A subsidiary of Udenna Corp. that bought Chevron Malampaya’s 45% stake in the consortium supplying 20% of the country’s electricity requirements failed the ¬ financial test, and yet the Department of Energy (DOE) approved the acquisition deal.
The DOE said it applied the financial test to Chevron Malampaya which passed the review, a processthat three senators insisted was flawed.
The failure of Udenna subsidiary UC Malampaya Philippines Pte. Ltd to meet the three-way test (the two others being legal and technical) came to light at the hearing of the Senate energy committee chaired by Sen. Sherwin Gatchalian. Minutes of the Dec. 15, 2021, hearing were made available to Opinyon.
Sen. Koko Pimentel said the three tests must be applied to the same entity—the transferee, buyer or assignee—in this case UC Malampaya. “The new personality must pass all three tests. [The DOE must] not look for an entity that passed [the financial test] because the former did not make it,” he said.
Besides greenlighting the sale of the Chevron shares of stock, the DOE has recommended to the Office of the President the approval of two service contracts in Recto Bank covering almost 3 million hectares in the West Philippine Sea, which the department awarded to UC Malampaya although the company has no track record in exploration.
It also came to light that UC Malampaya was receiving income from the deep water gas-to-powerproject off Palawan a full year before the DOE approved the sale of Chevron shares on March 20, 2021.
Campaign donor
Udenna Corp. is owned by a campaign donor of President Duterte, Dennis Uy, who, Sen. Risa Hontiveros notes, has bagged other big projects, such as the contract to distribute ballots, counting machines and other paraphernalia for the May 2022 elections, and the operation of a third telecom company in the country.
Upon questioning, Energy Secretary Alfonso Cusi said UC Malampaya had passed the legal ang technical tests, but he acknowledged that it did not meet the requirements of the financial test.
So in lieu of UC Malampaya, the DOE applied the - financial test to Chevron Philippines, which Cusi claims is still part of the three-member consortium— the two other members being Shell Philippines Co- Exploration B.V. (SPEx, owner of 45%) and the government’s Philippine National Oil Co.- Exploration Corp. (PNOC-EC, 10%).
Under Service Contract 38 with the DOE, the Philippine government gets 60% of revenues and the Malampaya consortium, 40%. Since 2002, the national government has received P261.7 billion from the gas project.
Another Udenna unit, Malampaya Energy XP, bought out SPEx in May 2021, giving Udenna a 90% share of the consortium that operates the Malampaya gas field. The sale came 18 months after UC Malampaya signed a sale and purchase agreement to acquire the shares of Chevron Malampaya.
“Although UC Malampaya already bought the shares of Chevron Philippines in Chevron Malampaya Delaware, Chevron Malampaya is still part of the consortium,” which still holds Service Contract 38, Cusi said in justifying the use of the financial test on Chevron. “The consortium did not change.”
“That’s the DOE point of view,” said Senator Pimentel, who pointed out that “the name is still Chevron Malampaya LLC, but the new owner is now different.”
Cusi said the DOE used Presidential Decree No. 87, or The Oil Exploration and Development Act of 1972, as a benchmark to approve the transaction because there was no specific law governing the sale of shares of stock of a member of the consortium.
‘Mestizo’ application of law
Without access to the books of UC Malampaya, the DOE looked into those of Chevron Malampaya. “So the application of the law (PD 87) became mestizo,” Cusi said.
Using another metaphor, he described as ``a square peg in a round hole’’ the decision of the DOE to use Department Circular 2007 and PD 87 on just the stock transfer, and not on interest and rights.
The energy secretary maintained that Udenna was merely an acquisition company and was not dealing with the consortium. “That’s the dilemma.”
Pimentel said the DOE applied the legal and technical tests to UC Malampaya, which reportedly passed. “They applied the nancial test, bagsak (UC Malampaya failed). Then they applied the financial test to Chevron Malampaya LLC. Pumasa (It passed).’’
Section 11 of PD 87 stipulates that if a partner transfers its rights to an affiliate the latter should be qualified for the lifetime of the contract. “That’s how strict” the law is because this is a highly regulated area of the economy, Pimentel said.
Gatchalian said it was clear from the recommendation and documents from the DOE legal department that the transferee was no less than UC Malampaya.
This is where the problem comes in Secretary [Cusi] … Obviously, UC Malampaya, an Udenna subsidiary, will not be qualified. This is where we cannot erase doubts in our mind that because UC Malampaya is not qualified, then [you] now evaluate UC 38 which is qualified. The law does not say this. The circular does not say that. You have to stick to the transferee,” Gatchalian said. Cusi said “I stand by it,” referring to his approval of the transaction.
Participating interest
Gatchalian said Department Circular 2007 under PD 87 should not be used as the benchmark but the basis of approval of the sale to UC Malampaya of the Chevron shares of stock.
He said it was clear that the basis of the approval on March 20, 2021, was DC 2007 under PD 87, citing the document signed by Cusi that was flashed on the screen, which read “transfer of participating interest of Chevron Malampaya to UC Malampaya under Service Contract 38.”
The approval said the transfer of participating interest was in accordance with Department Circular 2007, titled “Prescribing the Guidelines and Procedures for the Transfer of Rights and Obligations in Petroleum Service Contracts under Presidential Decree 87, as amended.”
It further read:
“After thorough review and evaluation of the submitted documents of SC 38, the acquisition of 45 [percent of] participating interest of UC 38 under SC 38 was found acceptable and hereby approved.”
Gatchalian said there was “no mention of ‘benchmark’ and ‘guidance.’ Nothing.”
Pimentel added that the legal basis of examining the transaction would include the terms of the Civil Code on the general principles of partnership, contract law, plus PD 87 and related issuances. “The legal basis or mandate for the review of this contract are that many.”
When the senator asked about the original name of the third partner in the consortium and whether UC Malampaya was a new name, Gatchalian said it was Chevron Malampaya LLC.
“So it is obvious that there is a new controlling interest in that party. Even the name was changed,” Pimentel said. “There is clearly a fundamental change now in the partnership that must be approved by the other partners.”
Under the general rules on partnership, he said, the new entity must get the consent of the two other partners. And the DOE must also approve the arrangement as regulator based on PD 87 and thedepartment circular.
On top of that, under the joint operating agreement, any change in the participating interest would require the consent of the partners because there was a change of control, according to Gatchalian. “To get a decision, they need a 2/3s vote. So if the entity changes, they need to give their consent because it affects the entire consortium and the decision-making process of the consortium.”
Cusi said PNOC-EC, which he chairs, waived its right to match the offer of UC Malampaya for Chevron shares, and gave its consent to the transaction. Shell took the same action. After the consent was given, the DOE evaluated the sale, the energy chief said.
Unaudited statements
Gatchalian expressed doubts over the financial health of UC 38, formerly Chevron Malampaya, which passed the financial test administered by the DOE, saying the department used unaudited financial statements in its evaluation.
DC 2007 requires audited financial statements and annual reports for the past three years, according to the committee chair.
The unaudited financial statement showed that UC 38 had a positive working capital of $177 million, while UC Malampaya had a negative working capital of $137 million.
Cusi said that a bank deposit that Udenna had submitted to the DOE “solved the problem of the unaudited issue” and that it was made clear to him that “a bank deposit or bank certificate will suffice.”
No track record
Hontiveros questioned the technical expertise of Udenna Energy Corp, which the DOE has awarded two service contracts in Recto Bank, subject to approval by the Office of the President. She noted that the company had no experience in exploration.
She said the technical basis in the three-way test should be track record, not registration papers.
Hontiveros also wondered why Udenna was already earning from the Malampaya gas project, the crown jewel of the country’s energy infrastructure, when its acquisition of Chevron Malampaya’s stake in the consortium had not yet been approved.
“That is a matter between Udenna and Chevron,” Cusi said. “Why did Chevron agree to that arrangement, I don’t know.”
Amid the controversy over the sale of Chevron’s stake to UC Malampaya, PNOC-EC president Rozzano Briguez said at the hearing that the government corporation had withheld its consent to the sale of SPEx’s 45% stake in the offshore gas-to-power project to Malampaya Energy, an Udenna subsidiary. Without the consent, the sale cannot proceed.