September 4, 2024 | 12:00am
The Malampaya consortium was not thinking of asking power consumers for any subsidy.
Donnabel Kuizon Cruz, managing director of Prime Energy, told me it is unfortunate their decision to seek a temporary restraining order (TRO) on the Meralco CSP bidding gave the wrong impression.
Indeed, she said, the Malampaya price had been stable and had been mostly lower than international spot market prices since 2010.
Their seemingly higher price compared to the international spot market is more of a mirage. It has to do with how the power companies who off-take Malampaya price their bid during CSP biddings. What the consortium wants, Ms. Cruz said, is a fair comparison of costs. She explains how the system works:
“The cost of LNG is composed of “fuel cost” (the cost of the fuel molecule itself) + “non fuel cost” (composed of shipping/ freight cost + regasification cost + terminal costs such as the contract for tugboats, among others). Both of these costs are pass-through directly to consumers.
“In the recent Meralco bids, the non-fuel costs of the winning bidder (Ilijan plant) were about $2.60/mmbtu. This was based on assumed references i.e. examples from other countries which have more mature and large-scale LNG operations. Adding the fuel (molecule) cost, the total LNG cost of the bid was $10.5/mmbtu.
“However, today, if we look at the July 2024 generation cost of the Ilijan plant and back-calculate its total LNG cost, we can see that the actual non-fuel cost is about 150 percent higher than in the bid. This amounts to a total LNG cost of $13.4/mmbtu. This is the real cost passed through to consumers versus the original $10.5/mmbtu in the bid.
“Malampaya price, on the other hand, is ‘all in.’ There is no ‘non-fuel’ cost added on top of it as it is irrelevant for this type of business and operation (upstream). Hence whatever Malampaya price is submitted in a bid, that’s really it. It can only go up or down slightly based on fuel indices in its price formula. In July, to compare, the price of Malampaya was $12.8/mmbtu.”
She is saying the CSP process is unfair to allow Ilijan to submit a low bid based on faulty assumptions and for ERC to simply allow Ilijan to pass through to power consumers the higher LNG non-fuel costs (shipping/freight, regasification, other terminal-related costs).
In other words, they are asking for a more level playing field, not a consumer subsidy like a feed-in tariff for a local energy source that their TRO case and Sen. Pia Cayetano’s bill calling for preference suggested.
Ilijan’s recent CSP bid was a low $10.5/mmbtu which seems lower than Malampaya’s $12.8/mmbtu. But once the pass-through costs were added, Ilijan’s cost was $13.4/mmbtu, higher than Malampaya’s $12.8/mmbtu. Consumers could have saved some money if Ilijan used Malampaya, assuming it could use Malampaya at that time.
ERC should review that practice of simple pass-through or maybe Sen. Pia’s bill should mandate ERC to review this pass-through process and let power companies live or die on the basis of their bid assumptions. That would be fair.
Then again, there is a good justification to give some preference to Malampaya if only because it enhances energy security. The resource is already in the country. The price is stable unlike the international spot market for LNG.
Prime Energy’s Ms. Cruz said that “all LNG suppliers we’ve spoken to can only sell the long-term LNG in 2027 to 2028. So, we will expect both FGEN and SMC to be importing at these volatile and generally high prices…I am praying it won’t get worse from today. The spot LNG price today is $14 to $15/mmbtu including terminal costs.”
Unfortunately, the Philippines has no choice but to import spot LNG rather than “long term” LNG (which is priced similarly to Malampaya) because all long-term LNG volumes are already contracted to other international buyers – they’re unavailable.
Importing LNG is not easy as the Philippines is in competition with other countries. The role of government is paramount in providing off-take assurance and credit support to underpin large and critical investments such as LNG terminals.
Guaranteed term off-take agreements for LNG can significantly enhance price stability, allowing power generators to secure more favorable long-term contracts and pricing that should be beneficial for end-consumers.
Assuming that local natgas production should be supported whenever their price exceeds international spot, any subsidy should be taken out of the 60 percent royalty that the national government is getting from Malampaya and not passed on to power consumers.
The consortium has remitted $13.5 billion in Malampaya royalty to the government to-date. The general impression we get is all that money was largely dissipated as some kind of pork barrel funds during past administrations. No one can point to anything worthwhile that was financed by the Malampaya royalties.
In a recent presentation before FINEX, Giles Puno, First Gas president, noted that the company has invested $2 billion – $400 million of that is in their LNG regasification terminal and the rest on geothermal and hydroelectric projects. But “certain policies and regulations have created rather unattractive conditions that contribute to the underinvestment in capacity. If we need additional capacity to be built, why would anyone build if the signals being sent are unattractive?
“In the case of First Gen, we are ready to proceed with an additional 600-MW Sta. Maria (natural gas power plant) expansion that will be the most modern technology of its kind in the country. But under current circumstances, it will be difficult for us to defend the investment thesis with our board. It will be no different, I suspect, for other players.”
Well, the next move is for the government to clarify its policies. The alternative is higher power rates or worse, more yellow and red alerts or blackouts.
Boo Chanco’s email address is [email protected]. Follow him on X @boochanco.
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