Palace, Palawan face off over Malampaya’s $10 billion

Jesus F. Llanto, Newsbreak

Posted at Sep 01 2009 12:25 PM | Updated as of Sep 01 2009 08:29 PM

To deprive the province of its share, the national gov’t tries varying territorial definitions

The national government and the province of Palawan will enter today the most crucial stage so far in their legal battle over how to split the US$8.1 billion to $10 billion that the Malampaya natural gas project is estimated to earn in 2 decades starting in 2002.

In oral arguments before the Supreme Court Tuesday afternoon, Palawan will push its position that the province should get a share from those earnings, according to the constitutional principle that when national wealth is utilized and developed, the local government where it is located is “entitled to an equitable share in the proceeds.”

Malacañang, on the other hand, will argue that the revenues should go entirely to the national government because the project is outside Palawan’s territory.

Newsbreak went over the position papers of all parties, as well as all the documents pertaining to the case, to spell out the stakes in the battle over the proceeds from the $4.8-billion Malampaya project, the single biggest foreign investment in Philipine business history.

However the high tribunal decides on the case will have implications on 3 issues:

  • The definition of national-local government relationship based on the principle of local autonomy.
  • The revenue sharing scheme in all future commercially operational petroleum deposits around Palawan.
  • The definition of geographic boundaries that are crucial to the Philippine claim on the disputed, oil-rich Spratlys.

“This is like a fight between David and Goliath,” Palawan Governor Joel Reyes told Newsbreak.

Change of heart

The Camago-Malampaya project is located around 80 kilometers northwest of the province of Palawan. The Camago gas field was first discovered in 1989 by Occidental Philippines, while the Malampaya reservoir was discovered by Shell Philippines in 1992. In 1998, the Department of Energy declared that the petroleum was commercial in quantity. (Read: Timeline: The battle for Malampaya’s billions.” )

The project is operated by a consortium composed of Shell Philippines (45%) and Chevron-Texaco (45%). The government has a 10% stake in the project through the Philippine National Oil Company-Exploration Corporation (PNOC-EC), the oil and gas subsidiary of the state-owned PNOC.

Since the commercial quantity of petroleum in the area was confirmed in 1998, all Philippine presidents have acknowledged that Palawan would have a share in its proceeds when project operations start.

Even President Arroyo, in her first 6 months in office, acknowledged that the project area is within Palawan’s territory.

Her position changed when the commercial operations of the project started in October 2001, and the finance department under Secretary Jose Isidro Camacho estimated that the proceeds from Malampaya would reach $8.1 billion to $10 billion in the next 20 years starting 2002.

At the current exchange rates (P48.50 to a dollar), the amount is equivalent to P388 billion to P485 billion, or P19.4 billion to P24.25 billion a year for 20 years.

Data from the Department of Energy’s oil and gas division show that from 2001 to April 2009, the “government share” from the Malampaya revenues has reached $.3.125 billion. “Government share” includes corporate income taxes, branch profit remittance tax, “source of assistance to LGUs,” and whatever goes to the DOE. (View the summary of reported revenues and government share from Malampaya.)

Host province

The provincial government of Palawan contends that it should have a share in whatever the state earns from the Malampaya project.

It cites the Constitution (in Article X, Section 7), which states that, “Local governments shall be entitled to an equitable share in the proceeds of the utilization and development of the national wealth within their respective areas, in the manner provided by law, including sharing the same with the inhabitants by way of direct benefits.”

Republic Act 7160, or the Local Government Code of 1991, is the law that sets “the manner” by which the local governments units (LGUs) will get their shares. It says in Sections 289 and 290 that the host LGUs “shall…have a share of 40% of the gross collection derived by the national government.”

To prove that the Camago-Malampaya project is within its area, the province is citing RA 7611,  or the Strategic Environmental Plan (SEP) of Palawan, which was passed in 1992. It defines the territorial jurisdiction of Palawan and includes Malampaya in its territory.

It also cites Administrative Order No. 381, signed by President Fidel Ramos on Feb. 17, 1998, which acknowledges Palawan as the host province of the Malampaya project and is therefore entitled to a share.

“The province of Palawan is expected to receive about US$2.1 billion from the total Government share of US$8.1 billion” during the 20-year project period, the order reads. (Read: AO 381.)

Ramos’s successor, President Joseph Estrada, didn’t revoke the administrative order.

The Palawan government is also arguing that the Malampaya reservoir is located in an area between mainland Palawan and Kalayaan, a municipality of the province that President Ferdinand Marcos created through Presidential Decree 1596. Malampaya is nearer to mainland Palawan than Kalayaan.

Question of limits

For its part, the national government contends that local governments can only exercise jurisdiction over municipal waters, and since Malampaya is not within Palawan’s 15-kilometer municipal waters, it is therefore within the national territory.

“Beyond this limit, the authority and jurisdiction to enforce the laws of the Philippines rests with the national government through the Philippine Navy, Philippine Coast Guard, Philippine National Police-Maritime Command and the Department of Agriculture in their respective areas of concern,” the national government’s petition for review reads.

The national government says that the territorial jurisdiction of a local government only includes the land area, and not bodies of water. It based its interpretation on the fact that under the Local Government Code, only land area—and not marine areas—are measured in the creation and conversion of LGUs.

Marcos’s PD 1596, the national government says, also “did not make per se the waters between the Municipality of Kalayaan and the main island of Palawan part of the territorial jurisdiction of the province of Palawan.”

Lawyer Harry Roque said that the project belongs to Palawan because the extraction of natural gas is not found in the waters but in the continental shelf of the province.
“It's found in the continental shelf and the continental shelf is a natural prolongation of landmass, not of Luzon but of Palawan as an archipelago,” he said.
‘Off Palawan’ now

The Arroyo government didn’t always sound that way.

On June 18, 2001, the President clearly said in a speech in the provincial capitol grounds in Puerto Princesa City that the biggest natural gas project in the world is in Palawan, and it’s just proper that the province will get a share in its “income.”

“Mabait ang Diyos sa inyo…yung pinakamalaking natural gas project sa mundo ay narito sa Palawan, at yan ang panggalingan ng mas malaki pang kayamanan…ng lalawigan ng Palawan sa mga darating na henerasyon (God is good to you…the biggest natural gas project in the world is here in Palawan, and that’s where bigger wealth will come for the province of Palawan for generations to come,” Arroyo said. (Read: President Arroyo’s speech.)

“Iyong ating mga cabinet member na nagbisita dito, hindi nila nakalilimutan na isa sa pinakamalaking panggagalingan ng income ng Pilipinas as manggagaling sa lalawigan ng Palawan kaya nararapat lamang na may mapunta ring sukli sa lalawigan ng Palawan (Our Cabinet members who visit here are aware that one of the Philippines’ biggest sources of income will come from Palawan, so it’s just right that the province of Palawan gets part of it),” Arroyo said.

Arroyo even encouraged Governor Reyes to float bonds that early since Palawan would definitely be able to pay these back with its expected benefits from the Malampaya gas project.

Four months later, during the ceremonial switch of the project on Oct. 16, 2001, the President changed tunes. She now described Palawan as just “the province nearest to the place where Malampaya is located.”

The natural gas, she said, was “discovered off Palawan.”

Votes, deficit

Arroyo paid a heavy price for her fli-flop. In 2004 presidential elections, she lost to Fernando Poe Jr. in Palawan by a huge margin. While her strongest rival got 63.64% of the votes, Arroyo got only 18%. It was an embarassing finish for her, who topped the vice presidential race in Palawan in 1998.

“It boomeranged on her politically,” said Governor Reyes, who thinks the President was “ill-advised” by some of her Cabinet members.
After Arroyo’s speech acknowledging Palawan’s jurisdiction over Malampaya, Finance Secetary Jose Isidro Camacho asked the justice department to review the issuances under the Ramos administration pertaining to the gas project.  

“During that time, the government had to look for revenues to cover up the deficit,” former interior and local government secretary Cesar Sarino told Newsbreak.

The Department of Justice issued an opinion that the Malampaya is not within Palawan because the province’s territorial jurisdiction is limited to its land area, and that the project is 80 kilometers away from Palawan and is therefore beyond its 15-kilometer municipal waters.

Palawan filed a motion for declaratory relief with the Regional Trial Court of Palawan to resolve the issue of territorial jurisdiction. The RTC ruled in favor of the provincial government, citing principles of local autonomy, devolution, and decentralization.

“It would be unthinkable to limit the operation as well as the implementation of such law only to land mass and the 15-km municipal waters of Palawan to protect the environment including the marine areas of the Camago-Malampaya natural gas project,” the court ruling reads.

The national government, meanwhile, filed a petition for review with the Supreme Court.

Interim agreement

Pending the resolution of the case, the national government and the Palawan government entered into an interim agreement in 2005 for the release of some portion of the disputed share.

Arroyo signed Executive Order 683, which authorized the budget department to release to Palawan 50% of the disputed 40% share to be spent for development projects.

“It’s a compromise in effect,” Emilia Boncodin, who was budget secretary then, told Newsbreak.

She said the agreement was, if Palawan wins the case, it would receive the entire 40% LGU share. If the national government wins, she added, the fund previously released to Palawan would be considered as subsidy or financial assistance of the national government to the province.

Former energy undersecretary JV Emmanuel de Dios says the interim agreement was “a win-win situation” because the court battle between the national and local governments had become “counterproductive.”

Some quarters are, however, questioning the legality of EO 683.

“It is unlawful because it reduces the share of Palawan from 40% to 20 %,” Sarino said.

Sarino is part of a group led by Palawan Bishop Pedro Dulay Arigo that wants EO 683 revoked. Their petition has reached the Supreme Court, which ordered its consolidation in the case of the  provincial government of Palawan.

According to estimates made by the energy department under 2 secretaries, Palawan will receive $2 billion (approximately P100 billion) for the 20-year production period. Eight years into the commercial operations of Malampaya, however, Palawan has received only about P3 billion.

A summary of reported revenues, provided by the DOE, indicates that the “source of assistance to LGUs” is at $699.34 million as of April 2009. A source privy to the computations explained the said item is safely labeled as “assistance” so as not to indicate any entitlement on the part of Palawan.

Should the tribunal decide that Palawan has to have a share in the Malampaya proceeds, the energy expert said, that item will just be renamed as LGU share. The said amount represents 40% of the total that goes to the energy department and the “assistance” to LGUs. Computed against the total “government share,” however,  the item for local governments is only 22%--a violation,  if ever, of the Local Government Code’s provision that the 60-40 sharing scheme between the national and local government should be based on the gross collection. - Newsbreak

(To be continued)