targets that are beyond the grid’s absorptive capacity. Power consumers in the Philippines may have to bear an additional charge of 11.38 centavos per kilowatt hour from the use of RE sources once the Energy Regulatory Commission approves the proposed FiT rates. The proposed FiT allowance of 11.38 centavos per kilowatt hour is actually lower than the industry proposal of 16.45 centavos. Once approved, the FiT allowance will be implemented by 2014 when all the expected RE facilities that would generate a combined 830 MW would have started operations. Meanwhile, the Energy Regulatory Commission is also mulling over approval of FiT rates for each RE source
separately, some earlier than others, to allow developers to move forward and get financial closing for their proposed projects. The FiT measure is the most awaited mechanism under the RE Law because this will determine the basic economic and financial viability of RE projects. The FiTs intend to mitigate demand-side risks in the face of inherent production variability by ensuring purchase by all grid-connected consumers at a guaranteed long-term fixed price. However, the Philippine Chamber of Commerce and Industry is urging the government to ensure that the costs of renewable energy will not be too restrictive for consumers. Injecting RE into the grid could jack up already high electricity prices and further reduce the Philippines’ international competitiveness. The chamber believes that in careful planning of the country’s renewable portfolio standards, the government should take into consideration the possible impact of renewable energy on both overall gen-
eration and transmission costs, as well as the high initial cost of RE and the associated developmental costs. A high FiT rate would tie consumers for the duration of its implementation while the consequence of low FiT rates is that the Energy Regulatory Commission can fine-tune the pricing in subsequent years. The lack of takers should have no consequence on power supply since RE is not expected to be part of base-load. The costs of RE technologies are expected to decline over time as more efficient technologies emerge. Perhaps it would be prudent on the part of regulators not to rush FiT rates or consumers may face another backlash similar to the outcome of the take-orpay provisions entered into by the Philippine government with independent power producers in the early 1990s. In the meantime, environment advocates, RE developers and consumer groups are eagerly anticipating how the government will address the issue. ■
It would be prudent on the part of regulators not to rush FiT rates or consumers may face another backlash. Philippine Resources 29
Legal Resources May - July 2011 www.philippine-resources.com
Is Philippine mining still competitive? By Patricia A. O. Bunye
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ne thing that struck me as a participant at the Asia Mining Congress in Singapore last April was how presentations on projects in Indonesia and Mongolia appeared to dominate the three-day program. While the Philippines had several well-received presentations – by SMI, CGA, Crazy Horse, TVI Pacific, Intex Resources, Mindoro Resources and OceanaGold – I could not help but feel that we have suffered by comparison in terms of our country’s competitiveness as an investment destination, due to challenges that our mining industry continues to battle. Indonesia, for example, passed its new mining law in 2009 to encourage foreign mining investment, derive maximum benefit from mining investments and introduce greater control, order and transparency to the mining sector. Although the implementing rules issued about a year later were viewed negatively by some, the Indonesian government’s initiative in abolishing the Contract of Work and Kuasa Pertembangan system was seen as calculated to improve the investment climate in that country. There is even greater optimism for Mongolia’s mining sector, if we are to go by the number of Mongolia-focused investment bankers present at the congress. Such are expectations for this
Our competitors on the world mining stage are getting ever more investor-friendly – for instance Mongolia has warmly welcomed Ivanhoe’s Oyu Tolgoi venture, the world’s biggest undeveloped copper-gold project. But the Philippines seems to be doing the reverse.
country that many believe it could have a world class mining industry in the next five to ten years that will rival those of Chile and Brazil. The enthusiasm is evident in recent mega-deals in Mongolia, including Ivanhoe Mines’ Oyu Tolgoi project. These are attributed to the Mongolian government’s efforts to offer a favorable investment environment by Atty Patricia A. O. Bunye is a senior partner at Villaraza Cruz Marcelo & Angangco (website www.cvclaw. com). Her areas of specialization are mining and natural resources, power and energy and intellectual property (particularly IP commercialization). She may be reached at po.bunye@ cvclaw.com.
reducing red tape, concentrating on mining-related infrastructure and striving to ensure transparency and international standards. While our competitors on the world mining stage, particularly Indonesia and Mongolia, appear to be taking steps to be more investor-friendly, the Philippines seems to be doing the reverse. It is disheartening to see proposals now being made affecting mining that have the potential of raising the cost of doing business here and shaking investor confidence. Earlier this year we saw the proposal by government’s Mines and Geosciences Bureau to establish mineral reservations and to impose a five percent royalty on gross revenue of mining operations, on top of the existing two percent excise tax. This proposal is covered by a draft Executive Order that is currently being considered. Now an expanded Executive Order is being considered that not only includes this proposal but also has additional provisions covering full enforcement of environmental standards in minContinued on page 31 >
30 Philippine Resources
Legal Resources May - July 2011 www.philippine-resources.com
Philippines slipping behind international competitors < Continued from page 30 ing, increasing revenue collection through higher or additional fees and taxes, and opening of areas for mining through public bidding. Even without the looming expanded Executive Order, mining companies already face issues such as the ban by the South Cotabato local government on open pit mining which has emboldened other local government units (LGUs) to follow suit. The actions taken by these LGUs plainly contravene national law, but there has yet to be decisive action to address the antagonism between mining companies and LGUs as a result of these bans. Projects continue to hang in the balance in areas affected by these LGU bans. As a result of these continuing uncertainties and the threat of further shifts in policy, the Philippines ranks only 66th out of 79 countries in the Policy Potential Index of the Fraser Institute Survey of Mining Companies for 2010/2011. This annual survey ranks the overall policy attractiveness of each country/ jurisdiction. In particular, the Policy Potential Index is considered a “report card” to governments on the attractiveness of their mining policies on: administration, interpretation and enforcement of existing regulations; environmental regulations; regulatory duplication and inconsistencies; taxation; uncertainty about native land claims and protected areas; infrastructure; socioeconomic agreements; political stability; labor issues; geological data bases; security; and reliability of legal systems, i.e. “legal processes that are fair, transparent, non-corrupt, timely, efficiently administered.” In the 2008/2009 Fraser Institute Survey, just as Philippine mining was gaining momentum a few years after the constitutionality of the Mining Act was settled, and due in large part to the government’s shift from a policy of mere tolerance to active promotion of mining, the country managed to climb to a rating of 59th out of 71. Unfortunately, due to a seeming change in direction in policy, our rating has declined since then. The basic principle underlying mineral investments allowed by the Philippine constitution is that the government and the private sector are partners, and it is presumed that the government has the same interest as the private sector in ensuring the success of mining projects. More than just being a regulator and crafter of policies, government must also be mindful that investors will not remain in the country simply because of the attractiveness of our mineral deposits. Due regard must be given to the impact of proposed policies on these investors’ bottom lines, and ultimately their willingness to risk their capital investment here. It is therefore imperative that genuine consultations, with the opportunity to participate in their actual drafting, are conducted before any new policies are introduced and implemented in order to gain understanding of, and more importantly, support for, these initiatives. Otherwise, all efforts to promote mining investments in the Philippines will be overshadowed by the lack of stability or predictability of our investment environment. ■ Philippine Resources 31
Oil & Gas Resources May - July 2011 www.philippine-resources.com
After spudding Gindara, Trans-Asia in China deal Nido now eyes Pawikan
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ido Petroleum believes its latest analysis of vintage 2D seismic data has identified a preliminary lead portfolio which includes a large Nido limestone lead that could match or better its important Gindara prospect. The company says the lead, called Pawikan, is about 53 square kilometers in size and has a vertical relief of about 300 meters which is comparable to or larger in size than Gindara. “The large Pawikan lead is an interesting structure as it lies to the south and on trend with the Gindara prospect,” said Nido’s head of exploration, Jon Pattillo. “While further work is required to mature the structure to prospect level, Pawikan could offer an excellent large scale follow-up drilling opportunity.” Nido now plans to further mature its lead portfolio and carry out test reprocessing of selected vintage 2D data over the coming months to improve seismic image quality over the Pawikan lead. Australia-based Nido holds a 33 percent stake and is operator of Service Contract 54B along with joint venture partners Shell and Kairiki Energy which hold a 45 percent and 22 percent interest respectively. The Pakiwan news follows Nido’s spudding of the Gindara-1 wildcat in Service Contract 54B in mid-May. For this, mobilization activities included the loadout of the drilling materials moved from the Loyang offshore base in Singapore to Labuan in Malaysia using the Voss Signal workboat. The materials were then loaded onto Atwood Oceanics’ deepwater semi-submersible Atwood Falcon headed for Gindara. Exploration head Jon Pattillo said the rig is well-suited to operate offshore Philippines, having drilled two deep-water wells last year for Shell in the country. Nido has estimated the Gindara-1 well to hold mean in-place oil reserves of 634 million barrels. The Gindara-1 project is the first drilling project under the Service Con32 Philippine Resources
tract 54B joint venture. It is also the first well under Nido Petroleum’s planned five-well program. Gindara lies about 50 kilometers south of the largest oil discovery made in the Philippines to date, the Malampaya gas field under SC38. ■
The deep-water semi-submersible rig Atwood Falcon is well-suited to operate offshore Philippines, having drilled two deepwater wells last year for Shell in the country.
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rans-Asia Oil and Energy Development is acquiring 25 percent equity participation in a subsidiary of Frontier Gasfields of Australia via an option agreement that will get it involved in the Shengli oil field venture in China. The subject of equity acquisition will be Frontier Gasfield’s equity in a Singaporean subsidiary, the company has indicated in its disclosure to the Philippine Stock Exchange. No further details of the agreement were provided. Frontier Gas has a joint venture agreement with Shengli Oil Field Petroleum Company for the Shengli oil field development in China. Shengli Oil has secured a letter of mandate from the Sinopec group (China Petroleum Corporation) for the “comprehensive utilization of Shengli oil field resources.” The Shengli oil field, which lies along the Yellow River delta in the north of Shandong province and bordering the Bohai Sea, has been rated the second largest oil field in China with daily production rate of 650,000 barrels. Discovery of the field dates back to the early 1960s and development started in 1964. The field’s accumulated proven oil reserves have been estimated at 4.63 billion tonnes. ■
Philex sees new revenue in oil
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he Philippine mining major Philex is getting increasingly optimistic about its latest venture into oil and gas exploration. A Philex affiliate, Pitkin Petroleum, has reported encouraging results from a second appraisal well at its petroleum exploration block in Vietnam. In a disclosure to the Philippine Stock Exchange, Philex said the well was drilled to test a section of the Ca Rong Do prospect which a previous drilling failed to evaluate. “We are encouraged by the hydrocarbon flow rates from the Oligocene section in Ca Rong Do, which, in addition to the previously proven Miocene reservoirs, provide further exploration upside across the area,” said Simon Lockett, chief executive of Premier Oil Vietnam
South, operator of the petroleum block. Philex owns 21.1 percent of Pitkin, an international upstream oil and gas exploration and production company focused mainly on the Pacific Rim region with operations in Vietnam, the Philippines, Peru and the United States. Pitkin has a 40 percent interest in the block, while Premier Oil holds 30 percent, Pearl Oil (Ophiolite) 15 percent, and Pan Pacific Petroleum (Vietnam) 15 percent. Philex hopes the Vietnam investment may provide the company with a new revenue stream on top of its copper and gold sales in the Philippines. Philex also has small interests through PetroEnery Resources in the Galoc field off Palawan and in Abouma field in Gabon, which are both in production. ■
Oil & Gas Resources May - July 2011 www.philippine-resources.com
Go-ahead for BHP farm-in with Otto
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HP Billiton is taking over operations and getting a participating interest of up to 60 percent in a major oil prospect off Palawan. In separate stock exchange disclosures, Philippine-listed Trans-Asia Oil and Energy Development and its partner Otto Energy of Australia confirmed BHP is exercising an option to farm-in to Service Contract 55, taking a majority of the interest of NorAsian Energy, a unit of Otto. Otto Energy’s interest in the oil prospect falls to 33.2 percent following BHP’s farm-in. Trans-Asia has an interest of about seven percent. BHP’s entry into the prospect is subject to approvals of the joint venture and the Philippine government’ Department of Energy. Under the farm-in agreement, BHP assumes operations of the service contract by reimbursing Otto’s past costs and funding one offshore deepwater well next year, with an option to drill a second deepwater well in 2013. The farm-in option held by BHP Billiton was signed in January 2010. Otto has explored the prospect since early 2010 and says it has acquired extensive 3D seismic data over an area covering 1,800 square kilometers which indicates “an active petroleum system with a series of large to very large Nido carbonate structures that supplement the Hawkeye prospect.” “We are looking forward to continuing to work with BHP Billiton in Service Contract 55 as we move into the drilling phase of exploration activities,” commented Otto managing director Paul Moore. “The past 16 months has been a very busy period for Otto as we have acquired, processed and interpreted a large volume of seismic data to identify a portfolio of significant oil and gas prospects. We have benefited from the co-operation shown by our joint venture partner, Trans-Asia, and also BHP Billiton. “We now look forward to participating in this exciting offshore deepwater exploration program which will provide exposure for Otto’s shareholders to material exploration in highly prospective, large structure opportunities.” Otto Energy shares quickly surged 34 Philippine Resources
The production, storage and offtake vessel Rubicon Intrepid has been hard at work at Otto Energy’s Galoc field and projections of reserves there now suggest there is a lot more work ahead.
18 per cent after the announcement by the Perth-based oil and gas junior. BHP’s farm-in into Service Contract 55 ends almost three years of attempts by Otto to secure a senior partner to help fund the costly exploration program. BHP was originally lined up as the farmin partner in late 2008, following a fivemonth search. It agreed then to fund up
to US$200 million of exploration, including 3D seismic work and two wells. However, the proposed deal fell through before being revised in January last year, when BHP agreed to fund the seismic work if Otto arranged for the seismic services. In return, BHP was Continued on page 36 >
Oil & Gas Resources May - July 2011 www.philippine-resources.com
Go-ahead for BHP farm-in with Otto < Continued from page 34 granted exclusivity to review the completed seismic work before deciding whether to push ahead with the farm-in. The seismic data identified several prospects within SC55, including Cinco, which has an estimated gross recoverable resource of up to 3.8 trillion cubic feet of gas and 132 million barrels of condensate. • Otto Energy has updated its remaining oil reserves balance at the Galoc field off Palawan and now reports proven reserves have jumped 78 percent to 0.69 MMboe while proven plus probable reserves have increased 52 percent to 1.38 MMboe.
The operator and 59.84 percent participant in the project, Galoc Production Company, in which Otto is a 31.38 percent shareholder, annually commissions a review on behalf of the Galoc joint venture of the remaining oil reserves balance, conducted by independent firm RISC. RISC has reviewed the Galoc field reserves as at January 1, 2011, in accordance with the SPE/WPC /AAPG/SPEE Petroleum Resource Management System definitions, guidelines and auditing standards. The increases in reserves are attributable to better than expected reservoir performance to date and an extension of field life due to higher prevailing oil
BHP Billiton’s farm-in deal with Otto Energy promotes Service Contract 55 well up the importance chart of the various service areas where Otto has a stake. 36 Philippine Resources
prices. The Galoc field is expected to continue producing until approximately 2014 to 2018 on the basis of the existing two wells alone. Contingent resources of 0.85 MMboe (Otto share) at 2C level are attributable to the Galoc Phase 2 development currently under consideration by the joint venture. Announcing the increases, Otto’s Paul Moore said: “The increased confidence in the Galoc field performance and underpinning reserves is supporting the efforts of the joint venture in progressing towards sanctioning a Phase 2 development, potentially comprising between one and three new wells, in the field.” Production at the Galoc oil field reached 6.92 million barrels as at endMarch 2011. The company has delivered a total of 20 shipments of Palawan light crude to its refinery customers since it began production in October 2008. In the first quarter of 2011, Galoc produced 651,551 barrels, for which Otto Energy received US$5.93 million from operator Galoc Production Company, after deducting operating and lifting costs. Otto Energy holds a 31.38 percent interest in Galoc Production Company, which in turn has a 59.84 percent interest in the service contract license. Nido Petroleum has a 22.28 percent stake in the SC 14C license. Other stakeholders are Philodrill, Oriental Petroleum and Minerals/ Linapacan Oil Gas & Power, and Forum Energy Philippines. • Meanwhile, Otto Energy has spud its Duhat-1 wildcat project to 1,000 meters on the San Isidro anticline on Leyte island. The well targets oil in Miocene Tagnocot sandstones. DESCO Rig 1 is on site. According to the company, Duhat-1 is the only modern deep exploration well in northwest Leyte. The company says hydrocarbon shows in several shallow wells drilled in the block and the presence of numerous oil seeps indicate the presence of an active petroleum system. Duhat-1, if successful, could be followed by more exploratory drilling on nearby look-alike structures. Otto Energy’s NorAsian Energy Continued on page 38 >
Oil & Gas Resources May - July 2011 www.philippine-resources.com
New permits promised – plus security
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he Philippine government is promising to ramp up oil and gas exploration with up to 15 contracts to be auctioned off by July. Energy Secretary Jose Rene Almendras hopes to coax hundreds of millions of dollars from prospective investors in the projects. “We have a situation where the Philippines has not found oil but we have found gas. We have a situation wherein more than ever, in the history of exploration in the Philippines, there is so much interest,” he said. Almendras also promised the government will contribute to security at the exploration areas. In March, the Philippines complained to China over alleged harassment by Chinese gunboats of a Philippine oil survey vessel in disputed seas near the Spratly islands in the South
China Sea. Almendras said a survey for that project has been completed but it will take two years to process the seismic data gathered. “We need security because there’s going to be hundreds of millions of dollars, and even billions of dollars, of new equipment in new exploration areas,” he said. Almendras said part of royalties owed the government from the Malampaya offshore gas field run by a unit of Royal Dutch Shell Group will be used to buy security equipment for the new projects. Noting that a presidential executive order is needed for the release of the money, he said Malampaya funds have been used in the past even in matters not related to energy. “We are looking at using the Malampaya fund for the security of multinational companies, and
the President wants the Department of Energy to play a role in that,” he said. Almendras said people in the energy sector have been complaining about losing people and equipment because of the growing interest in oil and gas exploration. “One of the exploration companies came to me and was complaining – they were running out of equipment and men with exploration experience because projects are going on all at the same time,” Almendras said. “There’s a need to strengthen security because companies exploring the area are bringing in equipment and investing billions of dollars.” He said the Department of National Defense has drawn up a security blueprint and will now determine the number of radar stations, boats and helicopters that would be needed. ■
PNOC doing very well out of Malampaya
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ith an ongoing favorable revenue stream coming in from the Malampaya gas field off Palawan, first quarter 2011 income of Philippine National Oil CompanyExploration Corporation, PNOC-EC, jumped 360 percent to 680.86 million pesos from 186.46 million pesos in the same period last year. “The income is driven mainly by the company’s share in the Malampaya gas project with the disciplined trading of coal and the intensified operations at the company’s Batangas port,” the firm said in a financial disclosure to the Philippine Stock Exchange.
With the likelihood of higher income this year, PNOC-EC says it should be able “to remit (as dividends to national government) a significant amount in the second quarter of 2011 once the audit of the company’s financial records for 2010 is completed.” The latest dividends declared by the state-run firm stood at 3 billion pesos in March this year. This is on top of the 559 million pesos in dividends declared by the company last November. The company is optimistic about additional projects, including prospects of increasing its share in the second phase of the Malampaya gas field,
which is requires an investment of US$1 billion. Through PNOC-EC’s take in the gas field project, Philippine Energy Secretary Rene D. Almendras said: “We will go very aggressive in Malampaya. We want to make more investments to tap more gas.” The capital infusion will cover developments to ensure continuous gas production to meet Malampaya’s commitment under the sale and purchase agreements with the gas takers – primarily as fuel for the 1,200 MW Ilijan and 1,500 MW Santa Rita and San Lorenzo power plants. ■
After BHP deal, Otto exploring more contract areas < Continued from page 36 subsidiary is operator of the 3,320 sq.km Service Contract 51 with a 40 percent interest. Estimated cost of the exploration is about U$2.5 million to $3 million. The current drilling operation in Duhat-I exploratory site has been extended by the Department of Energy until July. 38 Philippine Resources
Otto unit NorAsian Energy is also currently conducting a seismic survey in the waters off Camotes island in north Cebu, looking for oil and gas deposits in the area. This survey covers 464 square kilometers of the Camotes Sea across five municipalities. It mainly covers the municipal waters of Palompon in Leyte province and San Francisco
town, Camotes. The 3D survey is a follow-up to last year’s 2D survey of the area. The survey vessel BGP Explorer is towing four 4.5-kilometer cables that send sound waves to the sea floor to be captured by microphones on a fourkilometer cable attached to buoys. The signals are read by a computer in the vessel. ■
Supply Resources May - July 2011 www.philippine-resources.com
Environmental solutions specialists restructure ownership, operations
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he environmental solutions specialists Maccaferri and Infratex have completed a restructuring of their ownership, management and operations. The overhaul results in two new entities – Maccaferri Philippines Inc (MPI) and Infratex Environmental Services Inc (IESI) – under the Maccaferri umbrella, while the existing Infratex Philippines Inc (IPI) continues as a separate entity. MPI is a 100 percent foreign-owned subsidiary of the big international Officine Maccaferri group. After the restructuring, IESI is a wholly-owned subsidiary of MPI. The Philippine Gabions operation that was previously under the Maccaferri umbrella is being absorbed by MPI. IESI has taken over the HDPE liner and pipes design, distribution and installation range from IPI. IESI is managed by MPI headed by Thomas Wintermahr. IPI remains headed by Peter Heilveil with mining veteran John Cuthbertson as a consultant for IPI and IESI. MPI is a distribution company specializing in providing products and solutions for the preservation of the environment. –We are not merely a materials supplier but rather a complete solution provider in the areas of erosion control, river bank protection, retaining structures, channel lining, rock fall protection, sludge dewatering and many more. These are supported by our wide range of double-twist wire mesh and geosynthetic products,– says Thomas Wintermahr. In addition to its civil engineering applications, Maccaferri products and services includes a variety of solutions for miners. For underground or closed mines, its appli-
cations focus on reinforcement of support structures for underground galleries and also for tunnel lining using Wirand steel fibers to reinforce concrete. For open-cast mines, Maccaferri concentrates on providing stability and protection of cut slopes with applications including BioMac, MacMat, gabions, System Terramesh, MacTube, MacTex and MacCell. Wintermahr said Maccaferri and Infratex solutions have been used at many recent mining projects in the Philippines, including Masbate, Taganito, Berong Nickel and Didipio. IESI has taken over from IPI the exclusive distributorship of the leading HDPE lining supplier, GSE Lining Technology – which currently has over one million square meters of GSE liner installed in the Philippines – and of Vinidex. Applications of GSE HDPE geomembranes and Maccaferri product lines include tailing dams, heap leach pads and solution pads in the mining business, as well
as other applications including municipal and industry sanitary landfills, waste water lagoons, reservoirs, canal linings, tank linings, petrochemical secondary containment, power sector environmental containment, aquaculture, agriculture and animal waste containment. IESI can now also provide liner integrity surveys using advanced geoelectric leak detection methodology for critical HDPE liner containment systems. Peter Heilveil says it is the only company in the Philippines providing this service, which give mining companies and their local communities the assurance that liners installed are without leaks. IPI’s range of equipment for the mining industry includes the product lines of David Brown Gears, Acoustica noise abatement, Tru conveyor belts, Worldpoly butt welding, Lightning Protection International and J&B underground utility conduit systems. It plans to add soon fleet fuel management system.. ■
Maccaferri gabions and MacTex geotextile solutions are used in the Taganito Mines river realignment project in Surigao del Norte.
Integration and new people for QED
T
he Quest Exploration Drilling group has completed the legalities required for restructuring the group to bring its five regional operating companies under the QED umbrella. As a result, QED now has a single corporate identity in the Philippines, Indonesia, Papua New Guinea, the Solomon Islands and Cambodia.
40 Philippine Resources
QED managing director Alan Blackley said the single entity strategy enables clients who work across the region to deal with a company that has a single management structure with common practices and a known reputation for delivery. “Like a number of other contractors across the region, we are seeing a return to pre-crisis activity levels” Blackley said.
“Our challenge now is to ensure we can meet the expectation of our clients through the availability of equipment, but more importantly personnel.” QED sees its biggest challenge to growth in the coming years as the availability of skilled personnel and the company’s Continued on page 42 >
Supply Resources May - July 2011 www.philippine-resources.com
Supply specialist ‘excited about growth’
O
ptimism about growth in the mining business – with metal prices rising because of increasing demand and supply shortfalls – has come from a major supplier in the field. The generally rosy outlook is spelled out in latest forecasts from Metso, the big global supplier of technology and services for mining, construction, power generation, automation and other sectors. “I am especially excited about the growth – in both new orders and in net sales,” said Metso president and chief executive Matti Kähkönen in his recent review and outlook summary for 2011. Kähkönen – who took over as president and CEO on March 1 with the installation of the new Metso executive team – said demand in most of the company’s customer industries is back to “a relatively normal level” with some variations by customer industry and geographic area, although he noted “uncertainties related to fragility of economic recovery, inflationary pressures as well as high oil price.” “On the positive side, the operating environment is estimated to continue strong in the emerging markets and the outlook in the mining business is good. “Metal prices have been at a high level primarily due to strong demand in China and India and the general upswing in the global economy. At the same time,
copper and iron ore production has fallen short of demand. The number of quotations for equipment and projects from mining companies has strongly increased,” he said. “This has already had a clearly positive impact on our orders and we expect demand to be good this year. Since the industry players have confirmed significant capital investment programs for the coming years, we expect strong activity in larger projects this year. Due to the strengthening demand for minerals and our large installed equipment base, we expect demand for our mining services to be excellent.” In the automation products sector, Kähkönen believes demand will continue strong, as the oil, gas and petrochemical industries increase their investments amidst improvement in energy prices and demand. Overall, with the favorable forecast in market environment and order intake, Metso has upgraded its financial estimate for 2011 and now projects net sales will grow about 15 percent compared to 2010 while profitability will also improve. In the first quarter of 2011, Metso received new orders worth 1,847 million euros, 35 percent more than in the 2010 first quarter. Net sales increased 23 percent quarter-over-quarter to 1.444 billion euros.
• Metso has reinforced its knowhow in process optimization services to the mining and construction industries by acquiring the remaining interest in the joint venture company Metso CISA. Metso and its joint venture partner BRGM in France signed the acquisition agreement that makes Metso CISA now 100 percent owned by Metso. CISA was created in 1990 as a joint venture company between SERGAP, a subsidiary of BRGM (49 percent) and ARMCO (51 percent). Its business focus remains in advanced control and sensing as well as specialized column flotation. Metso acquired ARMCO’s shares in 1998 and in 2009 increased its ownership to 67 percent. Headquartered in Orléans, France, Metso CISA specializes in advanced process control of mineral processing systems using the company’s Optimizing Control System platform. In the early 2000s Metso CISA launched its first sensing system, VisioFroth, which now has a large installed base in mining. It also developed several new machine vision tools such as VisioRock, VisioTruck, VisioBall and VisioPellet, as well as applications for detecting oversize and other foreign objects on conveyor belts. Helsinki-based Metso currently has about 28,500 employees in more than 50 countries. ■
Integration and new people for QED < Continued from page 40 ability to attract the right people to support an expanding management team. In terms of equipment supply, QED recently took delivery of two Atlas Copco track-mounted CS14 drills, which come with remote tramming controls and advanced safety features. The rigs are the first of a planned upgrade of capability in the Philippines. To help tackle the skills shortage, QED has appointed Sean Fitzgerald as its new Philippine country manager, starting July 1. This appointment is one of a number of senior positions that have been created to 42 Philippine Resources
manage QED’s growth across the region. It follows the recruitment of Mick Premus as Philippine operations manager – Premus is currently understudy to Ted Maszniew who will shortly retire after 10 years with the company. “Having sufficient people in place to manage the day-to-day business now allows us to concentrate on what I consider to be the most critical issue we face – and that is people” Blackley said. QED is going ahead with plans to create dedicated training facilities for its staff across the region, with Blackley reiterating his belief that “the drillers of the future are going to come from the region in which
QED works. The future of QED as a successful company depends on the availability of skilled personnel who are more than lever pullers, but are people who embrace today’s standards based on safety, quality and productivity.”. ■
QED chief Alan Blackley: We need more good people.
International Resources May - July 2011 www.philippine-resources.com
Regulation of offshore oil rigs is still only a ‘work in progress’ By John M. Broder & Clifford Kraus
A
year after BP’s Macondo well blew out, killing 11 men and spewing millions of barrels of oil into the Gulf of Mexico, the much-maligned US federal agency responsible for policing offshore drilling has been remade, with a tough new director, an awkward new name and a sheaf of stricter safety rules. It is also trying to put some distance between itself and the industry it regulates. But is it fixed? The simple answer is no. In interviews with the International Herald Tribune newspaper, even those who run the agency formerly known as the Minerals Management Service concede that it will be years before they can establish a robust regulatory regime able to minimize the risks to workers and the environment while still allowing exploration offshore. “We are much safer today than we were a year ago,” said US Interior Secretary Ken Salazar, who oversees the agency, “but we know we have more to do.” Oil industry executives and their allies in Congress say the Obama administration, in its zeal to overhaul the agency, has lost sight of what they believe the agency’s fundamental mission should be — promoting the development of the nation’s offshore oil and gas resources. Environmentalists say the agency, now known as the Bureau of Ocean Energy Management, Regulation and Enforce-
It’s almost as if the Deepwater HorizonMacondo well disaster never happened.
ment, has made only cosmetic changes and remains too close to the people it is supposed to regulate. Even the officials who run it, Salazar and the new director Michael R. Bromwich, admit that they have a long way to go before government can provide the kind of rigorous oversight demanded by the complex, highly technical and deeply risky business of drilling for oil beneath the sea. The blowout preventers in use today remain incapable of handling a well rupture of the force of the BP blast. The containment system developed by the industry to respond to another blowout has not been tested in real-life conditions and, by the industry’s own estimate, could still allow hundreds of thousands of barrels of oil to spew before a runaway well could be capped. The seven-member commission named by President Obama to investigate the BP accident looked at the regulatory failures that contributed to it, and its conclusions were blunt. “MMS became an agency systematically lacking the resources, technical training or experience in petroleum engineering that is absolutely critical to ensuring that offshore drilling is being conducted in a safe and responsible manner,” the panel said in its final report, issued in January. “For a regulatory agency to fall so short of its essential safety mission is inexcusable.” Many of those flaws remain, according to William K. Reilly, a former Environmental Protection Agency administrator who was one of two chairmen of the commission. He told the IHT he believes Bromwich is doing a creditable job, but the agency still lacks the technical expertise needed to oversee such a specialized industry. “They changed the name, but all the people are the same,” Reilly said. “It’s embarrassing.” The job of repairing the agency has fallen to Bromwich, a former federal prosecutor and US Justice Department inspector general who was pressured into leading the agency by Obama. While defending the employees of the agency,
Bromwich, who took over last June, made no excuses for its past misbehavior, including a scandal at the Denver office that involved agency officials and oil company employees having sex and sharing drugs. Bromwich acknowledged accident rates for offshore drilling are several times higher in the United States than in Australia, Canada, Norway and the United Kingdom, in part because those countries imposed effective new rules after major accidents. After the Deepwater Horizon spill, the regulatory agency was broken into parts, dividing the revenue collection office from the oversight division to eliminate conflicts of interest. A series of new rules involving well design, spill response and environmental review were imposed. Permitting and production were set back months while the industry absorbed the changes. But Bromwich says his agency still lacks the resources, personnel, training, technology, enforcement tools, regulations and legislation it needs to do its job properly. He lays a large part of the blame on insufficient financing. The bureau’s budget has been basically flat since it was created in 1982, even as drilling activity in the deep-water gulf has drastically increased and the technology has grown more complicated. “Without more resources, we can keep doing what we’re doing, but we can’t grow,” Bromwich said in an interview with the IHT during a recruiting trip to nine US West Coast universities, where he was trying to lure young scientists and engineers to apply for relatively low-paying government jobs. “We need more people, and we need new people.” Bromwich has asked the Office of Personnel Management to adjust pay schedules so his office can compete with oil companies, which in some cases are paying twice the government salary for petroleum engineers. Obama has asked for an increase of more than US$100 million to the agency’s roughly $250 million Continued on page 44 > Philippine Resources 43
International Resources May - July 2011 www.philippine-resources.com
Enforcement agency lacks basic resources < Continued from page 43 annual budget. Congress provided about half that amount in the short-term budget deal reached recently, but discussions have not begun on next year’s budget. The House is considering three bills that would force the agency to move more quickly on drilling permits, to open vast new areas along the Atlantic and Pacific Coasts to drilling and to reopen lease sales that were canceled after the Deepwater Horizon spill. A separate bill would ease environmental rules for drilling off the shores of Alaska. “Much of the legislation that I have seen being bandied about, especially with the House Republicans, is almost as if the Deepwater Horizon-Macondo well incident never happened,” Salazar said. “If another Macondo happened and we didn’t have the ability to contain it, it would probably mean the death of energy development in the nation’s oceans.” Employees of the remade agency are candid about its persistent shortcomings. At a recent industry-government forum in New Orleans, officials from the Bureau of Ocean Energy Management repeatedly admitted that they could not answer many of the questions and could not account for many of the delays in responding to applications. Valerie Land, regulatory supervisor at W & T Offshore, complained that agency officials send back permit plans with questions that have been answered in the applications. Even some simple questions, like whether a blowout pre-
venter would be above or below water, seem to flummox some officials, she said. Michael Tolbert, a senior engineer with the bureau, shrugged and said: “We have a lot of new people looking at the plans.” Randall B. Luthi, a Wyoming rancher who was once a congressional aide to Dick Cheney, served as head of the Minerals Management Service for two years in the administration of then president George W. Bush. He said morale in his former agency is low because of the constant charges of corruption and coziness with industry, accusations echoed last year by Obama. Luthi, who now leads an industry group representing offshore drilling contractors, said the new leadership has centralized much of the decision making in Washington. The offshore operators Luthi represents are frustrated with the moratorium on deep-water drilling that has only recently begun to ease, saying companies which had nothing to do with the BP disaster believe they ware being indiscriminately punished. Although he refrained from criticizing Bromwich directly, Luthi suggested that the new director has been making decisions based on inadequate knowledge and experience. “They have instituted a lot of changes that would ordinarily require a year of research,” he said. “Here, Interior was forced to announce the changes and then do the legwork.” The oil and gas industry has, mostly, been cooperating in the regulator’s ef-
forts. Two industry groups helped create systems for capping out-of-control wells like BP’s Macondo, which spewed nearly five million barrels of oil into the gulf over 87 days. The US Interior Department held off granting new deep-water permits until new systems are in place; 10 have been issued since the moratorium was formally lifted in October. An additional 15 deep-water permits are pending. Representative Edward J. Markey, Democrat of Massachusetts, has been equally critical of industry and government regulators. “We should be requiring more of the oil companies to continue deep-water drilling than passable response plans, unreliable blowout preventers and a containment system that has only been used once and can’t be deployed past 8,000 feet,” Markey said. Rig inspectors, most of whom are from the same towns and culture as the industry employees they are supposed to police, are trying to adopt a more professional stance and no longer accept free transportation and meals from the rig operators. “They’re bringing their own lunches when they make visits,” said Mark Shuster, Shell’s manager for Gulf operations. He described inspections as more effective and comprehensive, but said the agency remains woefully understaffed and apparently lacking in resources to hire enough qualified new talent. “They need experienced people who really do know what they are doing,” he told the IHT. ■
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iPrint 29 JCL International 19 LOMAR – Logistics & Marketing Philippines 31 Lycopodium 5 McConnell Dowell Back cover Metso 3 Monark Equipment 1 NZ Oil & Gas Exhibition & Conference 39
Orion Project Services 7 Paperless Trail 41 Philippine Mining Club 35 Philippine Resources Journal 33 PNG Resources 37 QED – Quest Exploration Drilling Inside front cover SGS – Inside back cover Surtech International 11