Arroyo forgets the fourth “E” in her SONA

Well, almost.

In her supposedly last State of the Nation (SONA) address yesterday before Congress, President Gloria Macapagal-Arroyo talked mainly in glowing terms, about her administration’s achievements since she first came into office in 2001.

Yes, the GDP grew from $86 billion in 2001 to $187 billion as of last year, and we have had 33 quarters of uninterrupted growth. The figures are cast in stone, so it is almost impossible to dispute these. What is not mentioned though is that the GDP number for instance is puny compared to our neighbors’ and it does not tell anything about the distribution of wealth. Our growth rates are tepid at best compared to the sizzle at some of our neighboring countries.

The achievement, she says, were accomplished due to her administration’s focus on three E’s—economy, education and environment—which are considered pillars of the economic progress. What was given a casual mention was the fourth E—energy—which I would consider to be one of the basic infrastructures to be given priority if the country were to progress beyond mediocrity. The other two are transportation and telecommunications.

She touted the passing of the EPIRA—the Electric Power Industry Reform Act of 2001—as a cornerstone on the path of reform, but forgot to point out that after nine years, the promised benefits of the energy liberalization has not taken hold: the target level of 70% of the power asset privatization has not been achieved, while the assigning of Independent Power Producers (IPP) administration has not really budged from first base.

These two requirements have stymied the real opening of a competitive power sector.

She also mentioned the passage of two landmark pieces of legislation on energy—the Biofuels Act of 2006 and the Renewable Energy Act of 2008—as part of her crowning glory, but the situation on the ground is not that impressive.

True, the mandated biodiesel content of 2% and an ethanol mix of 10% have been implemented, but there’s not much push to higher biodiesel or ethanol mix. No, the motorists should not be compelled to use them; but they should be educated on the advantages and limitations of these fuels mix.

The RE Act on the other hand, was passed on the philosophy that if you build it, they will come. No such torrent of new investments in renewable energy sources could be felt. Intentions are there, but laying down upfront cash is altogether different.

Part of the reason is that the implementing rules and regulations (IRR) of the Act has only come out very recently—almost a year since the bill was enacted into law. Even then, the detailed IRR of two of the most important provisions, those of the feed-in tariff and the renewable portfolio standards (RPS), are sorely lacking. Without these, investments in renewable energy resources, in particular, solar and wind could not be expected to take off.

Arroyo claimed that with these twin Acts, the populace should expect lower electricity bills soon. It is not clear however, how this would come about. On the contrary, without an attractive feed-in tariff and a well-defined RPS, investments in renewable energy would in fact jack up the prices of electricity.

Perhaps the lack of firm commitment or a report card on energy is a tacit acknowledgment that much is still needed to be done on this sector, if the country is to leapfrog forward and not just nonchalantly chug along.

Perhaps omission of the fourth “E” in the SONA was deliberate.

India squirms at “legally binding” limits of carbon emissions—shall we?

During the U.S.  Secretary of State Hillary Clinton’, visit to India last Sunday, where she heaped praises to that country’s efforts to curb carbon emissions, the local Environmental Minister Jairam Ramesh loudly thought otherwise. He said his country won’t agree to “legally binding” limits on greenhouse gases (GHG).

That remark couldn’t have come to an importune time as the minister escorted the ever graceful Clinton during the tour at ITC Green Center outside the Indian capital. She called the center “a monument to the future”, a testimony to India’s efforts towards cleaner energy sources.  Ramesh, however, pointed out that India is among the major countries which pledged recently to join the efforts to limit global warming by curbing carbon emissions.

But behind that facade of diplomatese lies a brewing conflict between the developed countries represented by the United States on one hand and the industrializing economies typified by India, over GHG emission limits.

Clinton’s smiles can easily disarm a gentleman like Ramesh, but she did not come to India to relish the splendour of Taj Majal. She was there to arm-twist India to accept her boss U.S. President Barack Obama’s cap-and trade plan as a means of weaning his country from fossil-based “dirty” energy sources like coal and oil.

Briefly, the cap-and-trade plan, which is becoming a contentious issue at par with Afghanistan at Capitol Hill, is a series of proposed legislation that makes power generation from fossil fuels more expensive by capping the amount of GHG emissions allowed from these sources. The polluting sources are only given certain emissions credits which they can trade if they have excess credits—hence the “trade” portion.

The current Obama proposal calls for an eventual 83% reduction from 2005 levels by 2050, and a do-able 14% reduction by 2020. And, yes, his bookies say that the government stands to gain $646 billion between 2012 and 2019 from the auction of carbon credits.

Obama cruised to the presidency partly riding on the promise to the American people of a cleaner future—and he is just doing that with the plan. For the American government, the plan is actually a tightrope policy of appeasing both the green movement and the coal industry which supplies roughly half of the power needs of the country. Outright banning of coal, or even a significant reduction of its use, would severely cripple the mightiest economy on earth.

American legislators know that such plan carries enormous costs, and protagonists from both sides of the divide are cranking out arguments and associated costs to support their contention. Nobody knows what the final costs would be, but one thing is sure: the American people would be facing increased electricity costs, despite the claims that money raised from the exercise could be plowed back into the economy.

To give you an idea on what electricity rates increases Americans could expect from the floated  cap and trade plan, utility operators estimate that price increases could range from a low of 40% to as high as 120% for coal-dependent states such as Oregon.

But what’s India—and the developing countries, including the Philippines—got to do with America’s internal energy policy?

Plenty.  U.S. policymakers and think tanks have already figured out, that with the increase in energy costs, the economy would come to a crawl, and the country’s competitiveness on the global arena would be acutely debased.

Which is why for the plan to be viable, the U.S. must enlist the cooperation of the fastest developing economies like India and China, by urging them to do likewise. Or using strong- arm tactics.

But India, which is growing at an average of 8% a year, cannot afford that its march to progress would be derailed by caps imposed from outside.

No, India is not running away from its commitment to cleaner future; “we are simply not in a position to take on legally binding emission targets,” Ramesh insists.

It may not be readily obvious, but people in the third world, who are consuming a fraction of energy per capita compared to their counterparts in developed economies, couldn’t simply have their angst for more power curtailed. The alternative is further slide into abject poverty.

If it were not for the associated cost, it would be pleasant to dream of fresh air every day throughout one’s life, brought about by clean sources of energy. Yes, Americans may grumble about increased electricity bills. They may have to learn to switch off their plasma TVs when not in use. Some may just bear and grin it, but somehow, other expenses will have to be pruned down. Such scenario could put more strain to people who have borne the brunt of the current recession which is considered the worst since the 1930s.

But for the millions of people in Asia and Africa, curtailing power use could mean complete darkness after dusk, or scaling down production at the micro-enterprises which could barely provide subsistence in the first place. That is, if they already have rudimentary electrical power in the first place.

Yes, mercury is still being emitted by coal plants, but will all of it finds its way to the human ecosystem?  Yes, pound for pound, a coal plant emits far more carbon dioxide than any of the alternative, albeit more costly, sources. The mightiest power on earth knows this, but it is powerless to scale down drastically its own coal usage. And for one reason: cost.

Yes, any sane person would love to dismantle all the fossil-fuel plants for the sake of a healthy future, but then, at this point in time, a major problem facing the country is still lingering poverty.

Would we buckle down and dream on, or be pragmatic like India?

Would I trade an unknown, possibly bright future, with a more horrible present?

And I thought about my country.

I just cringed. 

DMCI Holdings bags Calaca coal-fired plant for $361.7 M

In a terse, one-sentence announcement, publicly-listed DMCI Holdings (PSE:DMC) said today it has acquired the 600-MW coal-fired power plant from the Power Sector Assets and Liabilities Management Corporation (PSALM), the government agency tasked with the privatization of power assets, for $ 361.7 million which is the highest among the participating bids.

DMCI Holdings, controlled by the Consunji family, has interests in construction, tollway operation, water services, coal mining and real estate among others. Its subsidiary, Semirara Mining Corporation (PSE:SCC), is the largest coal producer in the country and supplies coal to local power plants including Calaca.

At the Philippine stock exchange, share prices of DMCI Holdings ballooned to P7.10 per share, up P0.50 or 7.58% while that of SCC climbed P3 to P38, up 8.57%. Apparently, investors have cheered the move since there is expected to be a synergy gained from the Calaca acquisition with SCC a major fuel supplier.

It can be recalled that the present winning bid is much less compared to the earlier winning bid of Suez Energy at $787 million for the same asset. Since then, Suez Energy backtracked on the project, losing a $14 million bid bond in the process.

The current bid is also not much higher than the highest bid at $280 million during the first auction of the asset, which was however rejected by PSALM because the price did not meet its base price. It is also at par with the last privatization, which is that of Tiwi-Makban geothermal complex when the Aboitiz group paid $0.6 million per MW. On a per MW basis, the price paid by DMCI amount exactly to the same amount.


The per-MW price is also reasonable compared to the construction of the similar 232-MW STEAG coal-fired plant in Mindanao at $305 million, or $1.31 million/MW.

It would appear then that our contention that Suez Energy merely cut its potential losses when it returned the assets to PSALM was justified. Including the forfeited bid bond, Suez Energy aborted a potential loss of $420 million if its bid is compared to that of the present winning bid.

At least, some sense of sanity has returned in valuing the power assets for sale by the government.

Minority Galoc partners bail out

If you and your friends discover a treasure trove that could provide you long term income, what would you do?

Sell out to your friends.

At least that was what two of the Filipino minority partners—Alcorn Gold Resources (PSE:APM) and Petroenergy Resources (PSE:PERC)-- in the Galoc oil production field did. On June 24, the consortium operating the Galoc field off Palawan declared the “commerciality” of the resource. Two days later, the aforementioned minority partners sold their interests (at 1.53 and 1.03% interests, respectively) to unnamed consortium members at $800,000 per percentage point.

The other participants in the project with their corresponding interests are as follows: Galoc Production Co. W.L.L. (58.29%); Nido Petroleum Phils Pty Ltd (22.28%); Philodrill Corp. (7.02%); Philodrill Corp. (7.02%; PSE:OV); Oriental Petroleum and Minerals (7.58%; PSE:OPM); and Forum Energy (2.27).

The identical reason cited by the minority partners is that their respective interests are too small to obtain a significant revenue stream considering the risks involved. Which could also be interpreted that the resource is not as good as it is touted to be.

The total amount of oil lifted from the field since October of last year has already exceeded 1.3 million bbls of oil, which is really a decent amount. The Department of Energy has been trumpeting that the field should produce from 17,000 to 20,000 bopd (barrels of oil per day) which corresponds to 6% of the country’s daily demand, but the operators are more circumspect, saying that the average production should be around 12,000 to 14,000 bopd. Nido Petroleum, one of the consortium members, and its parent firm listed at the Australian Stock Exchange (ASX:NDO), has a broader range of production target at 10,000 to 15,000 bopd, for planning purposes.

Unlike our energy planners, investors have not really been giving standing ovation at the seemingly sweet smell of money wafting from the oil patch. From a high of A$ 0.46 near the start of production, NDO’s share prices plummeted down to A$ 0.06 before recovering to current prices of about A$0.13 – 0.14. Share prices of the Filipino partner firms, all of which are listed at the local bourse, have not really been influenced to a significant degree from Galoc announcements.

The bailout of the minority partners tells more about the prospect than the official news.

First, the amount involved.

According to a presentation made by Nido, the revenues to be expected depends on the price of oil as well as the amount of production sown on the plot below at production levels between 10,000 and 15,000 bopd.

At a projected average oil price of between $65 to $70/bbl for the year 2009 (The price has since dropped to about $62, from about a high of $73, but that is another story), Nido’s share of the revenues amounts to around $50 million (a conservative amount), which translates to about $220 million for the whole consortium. That means about $2.2 million per percentage point participation.

This is the amount of revenue expected by, say, PetroEnergy which has a 1.03% interest, for the whole of 2009. Compare this with its revenue of $1.8 million for the first quarter 2009 from its small interest in an oil field in Gabon, Africa, which could be annualized to $7.2 million assuming steady oil prices and production.

Now, according to the existing production sharing agreement, for every $100 oil revenue, $70 goes to cost recovery, $7.50 goes to so-called “Filipino participation incentive allowance"and $11.22 as production allowance to the operator. The rest is booked as profit, with $6.77 of it to the government and $4.51 to the investor participant.

Now, figure out the amount due to the minority participants.

Moneywise, there is a compelling reason to take the money today, and run, “considering the risks involved”, as the backtracking participants put it.

Second, the risks are real. Production has not been consistent, with the wells shut from December to February 25 this year due to technical problems. And lately, there has been an interruption “after the mooring and riser system was detached from its floating production storage and offloading facility”. In layman’s term, a technical problem.

Production wont be accelerated soon. At the moment the consortium is actively looking for a strategic partner to help foot the bill required for further development of the field.

We have also pointed out earlier that a potential field problem that could arise is sea water intrusion owing to the fractured geology of the area, as shown by the adjacent West Linapacan field which only produced a short time.

Bailing out early may prove to be a smart move for the minority participants.

Mindanao’s power woes

The Mindanao power situation is becoming a choice between the devil and the deep blue sea.

The devil of course, is the perceived polluting coal-fired power plants that are mulled to be erected in Mindanao to address the looming power shortage on the island. To be sure, Mindanao is not stuck up solely on coal plants. There are lesser “devils” around like the planned 50 MW Mindanao 3 geothermal plant project of Energy Development Corporation (PSE:EDC), which doesn’t sit well with environmentalists due to its proximity to the Mt. Apo National Park, and a 42-MW hydro project in Davao which has also attracted some opposition from locals.

The deep blue sea is more like pitch darkness due to expected brownouts if none of these projects could take off on time due to local opposition. The year of reckoning is pegged in 2015 by the Department of Energy when power demand completely outstrips supply assuming a conservative power growth of 3 % per annum, and the committed power projects are on track.

The reign of darkness could come earlier by 2012 if one or two of the bigger power projects are derailed. Or if big power-hungry projects like Hanjin’s shipbuilding facilities in Misamis Oriental and big malls come on stream to GenSan and other booming cities in southern Mindanao.

At the same time, the DOE considers this year as critical for the Mindanao power grid with peak demand reaching 1,525 MW.

One of these power projects to help alleviate Mindanao’s power shortage is the recently unveiled 200-MW coal-fired power plant to be built in Sarangani province by the Alcantara-led Conal Holdings Corp. at a cost of $450 million. The proponent claims that the plant is “on track” to operate in three years despite that fact that it is still in the development stage.

Conal Holdings is backed by the Electricity Generating Corporation (EGCO), one of the largest generating companies in Thailand and Southeast Asia.

The plants would be built in two stages: Stage 1 comprises a 100-MW unit and the whole facilities for the power station complex, while Stage 2 would be the second 100-MW unit which would be constructed within 24 months after the commencement of operations of the first unit. The second unit is targeted to be completed in 2014.

If coal plants are considered dirty, then why are these preferred by investor- developers?

Compared to other types of generating plants like hydro or geothermal, coal plants have the shortest time of completion, and theoretically, one could erect them just about everywhere. The fuel is not a problem since one could just get it from the open market.

Mindanao is no stranger to coal plants. The speed in which coal plants can be constructed if so desired is best exemplified by the record completion of the 232-MW STEAG coal-fired power plant in Misamis Oriental, a significant control of which has now been acquired by the Aboitiz group.

The apparent choice of coal is of course dictated in the end by economics. But with not much choice considering the looming crisis, Mindanao may not have much choice but must make a pact with the devil.

Or the people there may have to consider coal plants not the devil himself, but a fallen angel with some hope for redemption. The choice is easily made if one looks at the other side and sees nothing but an abyss of darkness.