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 The bidding, however, was withdrawn by PSALM to consider changes in the bidding procedures and transaction documents that the government power privatization firm has been adopting in its recently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!