Renewing calls for renewable energy bill passage: Part 1

By J R Ruaya

Lost in the din of the clamor for lower electricity rates and soaring oil prices which have already reached $130 a barrel is a piece of legislation which could alter the whole energy scenario in the years to come, but is unfortunately slowly gathering dust in the halls of Congress: the renewable energy (RE) bill.

Dubbed Senate Bill No. 2046, or “AN ACT PROMOTING AND ENHANCING THE DEVELOPMENT, UTILIZATION AND COMMERCIALIZATION OF RENEWABLE ENERGY RESOURCES”, it seeks to provide a coherent policy framework of the development of renewable energy sources of the country. It is actually a consolidation of some 18 bills and resolutions which have been filed during the past several years, but which have not been acted upon by our legislators.

It has been certified by President Gloria Macapagal-Arroyo as urgent and listed by the Legislative-Executive Development Advisory Council (LEDAC) as one of the 28 priority bills which need to be passed by Congress. At the moment, it is only being considered for approval at the Senate committee level.

If this is indeed, an important piece of legislation, why is it that it has not received ample attention due to it? Considering its various incarnations, the bill has been pending in Congress since 1997 at least.

To be sure, the bill is non-populist, does not have grandstanding value as a probe like the NBN-ZTE deal, and its deliberations do not invite a live media coverage. Even before it could take off, some militant groups are already denouncing it, due to the fear it may aggravate electricity prices woes.

Environmental advocates on the other hand, warmly embrace it. For example, the group calling itself the Renewable Energy (RE)Coalition, a broad-based advocate for clean energy sources, has been at the forefront in the lobbying for its passage.

Other environmental groups, in an ironic twist, have taken the cudgels for the bill's passage, but on the same breath, bitterly oppose geothermal power development. Such an ambiguity in position could be partially traced to inadequate appreciation of the bill's provisions.

Incentives offerred

Catherine Maceda, head convenor of the RE Coalition, noted that in a much publicized survey, 77% of investors puts the highest priority to a predictable regulatory regime before they cough up investment money, while capital constraints fare poorly at only 10%. She went on to suggest that a coherent renewable energy policy such as that embodied in the bill is what is needed to jumpstart the development of significant amount of energy from renewable sources.

So, the renewable energy bill is the answer?

The bill offers a mixture of fiscal and non-fiscal incentives for developers of renewable energy sources. The fiscal incentives offered to risk-taking investors include (1) an income tax holiday, (2) preferential real estate tax rates, (3) exemption from import duties for capital equipment and (4) a reduction of government shares from royalties, among others.

For non fiscal incentives, the bill introduces a number of features which by themselves, are unfamiliar to most people, even to stakeholders in the energy industry. These are:

(1) the Renewable Portfolio Standards (RPS) which is a market based policy that requires electricity suppliers to source a certain portion of their supply from RE;(2) the Renewable Energy Market (REM) where RE power can be traded, purchased or sold, as part of the infrastructure support to facilitate compliance with the RPS mandate. It is envisioned to be a module of, linked to and be a function of the Wholesale Electricity Spot Market (WESM)(3) the Green Energy Option (GEO), which gives consumers the choice to use RE. In essence, it is claimed the Green Energy Option accelerates the open access concept under the Electric Power Industry Reform Act (EPIRA) of 2001.

(4) the Net Metering arrangement, allows distribution grid users who may produce RE powerand be appropriately credited with its contribution to the grid;

(5) The Minimum RE Generation Mandate for power generators in off-grid areas, which is expected to widen access to energy services to the rural constituents

Institutional support

Government and institutional support are embodied in the general provisions which create the following:

(1) the National Renewable Energy Board (NREB) which has the following functions:

(a) Evaluate and recommend to the DOE the mandated RPS and minimum RE generation capacities in offgrid areas, as it deems appropriate;

(b) Recommend specific actions to facilitate the implementation of the National Renewable Energy Program (NREP to be executed by the DOE and other appropriate agencies of government;

(c) Monitor and review the implementation of the NWP, including compliance with the RPS and minimum RE generation capacities in off-grid areas;

(d) Oversee and monitor the utilization of the Renewable Energy Trust Fund created pursuant to Section 19 of this Act and administered by the DOE;

(2) the Renewable Energy Trust Fund, which has the following functions and objectives:

a) Finance the research, development, demonstration, and promotion of the widespread and productive use of RE systems for power and non-power applications;

(b) Support the development and operation of new RE resources t improve the competitiveness in the market;

(c) Conduct nationwide resource and market assessment studies for the power and non-power applications of renewable energy systems;

(c) Propagate RE knowledge by accrediting, tapping, training, and providing benefits to institutions, entities and organizations which can extend the promotion and dissemination of RE benefits to the national and local levels; and

(d) Fund such other activities necessary or incidental to the attainment of the objectives of this Act.

Will it work?

With the basic provisions spelled out, one has the impression that the bill is saying a mouthful, but may signify nothing tangible. The bill obviously borrowed concepts mainly from the developed world, but the first question is, are we ready for these? Have we thought out the consequences once these policies are adopted? Is the current industry structure ready for any of these policies?

There is nothing wrong with adopting best practices from other nations; in fact, by doing so, one avoids the pitfalls of groping in the dark.

The fundamental premise for any of these concepts to work is an open, free and competitive energy and electricity market, which obviously we do not have. Seven long years after the passage of the EPIRA law, we still do not have a truly competitive wholesale electricity spot market. The one which is pretending to be is only confined in Luzon, and has been mired in controversies such as price-fixing.

The privatization of generating assets falls short of targets. The winning concessionaire for the transmission grid still lacks a legislative franchise to operate. Except for major cities, the electricity distribution network is still in the hands of inefficient, highly subsidized electricity cooperatives which are more often than not, under the whims and caprices of local politicians and moguls. Will these be covered, say, by the renewable portfolio standards?

The bill is even hazy on such very fundamental definition as what constitutes renewable energy sources? Large-scale hydro and mini- or micro-hydro are obviously renewables, but would these be treated equally? How about rooftop solar photovoltaics and grid-connected solar arrays? What about geothermal? Would all the laws governing geothermal development be superseded by the bill once it becomes law (it ought to be, by the rule of law)?

If the objective of the bill is only to have a motherhood statement policy, like the Constitution, fine. But for the bill to attract significant amount of investment in renewables, it sorely needs auxilliary laws which are clear and unambiguous. In various states of the U.S. and in countries of the European Union, each of the concepts lumped into the bill, such as RPS, Green Option, net metering, etc., is usualy contained in a separate piece of legislation, each with its detailed rules of engagement.

A more fundamental question is: are any, a combination, or all of these policies enough to jumpstart RE development?

Conspicuously absent is a feed-in tariff policy which requires only low cost deployment, but that has single-handedly pushed the explosive growth of wind and solar power in the European Union. Belatedly, the United States and Canada is playing catch up with several states like Michigan, Minnesota and Illinois in the U. S. and Ontario in Canada, rushing up their feed-in tariff policies only in the last few months.

Interestingly, Northwind, the developer of the wind farm at Bangui Bay, Ilocos Norte suggests a feed-in tariff specifically for wind projects to support the emerging source, but has only been met with blank stares.

Better than nothing?

As crafted, we have a bill noble in intentions but lacking much in substance. Shall we push for its passage, despite its flaws?

Microsoft, the software giant, has the propensity of releasing imperfect products only to correct flaws in mid stream. Would we follow the same tack?

At the moment, the best argument for its passage is, at least we would have a framework policy on which to build up the detailed structure later.

But, if you pass it, would they (investors) come?

Would the bill when signed into law actually pushes the energy industry into a more open and competitive market, or would we wait for an open and competitive market before acting on the bill?

Despite a perceived noise to the contrary in the mainstream media, there have been not much sober, analytical and methodological discussion on the merits and weaknesses of the bill. I am not aware of any scientific-based concept or white paper probing the implications of any of the aforementioned provisions in the Philippine context. What is passed on as discussion in the media is mostly histrionics for or against it.

This corner hopes to contribute to the discussion in future posts.

Tiwi-Makban sale also pushed back

By J R Ruaya

Energy and Chemistry Consultant

Like the Palinpinon sale, the auction for the 289-MW Tiwi and the 458.53 Makban geothermal power plant complex has been pushed back. Unlike the former though, the sale is moved back by three weeks only, from June 4 to June 27.

The Power Sector Assets and Liabilities Management Corp. (PSALM) said this was done to give ample time for investors to undertake due diligence activities. According to PSALM, the nine bidders of the two plants located in Laguna and Batangas provinces, have requested for more time to complete their deliverables, including conducting their due diligence.

PSALM said the submission of documentary deliverables was also extended by another week to give foreign bidders more time to secure their authenticated documents from the Philippine consular offices abroad.

It must be noted that PSALM initially offered the Tiwi and Makban plants as a package in September 2005. The bidding, however, was withdrawn by PSALM to consider changes in the bidding procedures and transaction documents that the government power privatization firm has been adopting in its recently sold assets.

Other than these procedural requirements, there are other issues and concerns raised by investor groups, according to published reports.

Let us hope the new schedule is not just another moving target of PSALM.

The Tiwi geothermal field

What is being sold?

Located in Tiwi, Albay province, the Tiwi geothermal power plant complex consists of three plants, namely, Plant A with two 60-MW units, Plant B with two 55-MW units, and Plant C with two 57-MW units. Plant B's Unit 4 was retired or decommissioned in 2003.

The Makban plant complex in Southern Luzon, Bay & Calauan, Laguna and Sto. Tomas, Batangas is situated 70 kilometers east of Metro Manila. It consists of Plants A and B with two 63-MW units each, Plant C with two 55-MW units, Plants D and E with two 20-MW units each, and a binary plant with five 3-MW and one 0.73-MW units.

Therefore, the actual capacity has a total of 747.53 MW, as contained in the bidding papers but Chevron pegs the actual generation capacity at 637 MW, which excludes the two 55-MW units up for rehabilitation.

The Tiwi and Makban geothermal power plants were first commissioned in 1979.

Unlike other geothermal power plants, though, Napocor also owns the steam fields facilities--surface steam pipes, separators, production and injection wells, some parcels of lands where the faclities are constructed--at both Tiwi and Makban. Chevron Geothermal Philippines Holdings Inc., formerly Philippine Geothermal Inc. while under Unocal, merely maintains and operates the fields, produce steam and sell it to Napocor--all for a management fee.

As an example, when the plant requires additional steam, Chevron would have to ask Napocor to drill the well and pay for the capital expense. The prospective bidder is actually buying the steam field facilities, of which he has not much control of, unless a new arrangement is made later on.

Under the original steam sales contract between Chevron and the National Power Corporation (Napocor, or NPC), which have been deemed lopsided in favor of the steam field manager by critics, a serious billing dispute inevitably arose in the past. The case went on to the International Court of Justice at the Hague for arbitration. However, in 2004, Chevron signed a compromise agreement settling the contract dispute.

As part of this agreement, Chevron Geothermal Philippines Holdings is operating the steam fields under a transition agreement with NPC. This transition agreement is expected to be superseded by a new agreement, which will become effective upon completion by NPC of the rehabilitation of the Mak-Ban geothermal plant and the formation by Chevron Geothermal Philippines Holdings of a Philippine company.

Under the new operating agreement, the Philippine company would be granted the right to operate the steam fields under a contract with the Philippine Department of Energy for an additional 25 years. The Philippine company would sell geothermal resources under a Geothermal Resources Sales Contract (GRSC) until 2021, at negotiated prices designed to baseload operation of the Tiwi and Mak-Ban geothermal plants

The contract itself is part of the assets being sold.

Rehabilitation of Tiwi-Makban plants

The rehabilitation of the Tiwi-Makban plants, in particular, Units 5 and 6 at Makban, is among the concerns raised by the investor groups, the expense of which is effectively transferred to the new investors. This should have been done by NPC as part of its compromise agreement with Chevron. Apparently, NPC has been remiss on its part and now wants the burden to be shifted to the new investors.

But there is more to rehabilitation than expense.

Former PSALM president Nieves Osorio noted that for the geothermal resource sales contract (GRSC) to be rendered effective, the rehabilitation of the generation units shall first be accomplished. Such particular development on meeting preconditions for the GSRC is also being watched carefully by prospective investors.

"The GRSC has to be effective and one of the conditions is the rehabilitation of the units" and she added, "Napocor-PSALM has to show it can deliver its CPs (condition precedents)".

On the other hand, Chevron seemed to have done its part in drilling additional wells for the expected increase in steam requirements upon completion of the rehabilitation works

Assigning power supply contracts

Any potential investor would like some assurance that it has a ready market for at least a major portion of the plant output. Past failure in bidding of some power assets could be attributed to the absence of a power sales contract.

To ensure better chances of asset disposal, PSALM said it had assigned power supply contracts on more than 400 megawatts in capacity of the 747-MW Tiwi-MakBan geothermal plant package, which will be auctioned on June 27. The rest of the output, if any, would have to be sold through the wholesale spot market, or to other big users under a bilateral contract.

PSALM said potential bidders for the plant complex would thus be assured of a ready market for that amount of electricity. During one of the pre-bid meetings, PSALM also discussed with nine interested groups the privatization framework that would cover the transition period until the geothermal resources sales contract took effect. Major provisions of the geothermal resources sales contract, such as scope and pricing were also tackled.

PSALM said the potential bidders were also briefed on the existing transition agreement between and among major stakeholders of the plant package, including PSALM, Napocor, Chevron, and the winning bidder.

Filipinizing Chevron Geothermal

The other major conditionality of the compromise agreement between Chevron and now, PSALM is "Filipinizing" Chevron geothermal, or putting up another Filipino company to operate the field.

The prescription for Chevron Geothermal to take in a local partner takes ground from the 1987 Philippine Constitution which limits the participation of foreign investors in the development and utilization of indigenous resources; and geothermal steam is included.

The concluded steam supply arrangement between Unocal and NPC years back, stretching until year 2021, puts mandate on the US firm to tap that local partner; and was blamed as among the reasons why the facilities’ earlier attempt at privatization was stalled.

After concluding that step in the new corporate vehicle to take on the steam supply for Tiwi and Makban plants, Chevron would need to file geothermal resource service contract with the Department of Energy. The current service contracts for Tiwi and Makban are owned by NPC, but if the plants are to be sold, the service contract would have to be "returned" to the Department of Energy.

For its part, Chevron as a matter of corporate policy, seems unwilling to to take on a minority position in any endeavor it is engaged in, based on experience it has shown worldwide. As a Filipino company, Chevron Geothermal can now even bid for the power plants, but with an existing "generous" GRSC, it doesn't have to. Financially, it might not even be to its advantage to acquire both the power plant and the steam field facilities.

The original EPIRA mandate to package both the power plants and the steam field facilities appears to have been resolved by attaching a power sales contract instead, but legal questions still linger.

It would now appear that the concerns raised by investors can be traced largely to the compromise agreement between PSALM and Chevron.

GRSC provisions and the industry structure

The success of the business lies of course, with the GRSC in which the potential investor would have to live with. It would have to be asumed that the investor would have to examine the provisions with a fine tooth comb. How would the provisions affect the cash flow of the enterprise in the future? and other similar questions need to be clarified.

It was also reported that under the GRSC, the steam price, like in the case of Palinpinon (see earlier post " Palinpinon power plant sale hangs" on May 12), is also pegged to coal prices. If so, then the consequences as discussed earlier, would apply here. But since the GRSC for Tiwi and Makban came before Palinpinon's, it would now appear that the latter's GRSC is patterned after that of Tiwi-Makban's.

The investor would have to factor in the current industry structure which is undergoing a major overhaul through the EPIRA. The very success of government privatization of power assets in fact hinges on the active participation of investors. But this situation could rapidly become a Catch-22 stand-off if the bidding process itself becomes unpalatable to investors due to the base price set, unresolved legal questions, provisions of the GRSC, political risks, market uncertainty, steam supply and what have you.

On the positive side, the winning investor would gain a foothold on the important and potentially lucrative local geothermal power sector. The experience gained could very well be transformed into a springboard for other ventures in the geothermal sector worldwide which has undergone some sort of a revival due in part to the surging oil prices and governments' desires for in-country energy security.

In this particular exercise, the winning bidder would have the chance to be partner in exploiting what could be one of the most productive geothermal fields in the world in terms of power density, which is Makban.

But before he could reach that goal, the investor has to tread carefully through a landmine-laden field.

The classic admonition applies very well to the present exercise: Caveat emptor!

The answer is, blowing in the wind?

By J R Ruaya

Energy and Chemistry Consultant

Recently, the PNOC-Energy Development Corp. (PNOC-EDC), majority-owned by the Lopez family, announced that it will push through with the development of wind power projects having a combined capacity of 140 megawatts (MW).

PNOC-EDC director and former Energy Secretary Vincent Perez said the new owner (Lopez group) of the company is “reviewing the feasibility of the wind power projects”.

This was confirmed by Department of Energy (DOE) director Mario Marasigan, saying that PNOC-EDC’s wind power projects form part of the indicative power project of DOE.

As proposed, the project will be done in three phases: 42 MW for Phase I, 40-60 MW for Phase 2 and 10-20 MW for the third phase. Another 20-MW of wind power project is also being eyed by the company in Ilocos Norte and elsewhere in the country.

PNOC-EDC' s project is not the first wind energy project in this country.

The first commercial wind energy project is the Bangui Bay 24.75 MW project in Pagudpud, Ilocos Norte which was commissioned in May 2005 and run by Northwind Power Development Corporation. It consists of 15 turbines, and at peak load can supply up to 40 % of the electricity requirements of Ilocos Norte.

The power generated is dispatched through a 57-km 69 kV transmission lines, also owned by Northwind, for distribution by the Ilocos Norte Electric Cooperative (INEC).

So, what prompts the flurry of activities in this renewable resource-- which is a prime choice of green energy advocates, but which is deemed economically uncompetitive against traditional sources of electric power?

What has changed, aside from $120 a-barrel-oil and pressures from environmental activists, since the man from La Mancha stopped chasing windmills?

The current scenario

Consider the current situation:

* Wind power is the fastest growing energy source on a percentage basis over the past five years at 29% annually from 2001-2005 with solar a very close second;

* The amount of electricity generated from wind power has tripled in the past five years;

* Total installed wind power capacity in the United States, the largest wind developer in absolute terms in the world stood at 11,603 MW at the end of 2006, or enough to power more than 2.9 million U.S. households.

* Denmark, the pioneer in harnessing the wind, gets 18.5% of its electricity from wind sources.

* More and more countries are getting into the bandwagon, with India, China and the United Kingdom being the most aggressive.

* New, larger wind turbines (from 1 to 3 megawatts per turbine) generate 120 times as much electricity as 1980s models at one-sixth the cost.

* The cost of wind-generated electricity has fallen dramatically from 38 cents per kilowatt in the 1980s to only 4 -6 cents today.

Despite the dramatic strides attained by the industry on the economics of wind generation, it has failed to fire up the imagination of local entrepreneurs.

Benign to the environment

The overriding attraction of wind energy is of course, its negligible effect to the environment.

For example, Northwind claims that its project displaces greenhouse gases such as carbon dioxide at 46,960 tons/yr; sulfur dioxide , 802 tons/yr; and suspended particulates , 1602 tons/yr which would otherwise have been emitted from a typical fossil-fueled generating plant.

But for the hard-nosed investor on the ground, it is economics. A quick glance of comparative tables would show that wind-generated electricity cannot hope to compete in terms of cost per unit generation against the established conventional sources of energy. But like any other product, wind energy may find its proper niche given the correct circumstances.

Our archipelagic country may be the right circumstance. The grand plan of linking the major islands into a national grid is still a pipe dream. The National Transmission Corp. has only linked, via direct current submarine cables, a few major islands like Luzon, Samar, Leyte, Cebu, Bohol, Negros, Panay, Mindoro and Mindanao. That leaves other major island provinces and many other important island provinces out of the grid circulation: Palawan, Masbate, Catanduanes, Batanes, Romblon, Camiguin, Siquijor, Basilan, Sulu, Tawi-tawi - you complete the list. Other major island or groups out of the loop are Camotes, Dinagat, Coron (Palawan), Polilio, and of course Boracay, and many others.

Is there a correlation between the incidence of poverty in many of these islands and the lack of affordable power?

A blessing from a curse

The first question that pop up in the mind of a potential investor is: do we have the resource?

We are cursed by the wind of the destructive kind: an average of twenty typhoons a year. But this is not we want. The ideal site for a wind project would be where the wind blows at an accepted strength for most of the time.

The Department of Energy has already made an inventory of the wind resources of the country while the National Renewable Energy Laboratory (NREL) of the U.S.' Department of Energy has published a comprehensive wind atlas for the whole archipelago. These studies identify wind availability, wind circulation patterns, velocities, areas suitable for wind projects and other data for investors and other interested parties.

According to a study by Prof. Rowaldo del Mundo of the UP National Engineering Center (NEC), NREL puts the country's wind potential at 76,600 MW. NEC's own study, after inputting a screening criteria of (1) a wind power density of at least 500 W/m2 and (2) a transmission line cost component of a maximum 25 % of the total project cost, came up with a harnessable 7,404 MW equivalent to an estimated annual generation of 23,047 GWh/yr. This potential could come from the following number of sites: Luzon, 686 site; Visayas, 302 sites and Mindanao, 47.

More studies needed

Like any other struggling technology, wind energy still requires a lot of scientific and technological groundwork for it to become more viable.

To increase value and reduce uncertainties in wind power production, del Mundo suggests more research and development (R & D) in forecasting power performance, in "reducing uncertainties related to engineering integrity " , in "improvements and validation of standards" and on storage techniques.

At first glance, wind energy cannot be stored because if the wind stops blowing, there is no power. But this has not deterred inventive scientists and engineers from pursuing the idea.

To effect cost reduction, del Mundo would focus on (1) improving site assessments and on finding new locations (2) coming up with better models for aerodynamics, (3) developing new intelligent structures and materials (4) designing more efficient generators and converters, (5) finding novel concepts in load reduction, and (6) improving performance of stand-alone and hybrid systems. A hybrid system consists of a standard wind turbine and a back-up facility which takes over at times when the wind simply dies down.

More incentives needed

It can be done, as Northwind has shown. However, there are market and financial hurdles to overcome, as Northwind Vice President Marlon Centeno pointed out, foremost of which is the inability of the electricity from the project to compete at the wholesale electricity spot market once the wheeling charges of Transco is factored in. Northwind's project is connected directly to INEC, as earlier noted.

The upfront high cost of putting up a wind facility could be mitigated by granting more tax incentives and low- finance credit facilities not only from the government but from institutional lenders like Asian Development Bank and the World Bank.

Carbon credits and additional so-called environmental credits also helps.

Many of the incentives to make a wind and other renewable energy projects viable are already embodied in the renewable energy bill now pending in Congress. Hastening its passage would be a major step in the right direction.

Wind energy may not become mainstream in the foreseeable future, but for many of our fellow Filipinos living in smaller islands , the best hope to taste the benefits of electricity coming from a non-polluting source might just be blowing in the wind.

Palinpinon power plant sale hangs

By J R Ruaya

Energy and Chemistry Consultant

According to a report carried by major papers, the privatization agency Power Sector Assets and Liabilities Management Corp. (PSALM) raises the possibility of again having to shelve the auction for the government's 192.5-megawatt Palinpinon geothermal power plant in Negros Oriental province because of problems with the plant’s fuel supply contract.

The PSALM vice president for asset management and electricity trading, Froilan Tampinco, said the amended geothermal resources sales contract (GRSC) for the plant was now being routed for signature among members of the Joint Congressional Power Commission (JCPC).

The plant was originally scheduled to be bidded out 5 December 2007, then to December 19, moved again to first quarter of this year, and now the tentative date of bidding is August of this year. Even this date is clouded by uncertainty, because, according to Tampinco, even if JCPC approves the GRSC, "PSALM could still end up in a stalemate scenario with PNOC Energy Development Corp.(PNOC-EDC), the owner of the steam fields that provides fuel for the Palinpinon plant" if the latter doesn’t go with the amended GRSC. In that case, the Palinpinon sale will have to be shelved again, he told reporters.

The 146.5-MW Panay diesel-fired power plant, previously bundled with the Palinpinon geothermal facility, would be packaged with the 22-MW Bohol diesel-run power plant and sold in July.

Should the JCPC approve the amended GRSC and PNOC-EDC is okay with it as well, the Palinpinon plant would be bundled with the Panay plant once again.

Mr. Tampinco said the sale schedules for the 289-MW Tiwi and 458.5-MW Makban geothermal plants would also be changed.

"We are still accommodating questions from various interested parties regarding the sale contract of the plant which is why we moved the bidding of the Tiwi-Makban from June 4 to June 27. The rescheduling will also give more time for the parties to complete the requirements we are asking," he said.

If one recalls, The Tiwi-Makban complex was first put up for sale in late 2005, then postponed to first quarter of 2006, then temporarily shelved, and now resurrected for June.

Why is the government having difficulty selling these geothermal assets? There are serious interested parties, with some going into the requisite due diligence process.

The issues involved are far-ranging and complex--from the asking base price, steam sales contracts, conditionalities surrounding like compelling the prospective buyers to rehabilitate aging generation units, bundling the assets with non-geothermal plants, land ownership, to constitutional limits to foreign participation in energy resources development. These are all legitimate concerns. Any buyer acquiring a significant asset would like to know what he is getting in the first place. For the investor-buyer, the overriding question is, can he make money out of it?

Each of the assets for sale has its own peculiarities and problems. Here. let us tackle Palinpinon. Tiwi and Makban would be the subject of a future post.

The Palinpinon contracts

The 192.5 MW Palinpinon power plant complex actually comprises a main 112.5 MW plant (Palinpinon 1) and four 20-MW modular units collectively called Palinpinon 2. Because the plants were put up at different times, PNOC-EDC entered into two steam sales contract with NPC, one for Palinpinon 1 and another collectively for Palinpinon 2.

The pertinent key provisions of the original steam sales contract, according to documents submitted by the company to the Philippine Stock Exchange, are the following:

" The steam sales contract for Palinpinon I provides, among others, that NPC shall pay the Company a base price per kilowatt-hour of gross generation, subject to inflation adjustments and based on a guaranteed take-or-pay rate at 75% plant factor. The contract is for a period of twenty years commencing on December 25, 1988."

"In June 1996, the Company and NPC signed a steam sales contract for Palinpinon II’s four modular plants - Nasuji, Okoy, Sogongon I and Sogongon II. Under the terms and conditions, NPC agrees to pay the Company a base price per kilowatt-hour of gross generation, subject to inflation adjustments and based on a guaranteed take-or-pay rate commencing from the established commercial operation period, using the following plant factors: 50% for the first year, 65% for the second year and 75% for the third and subsequent years. The contract is for a period of twenty-five years for each module commencing on December 13, 1993 for Nasuji; November 28, 1994

for Okoy; January 28, 1995 for Sogongon I and March 23, 1995 for Sogongon II."

When the plant complex was readied for auction late last year, the first contract was about to end. To address potential investor concerns regarding the absence of a steam sales agreement, PSALM and PNOC-EDC crafted a new steam sales agreement, now known as the geothermal resources sales contract (GRSC), which would take effect upon the expiration of the original contract or the takeover of new owners. Except that, the would-be owners were not part of the contract drafting, yet they would have to abide by it.

In all likelihood the GRSC, is patterned after existing NPC contracts with steam field operators with slight changes.

During the Congress hearings late last year when the government stake in the geothermal developer was about to be disposed of, Senator Miriam Defensor-Santiago, chairman of the JCPC, stopped the active efforts by PNOC-EDC president Paul Aquino to secure JCPC approval. She said her specific objections include: (1) the price of electricity is set in U.S. dollars, which allows losses due to weakness in peso against the dollar to be passed on to consumers; (2) certain performance incentives given to PNOC-EDC and (3) the steam price being indexed to coal.

Investor groups on the other hand, bewailed the absence of a take-or-pay provisions and expressed apprehensions on its effects on the establishment of the wholesale electricity spot market (WESM) which affects load dispatch.

To be fair to PSALM and PNOC-EDC, some of the concerns were not anticipated at the time of crafting the document.

Tampinco said the existing GRSC that PNOC-EDC submitted last year to the JCPC would have to be amended to adapt to an environment that had a commercially operating wholesale electricity spot market (WESM).

The electric power industry reform law (EPIRA) created the wholesale electricity spot market where electricity, like any other commodity, is traded by the market players --generators, distributors and consumers--according to supply and demand. If a an electricity generator does not have a long-term supply contract with an offtaker, then it has to trade all of its electricity produced into the WESM--but there is no guarantee that his product would be sold at his asking price.

The EPIRA law mandates that only 10 % of the output need be traded in the WESM on its first year of existence. All the rest may be sold on the bases of long-term contracts with buyers.

Instead of a supply agreement that has no take-or-pay provision, there has to be a certain level of steam covered by a take-or-pay provision so that the new owner of the Palinpinon plant will be assured of steady steam supply, he said.

With a take-or-pay provision, the future owner of the Palinpinon plant will have to pay for a specific level of steam, whether or not this is used to run the plant.

“We won’t adopt the original [steam sale agreement] since that was crafted for a non-WESM environment,” Tampinco said. “The contracted steam level for that agreement was 75 percent. For the GRSC now, we’re looking at a take-or-pay level of around 50-60 percent.”

Under the Electric Power Industry Reform Act, geothermal assets of the government’s electricity producer National Power Corp. (Napocor or NPC) and the steam fields that provide fuel to run them will be sold as one package through a public bidding.

However, since PNOC-EDC, the operator of the steam fields, also became fully private, the sale structure approved for Napocor’s geothermal assets was for the plants to be sold, not with the actual steam fields, but with steam sale agreements attached to them.

Why coal?

The reason given by PSALM for indexing the steam price to coal is that for a long time, the country's electricity generation market is dominated by coal-fired plants. Which was true for a time, but with the establishment of the natural gas plants, the contribution by coal plants is no longer dominant.

A side effect of indexing to coal is that, NPC's coal plants will always be competitive vis-a-vis geothermal-- which is starkedly emphasized these days with soaring coal prices in the world market. To put it in another perspective, geothermal electricity, despite coming from an indigenous resource, cannot hope to compete and win against coal under the provision. Which is a strange provision given that each electricity generator has its own price structure. One might as well index electricity price from hydro and natural gas to coal.

Apparently, NPC has some fondness for coal plants, as newspaper columnist Jarius Bondoc implies in his latest column on NPC's coal purchases.

PNOC-EDC president and chief executive Paul Aquino said the geothermal resource supply contract (GRSC) that it signed with PSALM in 2006 was “sacred” and “non-negotiable.” “You forced us into that contract and now you want to change the terms when the market condition changed? “That is not right,” he said. “So, we’re sticking to our guns on that. That is a signed and sealed contract.”

Aquino said that at the time the contract was signed, coal prices were dropping, which put the now-privatized PNOC-EDC at the losing end of the deal, as steam prices are benchmarked on coal prices.

He said that a few months after the signing of the contract, coal prices shot upwards, and so did the price of steam.

“And now PSALM wants to renegotiate it,” he said. “That’s non-negotiable for us. After almost two years of negotiation, [PSALM] never budged until we were forced to sign because of our IPO [initial public offering of stock]. Now that the market has turned around, they want to renegotiate. No way.”

So, the original contract submitted to JCPC must have turned out to be a potential bonanza for PNOC-EDC despite its apparent early misgivings; otherwise Aquino wouldn't be standing firm on his ground and moving heaven and earth for its approval.

While he may have legal grounds to claim sanctity of the contract, he fails to appreciate that he is now heading a private business--not a government corporation-- where the mantra is, the customer (here, the power plant operator) is always right. Or least, he has to be respected and listened to. Always listen to the customer--is this not taught in Business 101?

He also needs some lessons in business negotiation.

Apparently, PSALM listened, and pushed for an amended GRSC instead.

PNOC-EDC also bidding for Palinpinon

It is no secret that PNOC-EDC is also interested in the power plant complex. It has declared its intentions to the public. After all, with the turnover of the build-operate-transfer power plants at Leyte to it from CalEnergy, the previous contractor, PNOC-EDC is now both a steam field and power plant operator. Owning both the plant and the fuel would have economic benefits. That's a no-brainer.

However, the intention has unintended consequences on the bidding process.

One, PNOC-EDC would have undue advantage as far as steam supply information is concerned simply because it is the steam supplier. Two, by being adamant on the GRSC, PNOC-EDC has unduly delayed the privatization process.

For this--or for that matter, any other government asset sale to push through, somebody must leave some money on the table: PSALM, the seller and PNOC-EDC, the other interested party to the deal.

In the end, a prospective private investor always sees the bottom line: will I make money on this deal? To answer the question, he has to factor in a host of things--asset price, economic risks, political risks, public acceptance, cash flow, etc.--before putting the ante on the table.

If the answer is no, he can go to other more hospitable places.

Gokongweis, JP Morgan eyeing the wrong Petron stake

By J R Ruaya
Energy and Chemistry Consultant

According to today's papers, Energy Secretary Angelo Reyes said Wednesday that the Gokongweis and investment group JP Morgan have expressed interest in buying a 40 percent stake owned by Saudi Aramco in oil refiner Petron Corp.

Well and good. At least it shows that despite its mediocre performance in the past years, the refiner can still command some interest. In the first quarter of this year, Petron had a net profit of P 658 M, down 31 % year- on- year. Really, a silly performance in an industry where the price of its prime product, oil, is at stratospheric levels.

According to the covenant signed when Saudi Aramco acquired the stake in 1994, PNOC has the right of first refusal when the acquirer likes to divest the stake to another party. PNOC can also assign its option to a third party. Its board meets today to decide a course of action.

Let us hope the members of the board have given the matter the deepest thoughts.

The Gokongweis are no stranger to the industry. They have taken a dip into the industry through JG Summit Petrochemicals Corp., a unit of its flagship company, JG Summit Holdings. The petrochemicals unit is said to be the country's first integrated polyethylene and polypropylene plant. Therefore, the Petron stake fits nicely to the Gokongwei's portfolio.

Petron itself hopes to jumpstart its petrochemicals business this year by opening its new facility in Bataan. It hopes to increase its gasoline production and extraction of propylene, a raw material for plastics.

JP Morgan, on the other hand, has made its mark in the financial world as a financial adviser, principally in loan syndication, public offerings, and mergers and acquisition. This time it might be representing some clients, but it is also known for taking direct stakes in target companies with the hope of flipping these later for a tidy profit. Very much like the "dreaded" Ashmore.

Because Ashmore made the offer with only a slight premium, JG Summit and JP Morgan must be salivating over the stake, for they could get it for a song.

But wait. The government need not assign the stake to a third party at the same price as what Ashmore offered. It can, in effect, go through the motions of exercising its right of first refusal and put the stake into play, where anyone, including the known corporate raiders and vulture capitalists can take part in open bidding.

Better still, the Gokongweis and JP Morgan should offer to buy the government's other 40% stake while letting Ashmore partake of the other 40%. Putting both stakes together as a block at 80% would surely command a better price, but this would spark an open revolt from the ultranationalists and protectionists.

This is also the chance for the government to get out of Petron altogether. Many interests still have misty eyes about protectionism, energy security, and semblance of control of oil prices, but look what have we got?

We have tried tight control before and lossening up with partial privatization of Petron, but have we stopped or abated the onslaught of the oil price increase juggernaut? Market forces, like acts of God, are simply too strong to resist. Not by government. Not by a monopoly.

Re-acquiring the Petron stake by the government would run contrary to the vision of broadening the shareholder base of vital corporations such as Petron -- or Meralco, the other vital issue currently in the limelight.

The Gokongweis and JP Morgan are probably eyeing the wrong Petron stake.

-----
(Note added: After this has been posted, the Gokongweis clarified through a letter from Lance Y Gokongwei of JG Summit Petrochemicals Corporation that they are offering P 26.4 B or roughly 6.55 per share of the government's own stake, not Saudi Aramco's, according to Businessworld).

Leave Meralco alone!

By J R Ruaya

Energy and Chemistry Consultant

It started with an apparently innocent query by Winston Garcia, GSIS administrator and government representative to the board of Meralco, for certain documents from Meralco. The government is after all, a significant shareholder of Meralco with a combined stake of about 33%.

“It is not about ownership, says GSIS chief Winston Garcia. It is about transparency and proper governance of Meralco,” rues Garcia. Garcia has been asking Meralco management to furnish him copies of the company’s financial and operational documents.

Christian Monsod, Meralco director and consultant to the chairman, said that the management has repeatedly invited Garcia to review the documents he has requested at the company premises anytime during office hours and has even provided him copies of certain requested documents.

“All directors have a fiduciary responsibility to balance the interest of the demanding shareholder against the interest of the corporation as a whole and all other shareholders,” Monsod earlier said. However, Garcia said he wants copies of the “volumes and volumes of documents.”

“I want to study the volumes and volumes of documents. I want my own copies. I don’t want to just view the documents,” Garcia snapped back.

Carmen Pedrosa, a GMA supporter, in her Philippine Star May 4 column, fully agrees. Garcia's smoke signals drifted rapidly to Malacanang, who went into the offensive, citing Meralco for mitigating the high cost of electricity to the consumers. Specifically, Meralco is accused with buying electricity form the wholesale market (WESM) at peak hours when the prices are generally high.

And to pull the rug under Meralco, the President ordered Napocor to cut by half its charges to Meralco, apparently to pressure the latter into cutting its own rates.

This time there will be no excuses, the Palace resident warns, who said that Napocor's rates are often cited by Meralco as their basis for charging its customers.

She also directed the Department of Trade and Industry to file four petitions with the Energy Regulatory Commission (ERC), all aimed at pulling down Meralco rates.

The four petitions are as follows: to enjoin Meralco from buying electricity from the Wholesale Electricity Spot Market during peak hours; ensure preferential treatment for households and power-intensive industries in the distribution of TransCo (National Transmission Corp.) charges; to prohibit Meralco from charging its system loss as a separate item; and to require Meralco to charge the same rates as the Visayan Electric Co. (VECO), Cebu Electric Co. (CEBECO) or Davao Light.

Pedrosa, on the other hand, went on to rail against Meralco and the Lopezes, saying that President Arroyo not only wants lower electricity rates " but a beginning of the end of rent-seeking oligarchs". According to Pedrosa, GMA is merely continuing her father's legacy who was said to accuse the (older generation) Lopezes of “using political power and influence to promote the interests of its business empire".

”She is taking on the Lopezes for the high cost of electricity with whatever risks it involves because of powerful media and politicians in their pocket."

So the issue is not only transparency or high electricity cost, but a bitter campaign against entrenched oligarchs? This is probably stretching the rubber too much.

Napocor as the whipping boy

The President, who has a doctorate in economics, seems ill-advised on the dire consequences of her order to Napocor. Or is she just trading economics for political expediency or GMA misinformed on power economics? asks Federico Pascual in his Postscript column at Philippine Star today.

Senator Joker Arroyo, a GMA ally and one-time human rights lawyer, quickly warned the government against cutting the rates charged by the National Power Corp. (Napocor) to the Manila Electric Co. (Meralco), saying it might again leave the state-owned power firm in deep financial trouble.

He said he finds the President’s order to Napocor disturbing. “This was done in 2003 and was corrected in 2005 because Napocor lost big time and the public in the end had to shoulder the cost,” he said over dwIZ.

The suspect responds

As if to defang the recent criticisms hurled against itself, Meralco quickly responded by expressing support for the move of the National Power Corp. (Napocor) to lower power rates.

Meralco announced that the company would immediately pass to electricity consumers any generation cost reduction.

Meralco clarified that through a memorandum of agreement signed by the company with Napocor, the two firms have already been implementing an ecozone rate program that has significantly reduced the power rates of economic zone locators.

“As required by the Energy Regulatory Commission (ERC) for all distribution utilities, Meralco publishes its monthly purchased power cost data (generation and transmission cost) on its website (www.meralco.com.ph/Corporate/rates/rates.htm),” Meralco said.

Meralco data showed that the cost of power bought from independent power producers (IPPs) was lower by 30 centavos to P1 per kilowatt-hour than that purchased by Napocor.

Napocor sells power through its transition supply contracts, special programs, and the power it sells through the Wholesale Electricity Sport Market (WESM).

For the month of March this year, the average cost of generation from the three IPPs —First Gas’ Sta. Rita, San Lorenzo gas plants and Quezon Power —selling power to Meralco was at P4.55 per kWh.

Vox populi

This time personalities associated with the left and the public servants do not buy the charges levied against the utility firm.

Public school teachers chided Garcia for the efforts to take over Meralco for alleged “mischievous management” of the power distributor.

The Teachers’ Dignity Coalition (TDC) and the Alliance of Concerned Teachers (ACT) both criticized Garcia’s reported takeover moves against Meralco, saying the GSIS chief should attend to the problems of the state fund first, especially the GSIS-related problems of public school teachers.

“Garcia must fix his own mess (at GSIS) first before he tries to clean others,” Melchor Cayabyab, a teacher in Araullo High School in Manila and TDC’s secretary-general, said in a statement issued yesterday.

Cayabyab said that until now, teachers continue to suffer problems with the GSIS despite so many dialogues they had with the officials of the state-run insurance company.

Cayabyab said that Meralco and GSIS have both “exploited” their clients with Meralco allegedly overpricing and GSIS overcharging teachers.

“GSIS is charging teachers of many interests, surcharges and arrearages that were acquired and compounded not because of our liability,” Cayabyab said.

“At least, Meralco was able to refund.” Cayabyab said. TDC is a federation of public school teachers’ associations all over the country.

Antonio Tinio, ACT national chairperson, echoed the sentiments of TDC.

Party-list representative Teddy Casino, a member of the House committee on energy puts the blame on high electricity costs not to Meralco, but to Napocor, whose privatization efforts through PSALM are proceeding at snail's pace, its "onerous" contracts with independent power producers, and the failure of the full implementation of the EPIRA law.

Garcia at it again

Why is Garcia going ballistic against Meralco?

To recall, the government has been eyeing to sell its substantial Meralco stake as part of its fund raising campaign to plug the budget deficit. It can command a better price if all government shares are consolidated as a strategic block. It has doing this quietly by allowing the GSIS to purchase the Meralco shares held by other smaller institutions. Its 23 % stake when combined with another 10 % held by Land Bank of the Philippines, Social Security System, Philhealth and Pag-ibig Fund constitute a formidable block which commands not only a premium, but a strong platform to thwart the Lopezes' plans whatever these are. Or, in a most nefarious scheme, to take over the utility.

At the very least, Garcia wants a good price for the block. After all, his head hangs in the balance on the performance of the GSIS fund, of which the Meralco shares, along with other stocks like Petron and San Miguel, constitute a significant portion of the portfolio.

Garcia's antics are his trademark. These are not new. Not too long ago, he tangled with the Sy empire over the then Equitable PCI shares acquired during the previous administration. At least he walked away in that case with slight bruises, with Teresita Coson-Sy's BDO swallowing the bank, and Garcia getting a better price than initally offered.

All the other reasons proferred--transparency and good governance--are merely smokescreen.

The real culprit

There other ways to make Meralco lower its rates, Senator Arroyo suggests.

Senator Juan Ponce-Enrile says that by removing certain charges that the EPIRA allows to be passed on to consumers, prices of electricyt can be brought down.

Under Senate Bill 2121, Enrile said the (EPIRA) law failed to check market abuse or to make the review process for power contracts transparent.

He said consumers should only be required to pay for actual consumption, while industry players should shoulder the risk costs in every business venture.

Two of the extraneous charges Enrile wants power-generating companies to assume and not pass on to end users are: the cost of unused power, brought about by “stranded debts and contract costs” (debts and other liabilities) of Napocor and the “stranded contract costs” (fixed contract price regardless of actual consumption) of distribution utilities through the so-called universal charge; and the cost of royalty on energy from indigenous or renewable sources also through the universal charge.

To further lower the cost of electricity, Enrile also wants franchise taxes imposed by local government units to “be limited only to the distribution and wheeling charges earned by the distribution utilities, and not on... gross receipts.”

The bill also provides for public hearings – not public consultations where resource persons and witnesses are not bound by oath and have limited accountability – on applications for rate increases.

To ensure real competition, Enrile also proposes lower requirements for the privatization of generation assets from 70 percent to 50 percent as well as lower requirements for transfer of management and control of total energy output of power plants under contract with Napocor to independent power producers, also from 70 percent to 50 percent.

Enrile said his was the only negative vote for EPIRA when it was passed into law in 2001. He said that while he believed in restructuring the industry, encouraging competition, privatization, and effective regulation, he said he did not think the EPIRA would be able to accomplish these.

“It was my firm belief that the EPIRA’s promised benefit of ensuring the quality and reliability of the supply of electricity that would translate to lower consumption costs could not be achieved, thus making this promise illusory,” he said.

Business in a wretched environment

As it is, Meralco is operating in a wrenching environment. It in an industry restricted by a multitude of laws and regulations. Its profitability capped by provisions in its franchise, e.g., the rate-of-return provision.

If it is reaping windfall profits, just ask the thousands of small shareholders who saw the dividends vanish and the value of their investments shrivelled as years pass by. Why do you think Union Fenosa, the biggest utility firm in Spain, quietly divested its stake in Meralco after clinging to it for years?

If the perceived problem is the oligarchic hold of the Lopezes on the utility firm, then by all means let us make the utility firm a truly professionalized, public corporation by broadening its shareholder base. There is a provision in its original bylaws which says in effect that it is prohibited to own by any individual or entity more than 10 % of Meralco, except the Lopezes and the government. We can replace the word "except" by "including".

I am also groaning under the weight of my Meralco bill. But I would train my guns on the masterminds, not on the accomplices. As the song goes, shot the sheriff, not the deputy.

In short, it is not Meralco which is causing all our electricity and energy misery. It is failure of EPIRA implementation. It is the footdragging in privatizing the government's power assets. It is failure to attract sufficient investments in the power sector. It is failure to implement a comprehensive energy plan.

It is a failure in governance.

And if the grand plan of the government is to ultimately take over Meralco in the name of "public service", heaven forbids!

Noli me tangere!

Who's afraid of Ashmore? The Petron saga continues

By J R Ruaya

Energy and Chemistry Consultant

When Saudi Aramco announced on March 14, 2008 that it is divesting its 40% stake in petroleum refiner and fuel retailer Petron, it created a stir on several fronts. The natural questions arose: Why is Aramco selling out, and why to a little-known (at least outside the investment circles) Ashmore, a London-based investment group? How would it affect the perceived national energy security brought about by supposedly strategic investor Aramco at Petron? Why was there no premium for a strategic stake?

The ultranationalists and the protectionists are quick to demand a re-nationalization, by prodding the government to re-acquire the shares. Under the 1994 agreement upon purchase of the stake from the Philippine government, Saudi Aramco is obliged to supply the oil requirements of the country while the government has the right of first refusal in case Aramco decides to divest.

Up to this time, the government is mulling over its options while the end of the 60-day reprieve to exercise its option is drawing close.

"They must have been cooking this up months ago, when the (stock) price of Petron was P4 or P5. So P6 transaction price already includes premium," says Joey Roxas, president of Eagle Equities when the deal was announced. Petron's price (PSE:PCOR) at the stock market have been languishing for years, and underperforming the index. In the months prior to the announcement, the highest price PCOR could fetch was at around 7.10 pesos in late October last year, but went down to as low as 4.80 in mid-January of this year. For the whole month of January, the prices stayed below 5.50 pesos.

If there was a premium, then Ashmore could have made the decision at around this time, but the premium was not as much as Roxas implied. At some stage, it will have to flip its investment; it doesn't need to own Petron as a prized trophy. Upfront, it would not be expected to overpay as a matter of sound investment policy.

When the deal was announced, there was hardly any ripple in the price. In fact, the bias in price has been downward since.

Is it a good deal?

Vulture and savvy investors make offers when the price of an asset is at its ebb, when there is blood in the streets. They will swoop down upon such animals when they are weakest, when they think that their prey is heavily undervalued and when they think that there is much upside potential, or they can unlock the true value of the asset later.

Petron seems to fall into that category. It is at an industry which is reaping windfall profits from skyrocketing prices of its basic commodity, oil. Of course, much of the money can be had at the upstream end, at production and even petrochemicals, but the bulk of Petron's business is downstream, at refining and retailing when competition is cut-throat and margins are razor thin.

Already, Caltex has pulled out of refining altogether, and the other of the big three, Shell, hasn't have not much appetite for local refining. Whatever refining capabilities we have pales in comparison with say, the Singapore-based refiners.

A PNOC executive speculated that the Company's direction towards petrochemicals could be the icing on the cake for Ashmore, which is supporting the move. In fact, Ashmore is buying the stake through its unit aptly named SEA Refinery Holdings.

Why is Saudi firm Aramco Overseas Corp B.V. selling out? boomed Newsbreak. It has bought the stake for $530 M in 1994, but why is it not asking for more?

"Between then and now, Aramco even earned some dividends. So there is a lot of speculation on why it is only selling at $550 million," said Gio de la Rosa, senior analyst at Deutsche Regis Partners.

"If Petron is doing well, why is Aramco selling its stake?" de la Rosa asked.

Apparently, it is not.

To put it in another perspective, Aramco's investment in Petron is insignificant in its portfolio. Aramco is the largest oil company in the world in terms of production. In 2006, its revenues topped a whopping $168 billion while PCOR's revenues is at measly $5 billion which translates to $2 billion attibutable to Saudi Aramco. No reliable actual figures for Saudi Aramco has been released for 2007.

Aramco might simply want to get rid of it, being just a pain in the neck as an underperforming investment. It is not worth keeping. In terms of volume of business it is generating here, Saudi Aramco simply thinks that the Philippines is too small a market to maintain. It would rather move on to much bigger markets like China.

Enter the speculator

Speculation on the motives of Ashmore, which is tight-lipped on the deal, abound. Simply put, it is making an investment, but why Petron? The only way to catch a gleam of its motives is to study its habits.

"Ashmore Investment Management Limited is one of the world's leading investment managers dedicated to emerging markets with a history of consistently outperforming the market. Ashmore focuses on a number of investment themes including dollar debt, local currency, special situations (incorporating distressed debt and private equity) corporate high yield and equity," declares its purpose in its main web page.

On special situations, its avowed strategy is "bottom-up, value and event-driven strategy. Investments are mainly in corporate restructurings through distressed debt, private and public equity and equity linked securities", and on equity, it "[f]ocuses primarily on liquidity and top-down macro country selection in publicly traded equities and is complemented by a portion of equity special situations".

Based in London, the business started in 1992 as part of the Australia and New Zealand Banking Group. In 1999, Ashmore through management buyout became independent and today manages US$36.3 billion (at 31 March 2008) in pooled funds, segregated accounts and structured products. It is listed at the London Stock Exchange.

Its investment philosophy and results have been recognized by the numerous awards given and top rankings accorded to it by major rating agencies including Lipper and Standard & Poor's. The company won Global Investor's Award for Investment Excellence in Emerging Markets Bonds in 2001, 2002, 2004, 2005 and 2006 and Global Pensions' Emerging Markets Manager of the Year Award in 2006. It is on the same league as its esteemed competitors like Aberdeen Asset Management, Invesco and the MAN Group of Germany.

Ashmore's portfolio in the Philippines includes a stake in Maynilad Water Services and Landco, a unit of Metro Pacific Investments. Until lately, Maynilad was a basket case, while Landco, an unlisted unit, owns premier lots which holds a large upside potential. Like Petron, both fit nicely into Ashmore's avowed strategy.

The Group is publicly traded, and it is not as secretive as one might think. On the contrary, Saudi Aramco, along with Kuwait Petroleum, is ranked by an industry watchdog as the worst offender in revenue transparency among the oil majors.

Therefore, Ashmore is really in for the money, period. Do you have a problem with that?

Dirty hands in the deal?

Boo Chanco, a former Petron and PNOC executive and now a columnist at Philippine Star, fiercely wants PCOR to be in private hands, but not Asmore's, according to his latest (today) May 2 column. He said that " in the current case, it makes sense for government to exercise its right of first refusal in the sale of Aramco’s shares to Ashmore, the foreign investment group. Two things come to mind: the buyer brings nothing to the table other than money. Aramco was a strategic partner that guarantees oil supply which is important in this unpredictable oil market. "

"Secondly, the sale is a bit suspicious… at less than market price. A nice block of shares like that should have even commanded a premium. Is Aramco being forced out? By whom? I don’t even want to consider the possibility I have heard that the sale is a neat way of laundering money that came from here, in the first place. But it is a very real possibility. Why would a foreign investor want to buy those shares when there are obviously better options in the international market for that kind of money?"

"I can guess that the money is coming from a domestic vested interest that’s possibly aligned with the administration. I am not sure we want to allow this party to control a vital energy company. Transco’s privatization already landed it in the hands of you-know-who."

I sympathize with Chanco's apprehension on the second reason, which I cannot add anything more, being out of the loop of the corridors of power, but not on the first.

Admittedly Ashmore brings only money on the table, but look how money can shake things up a staid environment like Petron's.

When the barbarians like Warren Buffett, Kirk Kerkorian or a Mittal are at the corporate gates, the company's cauldron begins to simmer. A laid-back corporate board becomes uneasy, deadwood insiders apparently come to life like zombies, and a teetotalling corporate "strategy" or a shadow of its semblance, righted. These predators could be the adrenaline dose Petron lacks.

"As a matter of public policy, it is better if Petron were owned by more people, more groups," Chanco enthuses. He adds, " Aramco’s exit could be a chance to broaden the ownership structure even more by selling those shares to the the stock market. This would also increase the liquidity of Petron shares."

He cited an editorial of Malaya which he considered to put it aptly: “[G]overnment should determine if there is an opportunity to make money at the price tag. If the assets are worth much more, then the government should exercise its right of first refusal and then turn around and look for another buyer. A few million dollars to be made would not hurt a government in chronic deficit.”

There is a non sequitur here.

First, the government will spend $550 million (that is, P 23.1 billion at P42 to a dollar) upfront acquiring the stake.

Second, I wouldn't bet that government, being now the majority owner at 80%, could increase significantly the shareholder value of the company. So the government wouldn't get a "few million dollars" in the foreseeable future to plug its chronic deficit. Putting a bet on somebody like Ashmore to accomplish this would increase the odds of getting one's money back and more.

If one wants the government to earn from its Petron investment, then let somebody (like Ashmore) increase the company's value, and the government to divest part or all of its stake at the proper time. This will also broaden the shareholder base of the company.

In the interim when the government owns Petron, that is the time when its coffers are prone to abuse by the powers that be, the very possibility Mr. Chanco wants to avoid.

We never learn from experience of government in business. We always fervently try to shoot both our feet all the time.

Supply assurance

In terms of supply security, today is no longer 1973, when the bulk of the free world supply is concentrated in Middle East; communist Russia, the alternative supplier, was still regarded as the devil incarnate; and the OPEC cartel was very much in command. True, oil prices are at all-time high, not because of tight supplies, but on the potential massive supply disruptions brought about by raging bushfires in the geopolitical landscape:

Iraq insecurity, U.S. nuclear posturing against Iran, nationalization threats in some Latin American countries, attacks on oil installations in the Niger delta--you name it.

On the other hand, a vast supply potential is waiting to be tapped from new fields in Latin America, West Africa and the former Soviet states. Here in Asia, Indonesia and Vietnam are opening their doors to foreigners who want to develop its hydrocarbon resources. Due to high prices (law of supply and demand again) oil field development have been on a frenzied pace. In the next few years, chances are oil prices would be going down than up.

With more suppliers other than the Middle East, supply would be less of a concern.

There would be supply apprehensions which can become real, like when U.S.' saber-rattling against Iran becomes a crescendo, when Al Qaida gains an upper hand in Iraq, or when President Chavez of Venezuela actually boots out the foreign infidels in oil production, but no thanks to Saudi Aramco's grip on Petron. The market will ultimately decide decide whether we would have oil or we go back to coconut oil lamps and calesa.

So, who's afraid of Ashmore?

Only the rabid protectionists and those who have shady interests on the deal.

.

Biofuels production: Threat or opportunity?

By J R Ruaya
Energy and Chemistry Consultant

In today's issue of Businessworld, two diametrically opposed views on biofuels have been presented. One, international food experts say that a "biofuels frenzy" and other misguided policies have led to the global food crisis in which prices have soared and rice consumption has outpaced production, threatening a billion people with malnutrition.

Joachim von Braun, director of the US-based International Food Policy Research Institute, cited "major policy failures" at the core of the crisis, in which recent price spikes have led to food riots, threats of starvation, and United Nation calls to lift export bans. Such policy blunder was the "ill-conceived" rapid promotion of biofuels in response to high energy prices.

On the other hand our government functionaries are quick to deny that our biofuels program, as embodied in the new biofuels act, could make a dent to the current food situation. The National Biofuels Board allots fallow land only to planting biofuel crops, the board’s executive director, Ramon Santos, said in an interview.

"The domestic situation is quite different from what is happening globally," Mr. Santos said. "We have a very different situation — biofuels as an industry is not a threat to our source of food supply."

He further stressed that the government was very careful not to accept areas suited for food crops even if a number of land owners have offered their property to the government for biofuel use.

Perhaps not. Or not yet. The mere fact that a number of land owners prefer to raise biofuels than rice should trigger alarm bells regarding our policies not only on energy but on food production and agriculture as well. In rice production, we have a heavily-subsidized NFA cheap rice program that keeps farm-gate prices ridiculously low, perhaps lower than actual production without subsidies, to the detriment of rice growers themselves, and costing us billions of pesos annually.

We have also a flawed agrarian reform program that does not encourage efficient production because its basic essence is to subdivide the large estates into marginal plots.

"These are hilly lands, mountainous lands that are unsuitable for agricultural crops," Mr. Santos insists, on land used for bifuels. "We have a very strong law protecting our agricultural lands, so that before a biofuel plantation can happen, it should have certification from our agency."

On the same breath, the agency lists the possible biofuels crops such as coconuts, sugar, jatropha, palm oil, sweet sorghum and soybeans. With the possible exception of jathropa as touted by its promoters, the rest of the crops does not really grow on hilly, or mountainous lands unfit for agriculture. Even jathropa may find its productive haven in tilled agricultural lands rather than in marginal hillsides.

Even in the United States, which is the world's largest food producer, calls for reviews in its biofuels program, which is already making a dent in its foods production, abound. There, a drop in food production threatens not only the domestic supply but a large portion of the developing world dependent on food imports from the U.S.

Clearly, going rapidly into biofuels is not a no-brainer choice.

Our policy-makers must periodically check the impact of the law's implementation not only on the present, but on the future food situation.

Every angle of the biofuels issue must be viewed with a microscope, not with a tainted glass.

Any zealotry for or against biofuels should be examined for hidden agenda, whether political or economic.

An analytic, dispassionate discussion on biofuels should flower, if only to prevent us from falling into a new policy quicksand which can be very difficult to extricate ourselves from.

Nobody wants food riots on our streets.