Fuelling growth: OBG talks to Edgar O Chua, Country Chairman, Shell Companies in the Philippines

How will a liquefied natural gas (LNG) import terminal help the Philippines meet its energy security goals and develop the local natural gas industry?

CHUA: Natural gas is abundant and is the cleanest-burning fossil fuel, emitting about 50% of the CO released by coal-fired power generation and can be used across multiple sectors, ranging from road transport to the marine industry, residential and power. Based on International Energy Agency (IEA) analysis, there are sufficient technically recoverable natural gas resources to last for at least the next 230 years at current consumption levels, ensuring energy security and reliability. However, infrastructure challenges exist to exploiting gas. For instance, we piloted a programme for the use of compressed natural gas for government transport, but the absence of a pipeline network in the Philippines will continue to make the programme a challenging one.

For the country to attract investment in import and regasification terminals, firm energy policies are needed. We need the government to implement a balanced energy mix policy consisting of coal, renewables, natural gas and other sources to ensure that one type of fuel does not dominate. The challenge with crafting an energy mix policy lies in balancing the competing policy objectives of affordability, supply security and sustainability. A recent Department of Energy study shows that if we do nothing, coal would account for up to 70% of the power mix by 2030. Without policy change that encourages investment in gas-fired capacity, in a high coal scenario, coal plants would operate in both the base load (~80% load factor) and mid-merit (~40% load factor) space, despite gas being more efficient at mid-merit. Coal plants are not designed to be load-following and this mode of operation affects their reliability. Moreover, the higher capital associated with coal means that higher utilisation is required for the investment to pay for itself. So at mid-merit, where utilisation is in the range of 40% to 50%, gas-fired generation would be cheaper than coal on a long run marginal cost basis. In 2011 researchers from the Harvard Medical School found that coal generation results in quantifiable costs from the health and the economic impact of emissions. When considering the costs of emissions, natural gas is also competitive at base load in the Philippines.

In the absence of any intervention, an ongoing tight power balance and a growing reliance upon coal-fired generation will result. The positive benefits which natural gas-fired generation have provided to the Philippines – stable, clean energy supply – will decline with Malampaya production over the course of the next decade. Thus, the government needs to look at implementing policies that incentivise gas-fired generation.

How can the Philippines meet higher fuel standards and boost value-added downstream output?

CHUA: The growth of the Philippine economy is a major catalyst for rising energy demand. For every 1% increase in GDP, demand for fuel and energy grows by 0.5%. Additionally, new developments in the mining sector or other energy-intensive industries produce a higher rate of demand growth. There is a lot of potential for organic growth in the downstream segment, as demand for products is driving smuggling that accounts for 20% to 30% of sales. It is unrealistic to aim for no smuggling, given that the Philippines is an archipelago, but this poses challenges to under-resourced authorities. Still, the level can be brought down to 10% or less.

The two oil refineries in the country are capable of meeting the Euro IV fuel compliance requirements by 2016; however, due to smuggling, there will be no additions to capacity, only facilities upgrades. The main entry points for smuggling have been the special economic zones (SEZs). Manufacturers pay taxes on imports of crude oil and can claim refunds when they export refined products, while importers with no value-added activities do not pay taxes, as their imports are presumed to be used in an ecozone or are re-exported. In 2012 a value-added tax for finished petroleum products, even in SEZs, was imposed. This leveled the playing field among oil players and significantly reduced smuggling.