Energy Industry ProjDev

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ENERGY INDUSTRY

IV. PROJECT FINANCE IN THE PHILIPPINE CONTEXT

INDUSTRY SPECIFIC

POWER AND ENERGY

A. Upstream Energy Industry Exploration, Developmentand Utilization of Resources1. Petroleum Oil and GasRead:Article XII, Section 2, 1987 ConstitutionPresidential Decree No. 87 (1972)Proclamation No. 72

The Guide to Financing International Oil and Gas Projects,Milbank, Tweed, Hadley & McCloy, pp. 59-81.Executive Order No. 66 (designating DOE as lead agency fordevelopment of Philippine natural gas industry)Case Study: The Malampaya Deep Water Gas to Power Project2. GeothermalRead:

Article XII, Section 2, 1987 ConstitutionPresidential Decree No. 1442Case Study: Tiwi-Makban Power Plant3. Coal EnergyRead:

Presidential Decree No. 972Presidential Decree No. 11744. Alternative and Renewable EnergyRead:Republic Act No. 7156Executive Order No. 462Executive Order No. 232Mining

Please see IV.E below.Midstream Energy Industry Power Generation andDistribution1. Power Generation Sector

Independent Power ProducersRead: The Guide to Financing Power Projects, Baker &Mckenzie, pp. 21-37. Administrative Order No. 10, May 26, 2001, Office of thePresident R.A. No. 8975, Prohibiting Injunctions and TROsProject DocumentationRead: The Guide to Financing Power Projects, Baker &Mckenzie, pp. 37-65.Philippine Power IndustryRead: Republic Act No. 9136, Electric Power IndustryReform Act of 2001Case Study

Quezon Power PlantIMPSADistribution Sector

Transmission SectorSupply SectorDownstream Energy Industry1. OilRead: Republic Act No. 8479

Garcia vs. Corona, G.R. No. 132451. December 17, 1999.2. Compressed Natural Gas3. Biofuels -Republic Act No. 9367 (Biofuels Act of 2006)

Pasted from

ARTICLE XII, SECTION 2, 1987 CONSTITUTION

ARTICLE XIINATIONAL ECONOMY AND PATRIMONYSection 2. All lands of the public domain, waters, minerals,coal, petroleum, and other mineral oils, all forces of potentialenergy, fisheries, forests or timber, wildlife, flora and fauna,and other natural resources are owned by the State. With theexception of agricultural lands, all other natural resourcesshall not be alienated. The exploration, development, andutilization of natural resources shall be under the full controland supervision of the State. The State may directlyundertake such activities, or it may enter into co-production,

joint venture, or production-sharing agreements with Filipinocitizens, or corporations or associations at least 60 percentum of whose capital is owned by such citizens. Suchagreements may be for a period not exceeding twenty-fiveyears, renewable for not more than twenty-five years, and

under such terms and conditions as may provided by law. Incases of water rights for irrigation, water supply, fisheries, orindustrial uses other than the development of waterpower,beneficial use may be the measure and limit of the grant.

The State shall protect the nations marine wealth in itsarchipelagic waters, territorial sea, and exclusive economiczone, and reserve its use and enjoyment exclusively toFilipino citizens.

The Congress may, by law, allow small-scale utilization ofnatural resources by Filipino citizens, as well as cooperativefish farming, with priority to subsistence fishermen and fishworkers in rivers, lakes, bays, and lagoons.

The President may enter into agreements with foreign-ownedcorporations involving either technical or financial assistancefor large-scale exploration, development, and utilization ofminerals, petroleum, and other mineral oils according to the

general terms and conditions provided by law, based on realcontributions to the economic growth and general welfare ofthe country. In such agreements, the State shall promote thedevelopment and use of local scientific and technicalresources.

The President shall notify the Congress of every contractentered into in accordance with this provision, within thirtydays from its execution.

PRESIDENTIAL DECREE NO. 87 (1972)

1 | P r o j e c t D e v e l o p m e n t _ C h a M e n d o z a
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}&end&base-path=FRANKIE\\5y1s%20for%20real\\ProjDev%20Notes.onehttp://opt/scribd/conversion/tmp/scratch2708/onenote:#Republic%20Act%20No.%208479&section-id={FEE21E51-2D57-4F8C-ABB6-9BF3FBAD114C}&page-id={A35B7627-2149-4357-870E-D3716EA82FD3}&end&base-path=FRANKIE\\5y1s%20for%20real\\ProjDev%20Notes.onehttp://opt/scribd/conversion/tmp/scratch2708/onenote:#Garcia%20vs.%20Corona,%20G.R.%20No.%20132451&section-id={FEE21E51-2D57-4F8C-ABB6-9BF3FBAD114C}&page-id={5EF887EC-ECAD-48BC-A3CB-DB1EBC2F03DE}&end&base-path=FRANKIE\\5y1s%20for%20real\\ProjDev%20Notes.onehttp://opt/scribd/conversion/tmp/scratch2708/onenote:#Republic%20Act%20No.%209367%20(Biofuels%20Act&section-id={FEE21E51-2D57-4F8C-ABB6-9BF3FBAD114C}&page-id={97791818-9DE3-4566-893F-369FAED486E0}&end&base-path=FRANKIE\\5y1s%20for%20real\\ProjDev%20Notes.onehttp://c/Documents%20and%20Settings/Charisse%20Mae%20Mendoza/My%20Documents/5y,%201s/ProjDev/ProjDEVCourse%20Outline.dochttp://c/Documents%20and%20Settings/Charisse%20Mae%20Mendoza/My%20Documents/5y,%201s/ProjDev/ProjDEVCourse%20Outline.dochttp://c/Documents%20and%20Settings/Charisse%20Mae%20Mendoza/My%20Documents/5y,%201s/ProjDev/ProjDEVCourse%20Outline.doc


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PRESIDENTIAL DECREE No. 87AMENDING PRESIDENTIAL DECREE NO. 8 ISSUED ONOCTOBER 2, 1972, AND PROMULGATING ANAMENDED ACT TO PROMOTE THE DISCOVERYAND PRODUCTIONOF INDIGENOUSPETROLEUM ANDAPPROPRIATE FUNDS THEREFORWHEREAS, Presidential Decree No. 8 dated October 2, 1972was issued to promote the discovery and development ofthe country's indigenouspetroleum resources and adoptingtherefore as part of the law of the land the provisions ofSenate Bill No. 531(An Act to Promote the Discovery, Production ofIndigenousPetroleum and Appropriate Funds Therefor);WHEREAS, it was found necessary for the national interest toamend Senate Bill No. 531 among others things to providemore meaningful incentives to prospective servicecontractors.NOW, THEREFORE, I, FERDINAND E. MARCOS, President of thePhilippines, by virtue of the powers vested in me by theConstitution as Commander-in-Chief of all the Armed Forces ofthe Philippines, and pursuant to Proclamation No. 1081, datedSeptember 21, 1972, and General Order No. 1, datedSeptember 22, 1972, as amended, do hereby amendPresidential Decree No. 8 as follows:AN ACT TO PROMOTE THE DISCOVERYAND PRODUCTION OF INDIGENOUSPETROLEUM, AND APPROPRIATINGFUNDS THEREFOR.Section 1.Short title. This Act shall be known and may be

cited as "THE OIL EXPLORATION AND DEVELOPMENT ACT OF1972."Section 2.Declaration of policy. It is hereby declared to bethe policy of the State to hastenthe discovery and production ofindigenouspetroleum through the utilization of government and/or private resources,local and foreign, under the arrangements embodied inthis Act which are calculated to yield the maximum benefit tothe Filipino people and the revenues to the PhilippineGovernment for use in furtherance of national economicdevelopment, and to assure just returns to participatingprivate enterprises, particularly those that will provide thenecessary services, financing and technology and fullyassume all exploration risks.Section 3.Definition of terms. As used in this Act, thefollowing shall have the following respective meanings:

(a) "Petroleum" shall include any mineral oil hydrocarbongas, bitumen, asphalt, mineral gas and all other similar ornaturally associated substances with the exception of coal,peat, bituminous shale and/or other stratified mineral fueldeposits.(b) "Crude oil" or "crude" means oil in its natural state beforethe same has been refined or otherwise treated. It does notinclude oil produced through destructive distillation of coal,bituminous shales or other stratified deposits, either in itsnational state or after the extraction of water, and sand orother foreign substances therefrom.(c) "Natural gas" means gas obtained from boreholes andwells and consisting primarily of hydrocarbons.(d) "Petroleum operations" means searching for andobtaining petroleum within the Philippines through drillingand pressure or suction or the like, and all other operationsincidental thereto. It includes the transportation, storage,

handling and sale (whether for export or for domesticconsumption) ofpetroleum so obtained but does not includeany: (1) transportation ofpetroleum outside the Philippines;(2) processing or refining at a refinery; or (3) any transactionsin the products so refined.(e) "Petroleum in commercial quantity" means petroleum insuch quantities which will permit its being economicallydeveloped as determined by the contractor after taking intoconsideration the location of the reserves, the depths andnumber of wells required to be drilled and the transport andterminal facilities needed to exploit the reserves which havebeen discovered.(f) "Posted price" refers to the FOB price established by the

Contractor in consultation with the Petroleum Board for eachgrade, gravity and quality of crude oil offered for sale tobuyers generally for export at the particular point of export,which price shall be based upon geographical location, andthe fair market export values for crude oil of comparablegrade, gravity and quality.(g) "Market Price" shall mean the price which would berealized for petroleum produced under a contract ashereinafter defined if sold in a transaction betweenindependent persons dealing at arm's length in a free market.(h) "Barrel" means 42 U.S. gallons or 9702 cubic inches attemperature of 60 Fahrenheit.Any reference in this Act to the value of any crude oil at theposted price or market price shall be construed as a referenceto the amount obtained by multiplying the number of barrelsof that crude oil by the posted price or market price per barreapplicable to that crude oil.(i) "Crude oil exported" shall include not only crude oilexported as such but also indigenous crude oil refined in thePhilippines for export.(j) "Government" means the Government of the Republic ofthe Philippines.(k) "Contractor" means the contractor in a service contractwhether acting alone or in consortium with others.(l) "Contract" refers to a service contract.(m) "Filipino participation incentive" means the allowancewhich may be given the Contractor with Filipino participationas provided in Section 28 hereof.

(n) "Philippine corporation" means a corporation organizedunder Philippine laws at least sixty per cent of the capital ofwhich is owned and held by citizens of the Philippines.(o) "Affiliate" means (a) a company in which a contractorholds directly or indirectly at least fifty per cent of itsoutstanding shares entitled to vote; (b) a company whichholds directly or indirectly at least fifty per cent of thecontractor's outstanding shares entitled to vote; or (c) acompany in which at least fifty per cent of its shareoutstanding and entitled to vote are owned by a companywhich owns directly or indirectly at least fifty per cent of theshares outstanding and entitled to vote of the contractor.(p) "Gross income" means the gross proceeds from the sale ofcrude, natural gas or casinghead petroleum spirit producedunder the contract and sold during the taxable year at postedor market price, as the case may be, and such other income

which are incidental to and arising from any one or more ofthe petroleum operations of the contractor.(q) "Taxable net income" means the gross income less thedeductions allowed in this Act.(r) "Taxable year" means the calendar or fiscal year of thecontractor.(s) "Casinghead petroleum spirit" means any liquidhydrocarbon obtained from natural gas by separation or byany chemical or physical process.(t) "Petroleum Board" refers to the Petroleum Boardcreated in Section seventeen of this Act.(u) "Operating Expenses" means the total expendituresfor petroleum operations made by the Contractor both withinand without the Philippines as provided in a service contract.Section 4.Government mayundertakepetroleum exploration andproduction. Subjectto the existing private rights, the Government may directly

explore for and produceindigenouspetroleum. It may alsoindirectly undertake the same under service contracts ashereinafter provided. These contracts may cover free areas,national reserve areas and/or petroleum reservations, asprovided for in the PetroleumAct of 1949, whether on-shoreor off-shore. In every case, however, the contractor must betechnically competent and financially capable as determinedby the Board to undertake the operations required in thecontract.Section 5.Execution of contract authorized in thisAct. Everycontract herein authorized shall, subject to the approval of thePresident, be executed by the Petroleum Board created inthis Act, after due public notice pre-qualification and public



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bidding or concluded through negotiations. In case bids arerequested or if requested no bid is submitted or the bidssubmitted are rejected by the Petroleum Board for beingdisadvantageous to the Government, the contract may beconcluded through negotiation.In opening contract areas and in selecting the best offerfor petroleum operations, any of the following alternativeprocedures may be resorted to by the Petroleum Board,subject to prior approval of the President:(a) The Petroleum Board may select an area or areas andoffer it for bid, specifying the minimum requirements andconditions; or(b) The Petroleum Board may open for bidding a large areawherein bidders may select integral areas not larger than themaximum provided in this Act. Only the best offer shall beaccepted and the selection thereon shall be made by aweighted system of evaluating the different aspects of eachbid; or(c) An area may be selected by an interested party who shallnegotiate with the Petroleum Board for a contract under theterms and conditions provided in this Act.Section 6.Nature of service contract. In a service contract,service and technology are furnished by the servicecontractor for which it shall be entitled to the stipulatedservice fee while financing is provided by the Government towhich all petroleum produced shall belong.Section 7.Special stipulation in service contract. Where theGovernment is unable to finance petroleum exploration

operations or in order to induce the contractor to exert themaximum efforts to discover and produce petroleum as soonas possible, the service contract shall stipulate that if thecontractor shall furnish services, technology and financing,the proceeds of sale of the petroleum produced under thecontract shall be the source of funds for payment of theservice fee and the operating expenses due the contractor.Section 8.Obligation of contractor in service contract. Thearrangement pursuant to the preceding section seven shall besuch that the contractor, which may be a consortium, shallundertake, manage and execute petroleum operations. Thecontract may authorize the contractor to take and dispose ofand market either domestically or for exportallpetroleum produced under the contract subject tosupplying the domestic requirements of the Republic of thePhilippines on a pro-rata basis. The Government shall oversee

the management of the operations contemplated in thecontract and in this connection shall require the contractor to(a) Provide all necessary services and technology;(b) Provide the requisite financing;(c) Perform the exploration work obligations and programprescribed in the agreement between the Government andthe Contractor, which may be more but shall not be less thanthe obligations prescribed in this Act;(d) Once petroleum in commercial quantity is discovered,operate the field on behalf of the Government in accordancewith accepted good oil field practices using modern andscientific methods to enable maximumeconomic production ofpetroleum; avoiding hazards to life,health and property; avoiding pollution of air, land and waters;and pursuant to an efficient and economic program ofoperation;

(e) Assume all exploration risks such that if no petroleum incommercial quantity is discovered and produced, it will not beentitled to reimbursement;(f) Furnish the Petroleum Board promptly with geological andother information, data and reports which it may require;(g) Maintain detailed technical records and accounts of itsoperations;(h) Conform to regulations regarding, among others, safety,demarcation of agreement acreage and work areas, non-interference with the rights of other petroleum, mineral andnatural resources operators;(i) Maintain all meters and measuring equipment in goodorder and allow access to these as well as to the exploration

and production sites and operations to inspectors authorizedby the Petroleum Board;(j) Allow examiners of the Bureau of Internal Revenue andother representatives authorized by the Petroleum Board fulaccess to their accounts, books and records, for tax and otherfiscal purposes; and(k) Be subject to Philippine income tax.On the other hand, the Petroleum Board shall (1) On behalf of the Government, reimburse the Contractor foall operating expenses not exceeding seventy per cent of thegross proceeds from production in any year: Provided, Thatif in any year the operating expenses exceeds seventy percent of gross proceeds from production, then the unrecordedexpenses shall be recovered from the operations ofsucceeding years.(2) Pay the Contractor a service fee the net amount of whichshall not exceed forty per cent of the balance of the grossincome after deducting the Filipino participation incentive, ifany, and all operating expenses recovered pursuant toSection 8 (1) above.(3) Reimbursement of operating expenses and payment of theservice fee shall be in such form and manner as provided forin the contract.Section 9. Minimum terms and conditions. In addition tothose elsewhere provided in this Act, every contract executedin pursuance hereof shall contain the following minimumterms and conditions:(a) Every contractor shall be obliged to spend in direct

prosecution of exploration work and in delineation anddevelopment following the discovery of oil in commercialquantity not less than the amounts provided for in thecontract between the Government and the contractor andthese amounts shall not be less than the total obtained bymultiplying the number of hectares covered by the contractby the following amounts for hectare:

Period On-shore Of-shore

Year 1 P3.00 P3.00

Year 2 3.00 3.00

Year 3 3.00 6.00

Year 4 3.00 6.00

Year 5 3.00 6.00

Year 6 9.00 18.00

Year 7 9.00 18.00

Year 8 9.00 18.00

Year 9 9.00 18.00

Year 10 9.00 18.00

Provided, That if during any contract year the Contractor shallspend more than the amount of money required to be spent,

the excess may be credited against the money required to bespent by the Contractor during the succeeding contract yearsProvided, further, That in case the same Contractor holds twoor more areas under different contracts of service, the totalamount of work obligations for exploration required for theinitial term of all contracts may be spent within any one ormore of them as if they are covered by a single contract ofservice: Provided, further, That should the Contractor fail tocomply with the work obligations provided for in the contract,it shall pay to the Government the amount it should havespent but did not in direct prosecution of its work obligations:Provided, finally, That the Contractor shall drill a minimumfootage of test wells before the end of periods of time as may



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be specified in the contract with the PetroleumBoard in orderto be entitled to the extension of the exploration period for 3years as provided for in paragraph (e) herein.(b) In case the contractor renounces or abandons wholly orpartly the area covered by his contract within two years fromits effective date, it shall in respect of the abandoned areapay the Government the amount it should have spent, but didnot, for exploration work during said two years, for whichpayment, among other obligations, the performanceguarantee posted by the contractor shall be answerable.(c) Every contract shall provide for the compulsoryrelinquishment of at least twenty-five per cent of the initial

area at the end of five years from its effective date and in theevent of an extension of the contract from seven to ten years,an additional relinquishment of at least twenty-five per cent ofthe initial area at the end of seven years from its effectivedate. But the portion already delineated as production areapursuant to the succeeding paragraph shall not be taken intoaccount in ascertaining the extent of relinquishment required.Any area renounced or abandoned under Sec. 9(b) above shallbe credited against the portion of the area subject to thecontract which is required to be surrendered hereunder.(d) The Contractor shall, from the discovery ofpetroleum incommercial quantity, delineate the production area withinthe period agreed upon in the contract.(e) The exploration period under every contract shall be sevenyears, extendible for three years if the contractor has notbeen in default in its exploration work obligations and other

obligations after which the contract shall lapseunless Petroleum has been discovered by the end of thetenth year and the contractor for requests a further extensionof one year to determine whether it is in commercial quantity,in which event, another extension of one year for explorationmay be granted. IfPetroleum in commercial quantity hasbeen discovered, the Contractor may retain after theexploration period and during the effectivity of the Contracttwelve and one-half per cent of the initial area in addition tothe delineated production area: Provided, however, That thecontractor shall pay annual rentals on such retained areawhich shall not be less than ten pesos per hectare or fractionthereof for on-shore areas and not less than twenty pesos asdetermined by the Petroleum Board per hectare or fractionthereof for off-shore areas: Provided, further, That suchrentals can be offset against exploration expenditures actuallyspent on such area.

(f) Where petroleum in commercial quantity is discoveredduring the exploration period in any area covered by thecontract, the contract with respect to said area shall remain inforce forproduction purposes during the balance of the tenyear exploration period and for an additional period of twenty-five years, thereafter renewable for a period not exceedingfifteen years under such terms and conditions as may beagreed upon by the parties at the time of renewal.(g) All materials, equipment, plants and other installationserected or placed on the exploration and/or production areaof a movable nature by the contractor shall remain propertiesof the contractor unless not removed therefrom within oneyear after the termination of the contract.(h) The contractor shall be subject to the provisions of laws ofgeneral application relating to labor, health, safety, andecology insofar as they are not in conflict with the provisions

otherwise contained in this Act.(i) Every contract executed in pursuance of this Act shallcontain provisions regarding the discovery, production, saleand disposal of natural gas and casinghead petroleum spiritthat shall be in line with the rules herein prescribed for crudeoil except that:(1) The market price shall be the basis for tax and all otherpurposes;(2) After meeting requirements in secondary recoveryoperations priority shall be given to supplying prospectivedemand in the Philippines.Section 10.Contract areas. Subject to Section eighteenhereof, a contractor or its affiliate may enter into one or morecontracts with the Government. Contracts for off-shore areas

may cover any portion beneath the Philippine territorialwaters or its continental shelf, or portion of the continentalslope, terrace or areas which are or may be subject toPhilippine jurisdiction: Provided, That for off-shore areasbeyond water depths of 200 meters, the Petroleum Boardmay provide for more liberal terms than that provided forherein with respect to contract areas, exploration period andrelinquishment.Section 11.Transfer and assignment. The rights andobligations under a contract executed under this Act shall notbe assigned or transferred without the prior approval ofthe Petroleum Board: Provided, That with respect to the

transfer or assignment of contractual rights and obligationsunder this Act to an affiliate of the transferor, the approvalthereof by the Petroleum Board shall be automatic, if thetransferee is as qualified as the transferor to enter into suchcontract with the Government: Provided, further, That theaffiliate relationships between the original transferor or acompany which holds at least fifty per cent of the contractor'soutstanding shares entitled to vote and each transferee shallbe maintained during the existence of the contract.Section 12.Privileges of contractor. The provisions of anylaw to the contrary notwithstanding, a contract executedunder this Act may provide that the contractor shall have thefollowing privileges:(a) Exemption from all taxes except income tax.(b) Exemption from payment of tariff duties andcompensating tax on the importation of machinery and

equipment, and spare parts and all materials requiredfor petroleum operations subject to the conditions that saidmachinery, equipment, spare parts and materials ofcomparable price and quality are not manufactureddomestically; and directly and actually needed and will beused exclusively by the contractor in its operations or inoperations for it by a subcontractor are covered by shippingdocuments in the name of the contractor to whom theshipment will be delivered direct by the customs authorities;and prior approval of the Petroleum Board was obtained bythe contractor before the importation of such machinery,equipment, spare parts and materials which approval shall nobe unreasonably withheld: Provided, however, That thecontractor or its subcontractor may not sell, transfer ordispose of these machinery, equipment, spare parts andmaterials without the prior approval of the Petroleum Boardand payment of taxes due the Government: Provided, further,

That should the contractor or its subcontractor sell, transfer ordispose of these machinery equipment, spare parts ormaterials without the prior consent of the Petroleum Board,it shall pay twice the amount of the tax exemption granted:Provided, finally That the Petroleum Board shall allow andapprove the sale, transfer, or disposition of the said itemswithout tax if made (1) to another contractor; (2) for reasonsof technical obsolescence; or (3) for purposes of replacementto improve and/or expand the operations of the contract;(c) Exemption upon approval by the Petroleum Board fromlaws, regulations and/or ordinances restricting the (1)construction, installation, and operation of power plant for theexclusive use of the contractor if no local enterprise cansupply within a reasonable period and at reasonable cost thepower needed by the contractor in its petroleum operations,(2) exportation of machinery and equipment which were

imported solely for its petroleum operation when no longerneeded therefor;(d) Exemption from publication requirements underRepublic Act Numbered Five thousand four hundred fifty-five;and the provisions of Republic Act Numbered Sixty-onehundred and seventy-three with respect to theexploration, production, exportation or sale or disposition ofcrude oil discovered and produced in the Philippines;(e) Exportation ofpetroleum subject to the prior filing pro-rata of domestic needs as elsewhere provided in this Act;(f) Entry, upon the sole approval of the Petroleum Boardwhich shall not be unreasonably withheld, of alien technicaland specialized personnel (including the immediate membersof their families), who may exercise their professions solely



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for the operations of the contractor as prescribed in itscontract with the Government under this Act: Provided, Thatif the employment or connection of any such alien withcontractor ceases, the applicable laws and regulations onimmigration shall apply to him and his immediate family:Provided, further, That Filipinos shall be given preference topositions for which they have adequate training: Andprovided, finally, That the contractor shall adopt andimplement a training program for Filipinos along technical orspecialized lines, which program shall be reported tothe Petroleum Board;(g) Rights and obligations in any contract concluded pursuant

to this Act shall be deemed as essential considerations for theconclusion thereof and shall not be unilaterally changed orimpaired; and(h) The privileges and benefits granted to a contractor underthe provisions of this Act together with any applicableobligations shall likewise be made available toconcessionaires under thePetroleumAct of 1949 and theirauthorized contractors and/or service operators, whether localor foreign, if they so elect.Section 13.Repatriation of capital and retention of profitsabroad.The contractor shall be entitled to (1) repatriate overa reasonable period the capital investment actually broughtinto the country in foreign exchange or other assets andregistered with the Central Bank; (2) retain abroad all foreignexchange representing proceeds arising from exportsaccruing to the contractor over and above (a) the foreign

exchange to be converted into pesos in an amount sufficientto cover, or equivalent to, the local costs for administrationand operations of the exported crude and (b) Revenues duethe Government on such crude: Provided, however, That theGovernment and the contractor shall stipulate in the contractthe currency in which the Government revenues arising under(b) above are to be paid; (3) convert into foreign exchangeand remit abroad at prevailing rates no less favorable toContractor than those available to Contractor than thoseavailable to any other purchaser of foreign currencies, anyexcess balances of their peso earningsfrom petroleumproduction and sale over and above thecurrent working balances they require, and (4) convert foreignexchange into Philippine currency for all purposes inconnection with its petroleum operations at prevailing ratesno less favorable to contractor than those available to anyother purchaser of such currency.

Section 14.Full disclosure of interest in contractor. Interestheld in the contractor by domestic miningand petroleum companies and/or the latter's stockholdersmay be allowed to any extent after full disclosure thereof to,and approved by the Petroleum Board.Section 15.Arbitration. The Petroleum Board may stipulatein a contract executed under this Act that disputes in theimplementation thereof between the Government and thecontractor may be settled in accordance with generallyaccepted international arbitration practice.Section 16.Performance guarantee. In order to guaranteecompliance with the obligations of the contractor in contractsexecuted under this Act, the contractor shall post a bond orother guarantee of sufficient amount in favor of theGovernment and with surety or sureties satisfactory tothe Petroleum Board, conditioned upon the faithful

performance by the contractor of any or all of the obligationsunder and pursuant to said contracts.IMPLEMENTING AGENCYSection 17.There is hereby created a Petroleum Boardcomposed of the Secretary of Agriculture and NaturalResources, as Chairman, and the Secretary of Finance, theSecretary of Justice, the Chairman of the Board ofInvestments, the Governor of the Central Bank, the Secretaryof Trade and Tourism and the Director of Mines asmembers. The Director of Mines shall be its Executive Officer.

The Board shall be attached to the National EconomicDevelopment Authority.

Section 18.Functions ofPetroleum Board. In accordancewith the provisions and objectives of this Act,the Petroleum Board shall:(a) Define and give public notice when applicable of the areasavailable for service contract;(b) Enter into contracts herein authorized with such terms andconditions as may be appropriate under the circumstancesincluding the grant of special allowance: Provided, however,

That no depletion allowance shall be granted: Provided,further, That except as provided in Sections twenty-six andtwenty-seven hereof, no contract in favor of one contractorand its affiliates shall cover less than fifty thousand nor more

than seven hundred and fifty thousand hectares for on-sphereareas, or less than eighty thousand nor more than one millionfive hundred thousand hectares for off-shore areas: Provided,finally, That in no case shall the annual net revenue or shareof the Government, including all taxes paid by or on behalf ofthe contractor, be less than sixty per cent of the differencebetween the gross income and the sum of operating expensesand Filipino participation incentive;(c) Provide for the manner and form of the income taxpayment, the reimbursement of operating expenses, thepayment of service fee, and payment of Filipino participationincentive allowance, if any, in the service contract;(d) Make specific proposals to Congress for the grant ofsubsidy to contractors and petroleum companies at leastsixty per cent of the capital of which is owned by Philippinecitizens, to be derived from the revenue or share that will

accrue to the Government in pursuance of this Act;(e) Undertake intensive studies and researches on oil fieldpractices, procedures, and policies;(f) Promulgate such rules and regulations as may benecessary and assess charges for services rendered, toimplement the intent and provisions of this Act;(g) Appoint, discipline and remove, and determine thecompensation of, its technical staff and other personnel:Provided, That positions which are highly technical orprimarily confidential shall not be subject to the Civil ServiceLaws and Rules, and of the Wage and Position ClassificationOffice;(h) Within four months after the close of every fiscal year,submit to the President and Legislature an annual report onits activities, with appropriate recommendation; and(i) Generally, exercise all powers necessary or incidental toattain the objectives of this Act.

TAX PROVISIONSSection 19.Imposition of tax. The contractor shall be liableeach taxable year for Philippine income tax on income derivedfrom its petroleum operations under its contract of service,computed as provided in Section 20, through 25.Section 20.Determination of gross income. The grossincome shall consist of:(a) In respect of crude oil exported, the gross proceeds fromthe sale of crude oil at the posted price;(b) In respect of crude oil sold for consumption in thePhilippines, the gross income shall consist of the grossproceeds from the sale thereof at market price per barrel;(c) In respect of natural gas and/orcasinghead petroleum exported or sold for consumption inthe Philippines the gross income shall consist of the totalquantity sold at the prevailing market price thereof; and

(d) Such other income which are incidental to and/or arisingfrom any petroleum operation.Section 21.Deductions from gross income. In computing thetaxable net income, there shall be allowed as deductions:(1) Filipino participation incentive; and(2) Operating expenses reimbursed pursuant to Section 8 (1)which includes amortization and depreciation as provided inSection 22.Section 22.Amortization and Depreciation. Intangibleexploration costs may be deductible in full; all tangibleexploration costs such as capital expenditures and otherrecoverable capital assets are to be depreciated for a periodof ten years.



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Section 23.Deductions not allowed. In ascertaining thetaxable net income, no deduction from gross income shall beallowed in respect of any interest or other consideration paidor suffered in respect of the financing ofits petroleum operations.Section 24.Return and payment of tax. Every party to aservice contract shall render to the Petroleum Board a returnfor each taxable year in duplicate in such form and manner asprovided by law setting forth its gross income and thedeductions herein allowed. The return shall be filed bythe Petroleum Board with the Commissioner of InternalRevenue or his deputies or other persons authorized by him to

receive such return within the period specified in the NationalInternal Revenue Code and the Rules and Regulationspromulgated thereunder. Every party to a service contractshall be subject to tax separately on its share of taxableincome arising from such contract.Section 25.Applicability of the provisions of the NationalRevenue Code. All provisions of the National Internal RevenueCode and rules and regulations promulgated in relationtherewith which are not inconsistent with the provisions ofthis Act shall be applicable to the Contractor.SPECIAL PROVISIONSSection 26.Option of exploration concessionaires. A holderof a valid and subsisting petroleum exploration concessionunder the PetroleumAct of 1949 may, at his option enterinto a contract of service under the rules ofthe PetroleumAct of 1949, subject to constitutional

restrictions, with any local or foreign oil company under suchterms and conditions as may be agreed upon by theconcessionaire and the service contractor. As an alternativethe concessionaire may convert his concession into a servicecontract as provided in this Act through negotiations, with allthe rights and privileges herein authorized: Provided, That thecontract which may be concluded after said negotiation shallcontain at least the minimum terms and conditions providedin this Act and shall take into account terms and conditionsmore favorable to the Government contained in contractsinvolving exploration pursuant to this Act: Provided, further,

That the exploration period shall commence to run from theeffective date of the original concession, except when theconcession has been effective for a period of seven years ormore, in which case the contractor shall be required tocommence exploratory drilling operations within a period ofnot exceeding eighteen months from the date of effectivity of

the service contract. If the contractor is not in default in thedrilling operations as hereunder required, an extension of theexploration period may be granted as provided in Sectionnine, paragraph (e) of this Act.Section 27.Alternative option of explorationconcessionaire. The concessionaire referred to in thepreceding section may form a consortium with anothercompany or companies and jointly enter into a servicecontract with the Government under this Act, with the right toassign to the consortium, subject to the approval ofthe Petroleum Board, the area covered by his concessionwhich shall thereupon be governed by the provisions ofthis Act: Provided, That the voluntary relinquishment of theconcession and its assignment, as well as all technical data onthe area resulting from studies conducted by theconcessionaire subsisting improvement introduced by him

thereon, shall be evaluated and given a fair value which mayconstitute his contribution, wholly or in part, to theconsortium: Provided, however, That the exploration periodunder the new contract shall commence to run from the dateof the effectivity of the contract if it covers areas in additionto the assigned areas; otherwise the provisions of thepreceding section shall apply: Provided, further, That dulypublished applications, for exploration concessions or bidstherefor already awarded by the Secretary of Agriculture andNatural Resources under the provisions ofthe PetroleumAct of 1949 shall be recognized and thecorresponding deeds of concessions issued accordingly:Provided, finally, That exploration concessions on which theholder thereof failed to perform the three consecutive years

the exploration work required under the provisions ofthe PetroleumAct of 1949, as amended byRepublic Act Numbered Five Thousand Eighty-Six shall beconsidered automatically cancelled.Section 28.Filipino Participation Incentive. The contractorunder a service contract in which Philippine citizens orcorporations have a minimum participating interest of fifteenper cent in the contract area may be subject to reasonableconditions imposed by the Petroleum Board be granted by agovernment subsidy, commensurate with the scope of Fil ipinoparticipation, i.e., a Filipino participation incentive, notexceeding seven and one-half per cent, which shall be

computed by deducting the said allowance from the posted ormarket price, whichever, is the higher, of crude oil exportsproduced in the contract area, and from the market price ofcrude oil produced in the contract area, sold or disposed of forconsumption in the Philippines.Section 29.Publicity. Negotiation with the Government forthe conclusion of a contract under this Act and every contractconcluded hereunder shall be given publicity consistent withthe best interest of the Government.Section 30.Provisions ofPetroleumActapplicable. Theprovisions of the PetroleumAct of 1949, as amended, shallnot be applicable to the service contract provided in this Act,except the following Articles:(a) Article 16, referring to public easements on lands coveredby concessions;(b) Article 17, providing that petroleum operations are

subject to existing mining rights, permits, leases andconcessions in respect of substances otherthan petroleum and to existingpetroleum rights;(c) Article 18, referring to the right of the Government toestablish reservations or grant mining rightson petroleum concessions;(d) Article 20, granting exploration and exploitationconcessionaires the right to enter private lands covered bytheir concessions;(e) Article 21, referring to easement and the exercise of theright of eminent domain over private lands for the purpose ofcarrying out any work essential to petroleum operations;(f) Article 22, providing for easements over public land for thepurpose of carrying out any work essentialto petroleum operations; and(g) Article 23, which grants concessionaires the right to utilizefor any of the work to which the concession relates, timber,

water, and clay from any public lands within theirconcessions.Section 31.Preference to Local Labor. The Contractor shallgive priority in employment to qualified personnel in themunicipality or municipalities or province where theexploration or productionoperations are located.Section 32.Foreign Assistance. Nothing in this Act or of anyother law shall preclude the Government of the Republic ofthe Philippines, through the Petroleum Board or any otherproper office or agency, from negotiating or entering into anyagreement with any foreign country or government forassistance in terms of equipment, technical know-how andfinancing for the explorationandproduction ofindigenous crude oil and its by-products.Section 33.Funds. To carry out the purpose of this Act,there is hereby appropriated, out of any funds in the National

Treasury not otherwise appropriated, the sum of five hundredthousand pesos for the fiscal year nineteen hundred seventy-three. Hereafter, the necessary appropriations shall beincluded in subsequent General Appropriations Act.Section 34.Repealing Clause. All laws, executive orders andregulations inconsistent with the provisions of this Act arehereby repealed, provided that no existing rights shall beprejudiced thereby.Section 35.Effectivity date. This Act shall take effect uponits approval.Done in the City of Manila, this thirty first day of December, inthe year of Our Lord, nineteen hundred and seventy-two.



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EXECUTIVE ORDER NO. 66 (DESIGNATING DOE AS LEAD

AGENCY FOR DEVELOPMENT OF PHILIPPINE

NATURAL GAS INDUSTRY)

Executive Order No. 66

DESIGNATING THE DEPARTMENT OF ENERGYAS THELEAD AGENCY IN DEVELOPING THE PHILIPPINENATURAL GAS INDUSTRY

WHEREAS, the Malampaya Gas-to-Power Project, the largestand most important investment of its kind in the Philippinehistory, represents the beginning of the Natural Gas Industryin the Philippines;WHEREAS, the development of the Natural Gas Industry shallsignal the much awaited boost to the economy by opening upvast opportunities both for the government and the privatesector;WHEREAS, Section 2 ofR.A. 7638 otherwise known as theDepartment of Energy Act of 1992, declares, among others,that it is the policy of the State to ensure a continuous,adequate and economic supply of energy with the end in viewof ultimately achieving self-reliance in the countrys energy

requirements through the integrated and intensiveexploration, production, management and development of thecountrys indigenous energy resources, without sacrificingecological concerns;WHEREAS, Sections 4, 5(a) and 5(b) ofR.A. 7638provide thatthe Department of Energy (DOE)is mandated to formulatepolicies for the planning and implementation of acomprehensive program for the efficient supply andeconomical use of energy consistent with the approvednational economic plan, and to provide a mechanism for theintegration, rationalization and coordination of the variousenergy programs of the Government with a preferential biasfor environment-friendly, indigenous and low-cost sources ofenergy;WHEREAS, Section 5(c) ofR.A. 7638 mandates the DOEtoestablish and administer programs for the exploration,transportation, marketing, distribution, utilization,conservation, stockpiling and storage of energy resources ofall forms, whether conventional or non-conventional;WHEREAS, Section 5(e) ofR.A. 7638authorizes theDOE toregulate private sector activities relative to energy projectsprovided it shall provide for an environment conducive to freeand active private sector participation and investment in allenergy activities;WHEREAS, natural gas has been recognized as anenvironment-friendly, indigenous and low-cost source ofenergy among the indigenous energy resources;WHEREAS, the critical nature of developing the Natural Gas

Industry necessitates the involvement and support of variousgovernment agencies to ensure a unified and coordinatedeffort towards establishing a successful and robust NaturalGas Industry;NOW, THEREFORE, I, GLORIA MACAPAGAL-ARROYO, Presidentof the Philippines, by virtue of the powers vested in me bylaw, do hereby order:SECTION 1. The Department of Energyis hereby designatedas the lead government agency in ensuring a unified andcoordinated effort towards establishing a successful androbust Natural Gas Industry;

SEC. 2. Pursuant to its mandate, the Department ofEnergy shall recommend and/or issue appropriate policystatements, industry rules and guidelines and other issuancesin order to facilitate and encourage private sector activities,investments and participation in the natural gas industry;SEC. 3. The Department of Energymay call upon anydepartment, agency or instrumentality of the Government forassistance to ensure the development of the Natural GasIndustry and shall have the authority to retain the services oftechnical consultants of proven and internationally recognized

expertise in natural gas technology as may be deemednecessary;SEC. 4. All Other Government Agencies shall assist andcooperate with the Department of Energyas may benecessary to develop and implement the programs for thenatural gas industry.SEC. 5. Funds. The funding requirements to carry out thesetasks shall be chargeable against the savings from theappropriations of the Department for the first year ofimplementation of this Order. Funds for succeeding yearsshall be chargeable against the regular appropriations ofthe Department;SEC. 6. Effectivity. This Order shall take effect immediately

Done in the city of Manila this 18th day of January, in the yearof Our Lord, two thousand and one.Pasted from

Case Study: The Malampaya Deep Water Gas to Power Project

PRESIDENTIAL DECREE NO. 1442

PRESIDENTIAL DECREE No. 1442AN ACT TO PROMOTE THE EXPLORATION AND

DEVELOPMENT OF GEOTHERMAL RESOURCESWHEREAS, it is necessary for the economic and industrialdevelopment of the country to reduce our dependence onimported energy supplies and accelerate the development ofgeothermal resources which have been identified as a viableand untapped economical source of energy;WHEREAS, it is in the national interest to allow servicecontracts for financial, technical, management or other formsof assistance with qualified domestic and foreign entities, forthe exploration, development, exploitation, or utilization ofthe country's geothermal resources;NOW, THEREFORE, I, FERDINAND E. MARCOS, President of thePhilippines, by virtue of the powers vested in me by theConstitution of the Philippines, do hereby order and decree asfollows:Section 1. Exploration of and Development of Geothermal

Resources by the Government. Subject to existing privaterights, the Government may directly explore for, exploit anddevelop geothermal resources. It may also indirectlyundertake the same under service contracts awarded throughpublic bidding or concluded through negotiation, with adomestic or foreign contractor who must be technically andfinancially capable of undertaking the operations required inthe service contract; Provided, that if the service contractorshall furnish the necessary services, technology and financingthe service contractor may be paid a fee not exceeding fortyper centum (40%) of the balance of the gross value of thegeothermal operations after deducting the necessaryexpenses incurred in the operations; Provided, further, thatthe execution of the activities and operations subject of the

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service contract, including the implementation of the workprogram and accounting procedures agreed upon, shall at alltimes be subject to direct supervision of the Government,through the Bureau of Energy Development.Service contracts as above authorized shall be subject to theapproval of the Secretary of Energy.Geothermal resources mean (a) all products of geothermalprocesses, embracing indigenous steam, hot water and hotbrines; (b) steam and other gases, hot water and hot brinesresulting from water, gas, or other fluids artificially introducedinto geothermal formations; (c) heat or other associatedenergy found in geothermal formations; and (d) any by-

product derived from them.Section 2.Geothermal Contract Areas. Service contracts, asherein authorized, may cover public lands, governmentgeothermal reservations, including those presentlyadministered or unappropriated areas, as well as areascovered by exploration permits or leases granted underRepublic Act No. 5092.Service contracts for exploration and development ofgeothermal resources may also cover private lands, or otherlands subject of agricultural, mining, petroleum or other rightsor devoted to purposes other than the exploration or use ofgeothermal energy; Provided, that the right to enter privatelands, and to established easements over such lands shall, inthe absence of a voluntary agreement with the privatelandowner, upon application of the contractor to the Court ofFirst Instance of the province or the municipal court of the

municipality where the land is situated, and upon posting ofthe necessary bond as may be fixed by the same court, beallowed by the court subject to payment of reasonablecompensation.Section 3.Conversion of Geothermal Exploration Permits andLeases to Service Contract. Holders of valid and subsistinggeothermal exploration permits and geothermal leasesgranted by the Government prior to January 17, 1973,pursuant to Republic Act No. 5092, shall enter into servicecontracts as herein provided relative to the areas covered bytheir respective permits or leases within six months from theeffective date of this Decree; and, in default thereof, thegeothermal exploration permits and geothermal leases shallbe deemed automatically canceled and the area coveredthereby shall revert back to the State.All geothermal exploration permit application filed underRepublic Act No. 5092 shall be deemed withdrawn and no

effect as of the effective date of this Decree.Section 4.Privileges of Service Contractors. The provisions ofany law to the contrary notwithstanding, a service contractexecuted under this Act may provide that the contractor shallhave the following privileges:(a) Exemption from payment of tariff duties andcompensating tax on the importation of machinery andequipment, and spare parts and all materials required forgeothermal operations subject to such conditions as may beimposed by the Director of Energy Development; Provided,that should the contractor or its sub-contractor sell, transferor dispose of the machinery, equipment, spare parts ormaterials without the prior consent of the Bureau of EnergyDevelopment, it shall pay twice the amount of the taxes andduties not paid because of the exemption granted;(b) Entry, upon the sole approval of the Bureau of Energy

Development which shall not be unreasonably withheld, andsubject to such conditions as it may impose, of alien technicaland specialized personnel (including the immediate membersof their families), who may exercise their professions solelyfor the operations of the contractor as prescribed in itscontract with the Government under this Act;(c) Subject to the regulations of the Central Bank, repatriationof capital investment and remittance of earnings derived fromits service contract operations, as well as such sums as maybe necessary to cover principal and interest of foreignobligations incurred for the geothermal operations.(d)Other privileges provided in Section 12 of PresidentialDecree no. 87 as may be applied to the geothermal operation.

Section 5.Exploitation Permits. In cases where discoveredgeothermal resources are deemed inappropriate for servicecontracts arrangements in view of economic and/or technicalreasons, the Bureau of Energy Development may issuedevelopment and exploitation permits for such resources andformulate the applicable rules and regulations to govern thesame.Section 6.Rules and Regulations. The Director of EnergyDevelopment shall be vested with the authority to promulgatesuch rules and regulations as may be necessary to implementthe provisions of this Act, subject to approval by the Secretaryof Energy.

Section 7.Repealing Clause. The provisions of Republic ActNo. 5092 and other laws, rules and regulations inconsistentwith this Decree are hereby repealed.Section 8.Effectivity. This Decree shall take effectimmediately upon approval.Done in the City of Manila, this 11th day of June, in the year ofOur Lord, nineteen hundred and seventy-eight.Pasted from

PRESIDENTIAL DECREE NO. 972

M a n i l aPRESIDENTIAL DECREE No. 972 July 28, 1976PROMULGATING AN ACT TO PROMOTE ANACCELERATED EXPLORATION, DEVELOPMENT,EXPLOITATION, PRODUCTION AND UTILIZATIONOF COALWHEREAS, the increasing cost of imported crude oilimposes an unduly heavy demand on the country'sinternational reserves thereby making it imperative forthe government to pursue actively the exploration,development and exploitation of indigenous energyresources;WHEREAS, while coal has been identified as a fossil fuelknown to exist in mineable quantities in the countrywhich could provide a viable energy source for somevital industries, large tracts of coalbearing lands have

not been explored and mined in a manner and to anextent adequate to meet the needs of the economy;WHEREAS, the proliferation of fragmented coal permitsand leases has prevented, or deterred, the adequateand speedy exploration, development, exploitation andproduction of indigenous coal resources;WHEREAS, to develop, achieve and implement a well-planned, systematic and meaningful exploration,development, exploitation and production of local coalresources, participation of the private sector withsufficient capital, technical and managerial resourcesmust be encouraged and the technical and financialcapabilities of the coal industry upgraded;WHEREAS, hand in hand with an accelerated coalexploration, development, exploitation and productionprogram, it is essential that the market for domesticcoal production be developed by granting incentives to

prospective coal users to convert their facilities for coalutilization;WHEREAS, to realize the above, it is necessary toamend and/or supplement existing legislation relatingto coal;WHEREAS, Article XVII, Section 12 of the Constitution ofthe Philippines provides in part that when the Nationalinterest so requires the incumbent President of thePhilippines or the interim Prime Minister may review allcontracts, concessions, permits or other forms orprivileges for the exploration, development,exploitation or utilization of natural resources enteredinto, granted, issued or acquired before the ratification

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of the Constitution;NOW, THEREFORE, I, FERDINAND E. MARCOS, by virtueof the powers vested in me by the Constitution of thePhilippines, do hereby decree and declare as part of thelaw of the land the following:Section 1.Short Title. This Act shall be known andmay be cited as "The Coal Development Act of 1976."Section 2.Declaration of Policy. It is hereby declaredto be the policy of the state to immediately acceleratethe exploration, development, exploitation productionand utilization of the country's coal resources. A coaldevelopment program is therefore promulgated andestablished by this Decree.Section 3.Coal Development Program. The countryshall be divided into coal regions and exploration andexploitation programs shall be instituted andimplemented pursuant to this Decree.

These programs shall be geared towards the promotionand development of the necessary technical andfinancial capability to undertake a work program toeffectively explore exploit coal resources.In recognition, however, of the social constraints thatmay be encountered in effecting the establishment ofcoal units in regions where there is high concentrationof small coal miners, a special coal program shall beformulated and implemented in coordination with theappropriate government agency/agencies to meet theparticular needs of such regions.

Section 4.Government to Undertake Coal ExplorationDevelopment and Production. The Government,through the Energy Development Board, its successorsor assigns, shall undertake by itself the activeexploration, development and production of coalresources. It may also execute coal operating contractsas hereafter defined. The active exploration andexploitation of coal resources by the Government orthrough coal operating contracts may cover publiclands, any unreserved or unappropriated coal bearinglands, claims located and recorded by private partiesareas covered by valid and subsisting coal revocablepermits, coal leases and other existing rights grantedby the Government for the exploration and exploitationof coal lands, government mineral reservations, coalareas/mines whose leases or permits are presently

owned or operated or held by government-owned orcontrolled corporations and coal mineable areasoperated or held by government agencies.Section 5.Blocking System. The Energy DevelopmentBoard shall establish coal regions delimiting its extentand boundaries after taking into consideration thevarious coal bearing lands of the Philippines. Each coalregion shall be divided into meridional blocks orquadrangles of two minutes (2') of latitude and one andone-half minutes (1-1/2) of longtitude, each blockcontaining an area of one thousand (1,000) hectares,more or less, the boundaries thereof to coincide withthe full two minutes and one and one-half minutes oflatitude and longtitude, respectively, based on thePhilippine Coast and Geodetic Survey Map, scale of1:50,000.Section 6.Coal Contract Area. In conformity with the

blocking system herein established, the EnergyDevelopment Board shall determine in each coal regionwhat areas, are available for coal operating contracts.In opening such contract areas, the EnergyDevelopment Board may resort to either of thefollowing alternative procedures:(a) By offering an area or areas for bids, specifying theminimum requirements and conditions in accordancewith this Decree: or(b) By negotiating with a qualified party for a coaloperating contract under the terms and conditionsprovided in this Decree.No person shall be entitled to more than fifteen (15)

blocks of coal lands in any one coal region.Section 7.Existing Permitees/Leaseholders. All validand subsisting holders of coal revocable permits, coalleases and other existing rights granted by thegovernment for the exploration and exploitation of coallands or the operators thereof duly approved by theappropriate government agency, shall be givenpreference in the grant of coal operating contract overthe area covered by their permits, leases or other rightssubjects to their compliance with the followingconditions and guidelines:(a) Those whose areas fall within a block as describedin Section 5 hereof shall organize or consolidatethemselves into a coal unit, singly or jointly with validand subsisting holders of coal revocable permits, coalleases and other existing coal rights or the dulyapproved operator thereof, of contiguous blocksprovided that a coal unit shall not be entitled to morethan fifteen (15) blocks of coal lands in any coal region.(b) Consolidation of areas into coal unit which shallrequire approval by the Energy Development Boardmust be completed within a period of six (6) monthsfrom the effectivity of this Decree.(c) In order to qualify for consolidation into coal units,permitees, leaseholders or operators must havecomplied with the requirements of their existingpermits, leases and/or rights as defined under existinglaws, rules and regulations.

(d) Members of the coal unit shall agree on the form,terms and extent of participation of its individualmembers. All holders of valid and subsisting coalrevocable permits, coal leases and other existing rightsgranted by the government for the exploration,development and exploitation of coal lands shall begiven percentage interest in the unit or payments outof production under such terms and conditions as maybe agreed by the members of the unit and approved bythe Energy Development Board.(e) A coal unit shall enter into a coal operating contractas hereafter provided within six (6) months from itsformation.Coal revocable permits, coal leases and other existingrights granted by the government for the explorationand exploitation of coal lands shall be deemed

automatically canceled and the area covered therebyshall revert back to the State for failure of the holdersor the qualified operators thereof for any causewhatsoever to consolidate their areas into coal units orsecure a coal operating contract within the periodspecified in this section.Section 8.Coal Operating Contract. Each coaloperating contract herein authorized shall, subject tothe approval of the President, be executed by theEnergy Development Board.In a coal operating contract, service, technology andfinancing are furnished by the operator for which itshall be entitled to the stipulated fee andreimbursement of operating expenses. Accordingly, theoperator must be technically competent and financiallycapable as determined by the Energy DevelopmentBoard to undertake the coal operations as required in

the contract.Section 9.Obligations of Operator in Coal OperatingContract. The operator under a coal operating contractshall undertake, manage and execute the coaloperations which shall include:(a) The examination and investigation of landssupposed to contain coal, by detailed surface geologicmapping, core drilling, trenching, test pitting and otherappropriate means, for the purpose of probing thepresence of coal deposits and the extent thereof;(b) Steps necessary to reach the coal deposits so thatcan be mined, including but not limited to shaft sinkingand tunneling; and



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(c) The extraction and utilization of coal deposits.The Government shall oversee the management ofoperation contemplated in the coal operating contractand in this connection, shall require the operator to:(a) Provide all the necessary service and technology;(b) Provide the requisite financing;(c) Perform the work obligations and programprescribed in the coal operating contract which shall beless than those prescribed in this Decree;(d) Operate the area on behalf of the Government inaccordance with good coal mining practices usingmodern methods appropriate for the geologicalconditions of the area to enable maximum economicproduction of coal, avoiding hazards to life, health andproperty, avoiding pollution of air, land and waters, andpursuant to an efficient and economic program ofoperation;(e) Furnish the Energy Development Board promptlywith all information, data and reports which it mayrequire;(f) Maintain detailed technical records and account ofits expenditures;(g) Maintain detailed technical records and account ofsafety demarcation of agreement acreage and workareas, non-interference with the rights of the otherpetroleum, mineral and natural resources operators;(h) Maintain all necessary equipment in good order andallow access to these as well as to the exploration,

development and production sites and operations toinspectors authorized by the Energy DevelopmentBoard;(i) Allow representatives authorized by the EnergyDevelopment Board full access to their accounts, booksand records for tax and other fiscal purposes;On the other hand, the Energy Development Boardshall:(a) On behalf of the Government, reimburse theoperator for all operating expenses not exceedingseventy per cent (70%) of the gross proceeds fromproduction in any year; Provided, that if in any year, theoperating expenses exceed seventy per cent (70%) ofthe gross proceeds from production, then theunrecovered expenses shall be recovered from theoperating of succeeding years. Operating expenses

means the total expenditures for coal operatingincurred by the operator as provided in a coal operatingcontract;(b) Pay the operator a fee, the net amount of whichshall not exceed forty per cent (40%) of the balance ofthe gross income after deducting all operatingexpenses;(c) Reimburse operating expenses and pay theoperator's fee in such form and manner as provided forin the coal operating contract.Section 10.Additional Fee. All valid and subsistingholders of coal revocable permits, coal leases and otherexisting rights granted by the government for theexploration and exploitation of coal lands or the dulyqualified operators thereof who have organized theirarea into a coal unit may, subject to conditions imposedby the Energy Development Board, be granted in the

coal operating contract, in addition to the face providedin Paragraph 2 of Section 9, a special allowance, theamount of which shall not exceed thirty per cent (30%)of the balance of the gross income after deducting alloperating expenses.Coal operating contracts entered into with Philippinecitizens or corporations except those already coveredunder the precedings paragraph, shall be granted aspecial allowance, the amount of which shall notexceed twenty per cent (20%) of the balance of thegross income after deducting all operating expenses;Provided, that coal operating contracts in whichPhilippine citizens or corporations have a minimum

participating interest of fifteen per cent (15%) in thecontract area, may subject to reasonable conditionsimposed by the Energy Development Board, be granteda special allowance not exceeding ten per cent (10%) ofthe balance of the gross income after deducting alloperating expenses.For the purpose of this section, a Philippine corporationmeans a corporation organized under Philippine laws atleast sixty per cent (60%) of the capital of which,including the voting shares, is owned and held bycitizens of the Philippines.Section 11.Minimum Terms and Conditions. Inaddition to those elsewhere provided in this Decree,every coal operating contract executed in pursuancehereof shall contain the following minimum terms andconditions:(a) Every operator shall be obliged to spend in directprosecution of exploration work not less than theamounts provided for in the coal operating contract andthese amounts shall not be less than the total obtainedby multiplying the number of coal blocks or fractionthereof covered by the contract by One Million Pesos(P1,000,000.00) per block annually; Provided, that if thearea or a portion thereof is suitable for open pit miningas determined jointly by the operator and the EnergyDevelopment Board, the minimum expenditurerequirement herein provided may be reduced up to TwoHundred Thousand Pesos (P200,000.00) per block

annually. From the time coal reserves in commercialquantity have been determined jointly by the operatorand the Energy Development Board, the operator shallundertake development and production of the contractarea within the period agreed upon in the contract andshall be obliged to spend in the development andproduction of the contract area an amount which shallbe determined by negotiation between the operatorand the Energy Development Board taking into accountfactors such as measured reserves, quality of coal,mining method and location and accessibility tomarket; Provided, further, that if during any contractyear the operator shall spend more than the amount ofmoney required to be spent, the excess may becredited against the money required to be spent by theoperator during the succeeding years, except excess

expenditures for exploration cannot be credited againstfinancial commitment for development and production;Provided, further, that should the operator fail tocomply with the work obligations provided for in thecoal operating contract, it shall pay to the Governmentthe amount it should have spent but did not in directprosecution of its work obligations; Provided, finally,that except in case of open pit mining, the operatorshall drill at least thirty (30) holes per blocks and aminimum footage of exploratory holes before the end ofthe exploration period as may be specified in the coaloperating contract.(b) The exploration period under every coal operatingcontract shall be for two (2) years. If the operator hascomplied with its exploration work obligations, theexploration period may be extended for another two (2)years. The coal operating contract shall lapse unless

coal of commercial quantity is measured during theexploration period or at the end thereof in any areacovered by the coal operating contract. If coal ofcommercial quantity is measured, the coal operatingcontract shall remain in force for development andproduction during the balance of the exploration periodand/or for an additional period ranging from ten (10) totwenty (20) years, thereafter renewable for a series ofthree (3)-year periods not exceeding twelve (12) yearsunder such terms and conditions as may be agreedupon by the parties.(c) All materials, equipment, plants and otherinstallations erected or placed on the exploration and/or



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production area of a movable nature by the operatorshall become properties of the Energy DevelopmentBoard if not removed therefrom within one (1) yearafter the termination of the coal operating contract.(d) The operator shall be subject to the provisions oflaws of general application relating to labor, health,safety and ecology insofar as they are not in conflictwith the provisions otherwise contained in this Decree.Section 12.Full Disclosure of Interest in CoalOperating Contract. Interest held in the coal operatingcontract by domestic mining companies and/or thelatter's stockholders may be allowed to any extent afterfull disclosure thereof and approved by the EnergyDevelopment Board.Section 13.Arbitration. The Energy DevelopmentBoard may stipulate in a coal operating contractexecuted under this Decree that disputes in theimplementation thereof between the Government andthe operator may be settled by arbitration.Section 14.Performance Guarantee. In order toguarantee compliance with the obligations of theoperator executed under this Decree, the operator shallpost a bond or other guarantee of sufficient amount infavor of the Government and with surety or suretiessatisfactory to the Energy Development Board,conditioned upon the faithful performance by theoperator of any or all of the obligations under andpursuant to said coal operating contracts.

Section 15.Transfer and Assignment. The rights andobligations under a coal operating contract executedunder this Decree shall not be transferred or assignedwithout the prior approval of the Energy DevelopmentBoard; Provided, that such transfer or assignment maybe made only to a qualified person possessing theresources and capability to continue the miningoperation of the coal operating contract and that theoperator has complied with all the obligations of thecoal operating contract.Section 16.Incentives to Operators. The provisions ofany law to the contrary notwithstanding, a contractexecuted under this Decree may provide that theoperator shall have the following incentives:(a) Exemption from all taxes except income tax;(b) Exemption from payment of tariff duties and

compensating tax on importation of machinery andequipment and spare parts and materials required forthe coal operations subject to the following conditions:1. that machinery, equipment, spare parts andmaterials of comparable price and quality are notmanufactured in the Philippines;2. that the same are directly and actually needed andwill be used exclusively by the operator in itsoperations or in operation for it by a contractor;3. That they are covered by shipping documents in thename of the operator to whom the shipment will bedelivered directly by the customs authorities; and4. that prior approval of the Energy Development Boardwas obtained by the operator before the importation ofsuch machinery, equipment, spare parts and materials,which approval shall not be unreasonably withheld;Provided, however, that the operator or its contractor

may not sell, transfer, or dispose of the machinery,equipment, spare parts and materials without the priorapproval of the Energy Development Board andpayment of taxes and duties thereon; Provided, further,that should the operator or its contractor sell, transfer,or dispose of these machinery, equipment, spare partsor materials without the prior approval of the EnergyDevelopment Board, it shall pay twice the amount ofthe taxes and duties thereon; Provided, finally, that theEnergy Development Board shall allow and approvedthe sale, transfer or disposition of the said itemswithout tax if made:(a) to another operator under a coal operating contract;

(b) for reasons of technical obsolescence; or(c) for purposes of replacement to improve and/orexpand the operation under the coal operatingcontract.(c) Accelerated Depreciation. At the option of thetaxpayer and in accordance with the proceduresestablished by the Bureau of Internal Revenue, fixedassets owned by the coal units in the performance of itscoal operating contract may be:1. Depreciated to the extent of not more than twice asfast as normal rate of depreciated or depreciated atnormal rate of depreciation if expected life is ten (10)years or less; or2. Depreciated over any number of years between five(5) years and expected life if the latter is more than ten(10) years, and the depreciation thereon allowed as adeduction from taxable income; Provided, that thetaxpayer notifies the Bureau of Internal Revenue at thebeginning of the depreciation peri