The next energy powerhouse

Into energy

Which group do you think would be the next dominant energy conglomerate in the medium to long term?

When it comes to power generation, the groups that readily come into minds are the Aboitiz and Lopez groups which have been entrenched in the power industry for generations. With the slew of reforms which was jumpstarted by the Electric Power Reform Act during the Ramos years and continuing to the present, the country has seen new formidable entrants to the power sector which bodes well for the industry and the country.

Which of these groups would come to dominate, or at least become a significant player in the energy sector, has been the topic of speculation by energy watchers.

Ramon Ang of San Miguel Corporation is being keenly watched as he is credited of transforming a stodgy food conglomerate into an energy player. He started by taking over Petron Corporation, and using this as a vehicle, expanded into Malaysia. Next, a huge chunk of Meralco, then some moves into power generation. Now Ang is talking big about upstream oil production.

The other large conglomerates are also suspects. The Ty group through a unit of GT Capital Holdings has been busy acquiring or putting up power assets mostly in the Visayas. The Consunjis have been testing the waters through a power unit of Semirara Mining Corporation. Even the group of Andrew Gotianun through Filinvest Development Corporation is putting up a 600 MW coal plant in Misamis Oriental.

What about--Ayala Corporation?

As of now, that might raise eyebrows as the group is better known for its iconic master planned property developments and banking (through Bank of the Philippine Islands). But since then, it has successfully branched into telecoms which gives the dominant carrier a run for its money, and water service.

Judging from its recent  pronouncements and actions, the group seems determined to stamp its mark in the energy industry.

At the recent stockholders' meeting, Eric Francia, the president of AC Energy Holdings of the Ayala group, revealed that the company has already committed US$325 m for four power projects already acquired or in advanced stage of development. The amount is part of the $700 m earmarked for upcoming power projects in the next few years.

Ayala debuted into energy a few years back by acquiring a 50% stake of 33 MW Bangui wind project from the original developers. At present, the group's equity interests in projects include a 20% of GNPower which is developing a 600 MW coal plant in Bataan; two 135-MW coal plants in Batangas in partnership with Trans-Asia Oil and Energy Development; and a mini-hydro project somewhere in Luzon.

These could represent just a start.

“Our strategy of record for AC Energy is to have a combination of conventional (or fossil-fuel) and renewable energy resources,"  Francia explained, which summed up a strategy combining reality to have conventional power sources together with renewables and hard-nosed business acumen which Ayala is renowned for.

That's why, according to Francia, the group leans towards competitively-priced conventional sources, but over time it sees a balanced portfolio of conventional and renewable sources. But that should take time. That makes sense.

Given its track record on other businesses by taking a long term view, the Ayala group cannot be ruled out as a dominant energy player, even if it has no previous record. When it acquired a small telecommunication outfit named Globe-Mackay, it had no telecom experience, but nevertheless transformed it to second-largest telecommunications firm GlobeTelecom. It acquired a much maligned government water service unit and developed it to a reliable--and profitable--service provider Manila Water Corporation despite having no prior exposure to the water distribution business.

Most importantly, it has the necessary capital firepower to undertake costly projects like power generating plants.

The oldest conglomerate may yet turn out to be the youngest dominant power player.

The Fitch ratings upgrade is welcome, but...

Bangui wind turbines. From Flickr

Before this Administration drum-beaters capitalize on the recent upgrade of the Philippines by Fitch ratings agency to investment grade by blowing its own horn to prop up its candidates this coming elections, it is better for it to go on a Lenten retreat and reflect it's (upgrade) ramifications.

Specifically, Fitch gave credit to Arroyo's--not the present--administration for laying the economic foundations into what we have now.
That's a sobering thought.

Perhaps, the most  prescient reaction to the upgrade is that of William Pesek in his piece he wrote yesterday for Bloomberg. In it he said that the "sick man of Asia" has the unique ability to disappoint even the most hardened optimists. And for good reasons. While he lauded Aquino's administration for its drive for more transparency in governance by punishing his predecessor and ousting a former chief justice, putting a cap on runaway overpopulation and addressing chronic tax evasion, he wondered aloud,"where does Aquino go from here?"

Specifically, he is worried if Aquino's successor would have a divergent view on reforms that could unravel what has been achieved so far. But it won't require a new president with different ideas to nullify the ratings upgrade.

It only requires that we fail to manage and improve our the basic infrastructures  that are hounding economic progress.

Just yesterday, my flight to Manila was delayed due what was euphemistically called "air traffic congestion" which actually demonstrates the inadequacy of our transportation systems.  The creation of modern international airports and improvement of existing ones have been have been priority projects at the start of this Administration, but none seemed to have taken off. Even what looked like a simple project such as the expansion of the Mactan international airport has been bogged down by changes in the bidding procedures and likely political posturing.

Major road  and transportation projects which are the pillars of the much-touted public-private partnership (PPP) program have not even broken ground. What happened to the Daang-Hari interconnection, the extension of our light rail transport system and the planned ports?

The other pillar that needs to be strengthened is the power sector. Here, the Administration deserves a grade of at most a "C", for going into the motion of trying to.

Consider for example, the feed-in tariff (FIT) system which ought to jump-start the use of renewable energy sources such as wind and solar by guaranteeing a reasonable price of power generated by renewable energy companies.  The renewable energy law was passed in 2008 but the feed-in tariff mechanism was only released July of last year or four years later, and only solar projects of between one and 3 MW would hopefully stand to benefit starting next year, according to Mario Marasigan, the energy department's renewable energy bureau chief revealed in an interview with reporters a few days ago.

Forget about those for geothermal and wind; that would be three to five years away, he added. The government has not even approved any of the hundred or so projects that have been submitted for consideration under the renewable energy act.

Marasigan's lame excuse for the snail-paced roll-out is that the government was introducing a completely new energy financing scheme and this took time to get right.

Don't be kidding.

The feed-in tariff scheme has been around for so long and this has been credited for the ballooning of renewable energy projects in major countries such as the United States and Germany since the 1990s. We have been articulating for a speedy resolution of the scheme a long time ago in several posts such as this one.

In the meantime, halfway through the term of the present administration, no significant capacity has been added to the power grid.

Let's come back to what Pesek warns: "Every five years or so, markets get all excited about change in the Philippines only to regret it. That makes it a fool's errand to predict turning points in this most erratic of Asian economies."

He might be proved correct.

And the early Easter gift by Fitch might turn up to be an egg.

Mindanao's power calvary

When President Benigno Aquino III declared yesterday that the people of Mindanao, which has been suffering from rotating brownouts for years now, will have to pay more for their power consumption, he is merely stating the inevitable and obvious. It is also and admission of failure of this Administration to address the lingering power problem in Mindanao as well as in the Visayas.

We have already said almost verbatim the same thing years back in a post. Reading my post again gives me goose pimples when I realized much of what I said then have come to pass.

“The power rates will go up in Mindanao because the choice is a higher power rate or no power. And many of those we’ve spoken to understood the necessity for higher rates, and they’re amenable to this, instead of no power at all,” he said during an ambush interview at a Pasay City bus terminal on Tuesday. What a message to Filipinos leaving to the provinces to observe the solemnity of the Lenten season.

No, I disagree that those whom he talked to are amenable to this. Are you?

Like good Christians we are more like submitting ourselves to bad governance and inadequate planning. We are carrying this cross of bad governance to our Calvary.

Pnoy was saying this in the context of DOE's plans to buy "modular" diesel-powered plants as a stop-gap measure until 2015 when the coal-fired plants start coming in. This was the plan presented by politician-turned-DOE secretary to Pnoy.

The idea is, the plants can be set up in as little as six months to at most one year. He also claimed, or rather being advised, that "[b]y 2015, we expect the problem to largely go away—by that time, we’ll have good surplus. That’s the time the (coal)  power plants go on line". Considering the procurement and setting up process alone, six months is a pipe dream. What about the permits and other bureaucratic requirements?

It seems that the president is ill-advised. The "solution" forwarded by Petilla is uncannily similar to what then DOE Secretary Rene Almendras proposed early 2012: sale of diesel-fueled power barges owned by the government. If that was a success, we won't be in dire situation today. Now how different is the current DOE secretary's proposal?

The numbers don't even add up. We even put a conservative 3% annual energy growth then (if we are to maintain the  economic growth at about 5.5 - 6, the energy demand would be nearer to 5 than 3%), and the power plants under advanced construction wouldn't put a dent on the demand.

The news report also quoted that at present, Mindanao has a power shortfall of 294 megawatts. The demand is at 1,157 MW while the actual supply is only 863 MW. But how much of this in dependable supply? The 300 MW to come online in 2015 quoted by the President is only enough to cover this shortfall at present. (For more of the coal plants coming on line, see this.)

How would we power the power-hungry new mines? New mines and sprouting subdivisions and malls if we are to believe in a peace dividend upon the cessation of political hostilities in Mindanao. We are not even factoring in the continuing siltation at Agus  or the aging diesel plants that are still in operation.

For a healthy economy to keep chugging along, the rule of thumb is, there should be a reserve supply of at least 30% more. Advanced and some developing countries have reserves of 40% or  more.

Just this afternoon, we have gained the coveted investment grade rating from Fitch. What it means is that the Philippines is safe enough to invest in. Imagine if a portion of the expected foreign  investment is poured into Mindanao.

At the very least, Aquino should refrain from recycling politicians into his Cabinet, especially like the sensitive and critical Department of Energy. How many DOE secretaries did we have in the last 5 years? Every time a new face sits at the DOE throne, all the pending and ongoing projects are delayed, scratched or "reviewed". We have not had any technocrat at the helm of DOE since the late Geronimo Velasco of Marcos' time, except probably Mr. Vince Perez.

In the meantime we can only shed tears and watch the people of Mindanao carrying the power shortage cross to Calvary. I don't want to see them nailed there.
_____
Note added on April 8: Napocor has warned that Mindanao power situation will get worse next month (May) due to decreasing water levels at Lake Lanao. The deficit is now 121 MW.

Methane hydrate deposits in the country?

State-owned Japan Oil, Gas & Metals National Corp. revealed March 12 that it produced gas in the world’s first offshore test to extract the fuel known as methane hydrate which is trapped in ice below the seabed off the  east coast  of Japan. It will be joined by  Natural Gas Corp. (ONGC), India’s biggest energy explorer, to try to produce the fuel, according to two officials at the regulator Directorate General of Hydrocarbons.

Methane hydrate?

For the average person, this potential source of unlimited fuel is virtually unknown and most energy planners may not have heard of it or it is not on their radar screens. But that situation would not last long.

 Methane hydrate, known in chemistry as methane clathrate, is an ice-like solid composed of  a methane molecule surrounded by several molecules of water.  Methane hydrates form under the low temperatures and high pressures of the ocean floor, usually at depths greater than about 575 meters, at the underlying sediments to about 225 m and  beneath Arctic permafrost.

It was first discovered off the coast of Guatemala during a deep drilling project in 1982 and remained a scientific curiosity for years until  the late 1990s when sufficient number of similar deposits have been detected or discovered and its possibility as a source of energy has been raised.

The catch is, there is no technology that could commercially extract the resource. The joint effort of the two companies attempts to prove that it could be done.

In the laboratory and pilot scale, extraction procedures have been tested and some of these look promising. The obvious method is depressurization to release methane from the lattice. But the biggest stumbling block is how to control the process since the hydrate exists under high pressure, and rapid depressurization could lead to catastrophic blow outs. An alternative suggestion is to displace the methane from the ice lattice using another gas such as waste carbon dioxide.

The possibility that the resource can be harnessed may have been unwittingly discovered by the Russians as early as 1970. In the  Messoyakha gas field of western Siberia,  Russian engineers were pumping natural gas from beneath the permafrost and piping it  across the wasteland to a large metal smelter. By the end of the decade, they ought to have exhausted the gas supply based on standard scientific estimates. But, lo and behold! The gas keeps on flowing, even up to the present. They thought that they have tapped a hidden reservoir beneath the identified field. However, exhaustive experiments revealed that the gas was seeping from the permafrost above. Now it is inferred that the field is in fact tapping a methane hydrate reservoir.

The current estimates of the volume of deposits discovered or inferred boggles the mind. Suffice is it to say that the quoted amount far more exceeds the total hydrocarbon deposits in the world. If only a fraction of it could be harnessed, the world would become self-sufficient in fuel energy. That's why the New Scientist online magazine dubbed it the next fossil fuel.

For this country, what is intriguing that in the updated map shown below (courtesy of the U.S. Geological Survey) of known or inferred methane hydrate deposits, the Philippines has been identified to have at least one. Based on the pressure and temperature regions of stability of this material, the country would have enormous potential.

It doesn't hurt if our researchers and energy planners look ahead into the future and examine the possibilities from methane hydrate.

Japan is showing the way.

Think big oil

Think big.

If you want to get ahead in life and be wildly successful in business, this is the counsel of the inimitable Donald J Trump in his book of the same title.

San Miguel Corp  (PSE: SMC) president Ramon Ang must have taken heed of this counsel when he recently declared that his diversifying conglomerate is looking for a big oil or natural gas field as its next target for acquisition.

“If we are able to buy one of those, it would be like printing money forever,” Ang said as a matter- of- factly.

Well, not exactly. That could happen if you execute your plan flawlessly. While big oil is big business, it has its share of gargantuan risks. One thing, nation owners could suddenly gain epiphany that the resources that lie within their borders belong to their people (clap! clap! for the grandstanding) and seize your oil assets. Look at what happened to Venezuela when Hugo Chavez—bless his soul—seized control of the country. Or to neighboring Argentina when its president Cristina Fernandez forcibly took control of ownership of Spain-owned YPF Repsol.

Or you could have a blow-out as in the Gulf of Mexico resulting to oil spill that cost the oil rig owner billions of dollars in damages, or you tanker runs aground somewhere in Alaska and oil spills out causing catastrophic environmental damage.

There are also risks caused deliberately.  Militants may attack your facilities as in Algeria, or the Arab spring erupts in your area of operations as in Libya and Syria.

All of these are surely at the back of Ang’s mind when he uttered those words. But, if your business has to grow, take heed of Trump’s next piece of advice: Take chances. Be a doer, not only a dreamer.

“We have a full force of people pursuing these deals,” Ang reveals.

Surely, he must be kind enough to help develop our struggling miniscule oil field prospects off the coast of Palawan? Oh, no, “those are toys”. Kind of small for his taste.

Credit and salutation should go to Ang just for thinking along those lines if one were to think about the future of this country. We are one of the few countries in Asia which do not have an oil champion seeking oil production outside the borders. Even our small neighbours are doing that. Malaysia has Petronas combing for opportunities and Thailand’s PTT following a similar plan.

It seems Ang is dead serious about his plan, no matter what the costs. Even if he has to let go of major assets like its brewery business or its power generation projects under SMC Global Power Holdings which are only taking off as we write.

“In business there is no such thing as sentimental value”, Ang mused.

Let’s sit and watch Ang’s designs unfolding.

Coal's call

Lately, coal has been in the news owing to the recent accident at the coal mine belonging to Semirara Mining Corporation (PSE:SCC) in Antique where 5 workers were confirmed dead. The tragedy highlights risks in mining, and anti-mining groups pounced on the incident to bolster their position against the industry. At the capital markets, SCC and its parent DMCI Holdings (PSE:DMC), being listed companies, have suffered sell-down immediately after the accident.

But the incident is not wholly a mining concern.  It is more about energy—our precarious energy situation in particular.

At about the same time as the accident, the Department of Energy (DOE) awarded service contracts to explore and develop 11 prospective coal blocks to eight companies. These coal blocks were auctioned off by the government in 2011 under the Philippine Energy Contracting Round.

The “winning proponents”  include Altura Mining for Area 3 (Catanduanes); Semirara Mining Corp. for Areas 9 (Oriental Mindoro) and 25B (Sarangani); Empire Asia for Area 18B (Surigao del Sur); SKI Mining for Area 19A (Agusan del Sur and Surigao del Sur); PNOC Exploration Corp for Areas 19B (Agusan del Sur and Surigao del Sur), 29 (Zamboanga Sibugay) and 30A (Zamboanga Sibugay); South Davao Developement Co. for Area 8 (Occidental Mindoro); Blackstone Mineral Resources for Area 27 (Zamboanga Sibugay) and Mega Phils. Inc. for Area 23 (South Cotabato, Sultan Kudarat and Sarangani).

As an aside, very recently Coal Asia Holdings (PSE: COAL) which is a pure play on coal, launched its initial public offering (IPO) at the Philippine Stock Exchange.

Why the upsurge in coal exploration and development despite coal world prices scraping near historical lows?

The Aquino government has trumpeted as its major achievement the 6.6% economic growth in 2012, and it this growth were to be sustained in the coming years, the country needs additional power—lots of it.

And if we need reliable power at the shortest time possible, the source would be coal-fired plants by default. Developing a coal-fired power plant does not require stringent requirements for a location, fuel is plentiful and the banks are more than happy to finance such low risk project. About the only most critical path to the project is getting the Environmental Clearance Certificate (ECC) and how to appease environmental protesters who would unfailingly raise ruckus against any power project.

Power generation from coal is undeniably not clean energy but economic considerations could trump pure environmentalism. That is why the major power plants that are coming on stream in the next few years would be coal-fired. Aboitiz Power Corp. (PSE:AP) alone is planning a total of 1,300 MW coal fired facilities to add to the Luzon and Mindanao grids in four years’ time. These are the 400 MW expansion of the existing Pagbilao plant, a 300 MW Davao plant and a 600 MW plant to be put up at Subic.  The Alcantara group which is based in Mindanao, through publicly-listed Alsons Consolidated Resources Inc. (PSE:ACR) has, in its pipeline, a 105 MW plant in Zamboanga and a 210 MW plant in Sarangani.  GT Capital Holdings (PSE: GTCAP) which is a major power player in the Visayas through its power subsidiaries, is planning two coal-based power projects. Even new-comer in the power industry AC Energy Holdings of the Ayala Group (PSE: AC) is planning to put up a 135 MW coal plant in Iloilo together with A Brown Inc. (PSE:BRN), and a 135 MW plant in Batangas (with Trans-Asia Oil and Energy Development (PSE: TA)); and it has a 17.1% stake in a 600 MW facility in Bataan owned by GNPower Mariveles Coal Plant Ltd. which is slated to come into operations by May of this year.

Clearly, it’s coal’s call this time.

Criticize coal plants to high heavens, but they may well be our salvation against debilitating brownouts that could derail our climb from  impoverishment to prosperity.

Resurrection

In the past couple of years, followers have repeatedly asked why this blog has virtually stopped. Well, the main reason is that I have been engaged exclusively to work for a major energy company and in order to avoid any possible conflict of interest, the blog has to be set aside in the meantime.  

But then, nagging energy issues both national and international, have piled up and by default, I have been remiss in my duty to at least contribute to the discussions on these issues as a citizen and as an energy professional. 

Hence, this revival.

Locally, some of the issues/topics that need to be elaborated and debated upon include:

1. The looming power crisis (if we are not there yet) especially in Mindanao;

2. Development--or lack of it—of renewable energy projects like wind, solar and geothermal despite the passage long ago of the renewable energy act;

3. The energy policies/ideas of the incoming Energy Secretary;

4. The perennial high cost of power;

And so on.

The larger picture at the international level will not be left out. 

And of course, the exciting developments in the laboratories and research centers that would greatly impact the future use and development of energy sources. 

There will also be physical changes in the  presentation.

As they say in advertising, “Watch out this space”.