ASIAN DEVELOPMENT BANK

Transcription

1 ASIAN DEVELOPMENT BANK TAR:PHI TECHNICAL ASSISTANCE (Financed by the Japan Special Fund) TO THE REPUBLIC OF THE PHILIPPINES FOR INSTITUTIONAL STRENGTHENING FOR THE DEVELOPMENT OF THE NATURAL GAS INDUSTRY October 2003

2 CURRENCY EQUIVALENTS (as of 1 September 2003) Currency Unit = peso (P) P1.00 = $ $1.00 = P55.05 ABBREVIATIONS ADB Asian Development Bank ASEAN Association of Southeast Asian Nations CNG compressed natural gas DOE Department of Energy E&P exploration and production EPIRA Electric Power Industry Reform Act of 2001 ERC Energy Regulatory Commission IRR interim rules and regulations JICA Japan International Cooperation Agency LNG liquefied natural gas TA technical assistance USAID United States Agency for International Development WEIGHTS AND MEASURES BCF billion cubic feet MW megawatt TCF trillion cubic feet NOTE In this report, $ refers to US dollars. This report was prepared by Y. Zhai.

3 I. INTRODUCTION 1. The Government of the Republic of the Philippines requested the Asian Development Bank (ADB) to provide advisory technical assistance (TA) for strengthening the Department of Energy (DOE) and the Energy Regulatory Commission (ERC) for the development of the natural gas industry in the country. The Fact-Finding Mission, conducted from 22 May to 2 June 2003, reached an understanding with the Government on the objectives, scope, cost estimates, financing, and implementation arrangements of the TA. 1 The TA framework is in Appendix 1. II. ISSUES 2. The discovery and the ensuing development of the Malampaya gas field, offshore northwest of Palawan, gave birth to the Philippine natural gas industry. With reserves estimates ranging from 2.26 trillion to 4.58 trillion cubic feet (TCF), the Malampaya gas field is currently supplying gas to three power plants with overall capacity of 2,760 megawatts (MW) of power in Batangas, South Luzon, and will be able to provide fuel for another 1,000 MW capacity of power plants for at least the next 20 years. The additional demand for gas for power plants and other uses is planned to be met by new reserves to be proven, or by imported gas, either as liquefied natural gas (LNG) in the medium term and/or through the Trans-ASEAN gas pipeline 2 in the long term. 3. With the assistance of Japan International Cooperation Agency (JICA), the Government has developed a master plan study for developing the natural gas industry in the Philippines. 3 On the basis of a least-cost analysis of energy supply options and an assessment of the energy demand, the study prepared a comprehensive medium- and long-term master plan for promoting natural gas utilization in the Philippines, including an action plan to implement priority projects in the medium term. After public consultations with public and private sector stakeholders, the Government approved the master plan. The Government is introducing policy measures and fiscal incentives to further promote the use of natural gas because it is consistent with the country s economic sustainability objective and energy self-sufficiency program. It is noted, in particular in line with the ongoing power sector reforms in the Philippines under the ADB-supported Power Sector Restructuring Program, 4 that it is critical to ensure the successful establishment of the natural gas industry, to avoid the forecast power shortages in Based on DOE s projections in consideration of competitive oil and coal prices, the natural gas demand would increase annually from 93.7 billion cubic feet (BCF) in 2003 to BCF by Demand in the power sector will account for the bulk of the total demand, with up to 4,200 MW additional capacity expected during the period. The demand for nonpower use (clustered industries near or along the gas pipeline) is also expected to grow from about 1.0 BCF in 2005 to 16.0 BCF in Moreover, with ADB's assistance, 5 DOE is currently undertaking a study to develop a master plan for the use of compressed natural gas (CNG) in 1 The TA first appeared in ADB Business Opportunities (Internet edition) on 24 May A memorandum of understanding was signed by the energy ministers of the Association of Southeast Asian Nations (ASEAN) in July 2002 to develop the Trans-ASEAN Gas Pipeline Project, which includes seven gas interconnections among ASEAN countries covering a total length of 4,500 kilometers. The total cost is estimated to be $7 billion and completion is expected by DOE/JICA A Master Plan Study on the Development of the Natural Gas Industry in the Republic of the Philippines. Manila. 4 ADB Loan to the Philippines for the Power Sector Restructuring Program. Manila. 5 ADB Technical Assistance for Air Emission Policy Studies. Manila.

4 2 public transport, including a pilot project phase, toward full commercialization of vehicles run by natural gas. Based on the current and expected market conditions for the supply of natural gas, the master plan established LNG imports as a feasible and economically viable option to meet gas demand in the Philippines in the medium term. Estimates of gas demand from the power sector indicate the need for imported LNG of about 23.2 BCF by 2008 to as much as BCF by LNG may be imported from Australia, Brunei, Indonesia, Malaysia, or Qatar depending on market conditions. An efficient infrastructure system that will enable the Philippines to meet the anticipated demand for natural gas will include the transmission, distribution, and city gas pipelines; LNG terminals; CNG refilling stations; and related facilities. DOE has identified two major pipelines to be constructed in the next few years: 100-kilometer (km) Batangas-Manila pipeline and 150 km Bataan-Manila pipeline, and corresponding LNG receiving terminals. An innovative public-private sector partnership needs to be developed to realize the needed investment. Moreover, the prospect of large scale LNG imports calls for rationalization of fiscal incentives to promote further private sector investment in domestic petroleum and gas exploration and production (E&P) activities. 5. The Natural Gas Bill is currently being deliberated in Congress. Prior to the adoption of the Bill, ADB assisted 6 DOE to issue the interim rules and regulations (IRR) governing the transmission, distribution, and supply of natural gas, which aim to promote competition by liberalizing entry into the industry and by adopting pro-competition and fair trade measures with due regard to sustaining the financial viability of industry participants. The ERC, an independent regulator that the Electric Power Industry Reform Act (EPIRA) established in 2001 to succeed the Energy Regulatory Board, in principle, has responsibility for the price regulation over the natural gas industry. However, EPIRA did not explicitly define ERC s mandate in regulating the natural gas sector. Since it is inappropriate for Government to carry out both policy and regulatory functions, a governance structure has to be established such that a clear distinction is drawn between the policy-making functions exercised by the Government and the regulatory functions that should be left to an independent energy regulator. It is necessary to assess governance to formulate relevant recommendations for streamlining the role of DOE and ERC in the natural gas sector. 6. Development of the natural gas industry should be pursued with best international technical practices, international safety standards, and Philippine environmental and social safeguard policies. The technical and safety standards need to be clearly defined and issued by the relevant authority to provide a clear and stable technical framework for private sector investors. Since development of natural gas infrastructure may have some implications for indigenous cultural communities, it is also necessary to strengthen DOE's capacity for screening and handling environmental and social safeguard concerns, specifically, for indigenous peoples. 7. Consultation was held with various stakeholders. On the upstream side, the Government of Norway is providing TA to assess resources and to strengthen the technical capacity of DOE to administer its oil and gas exploration and development contracts. On the downstream side, the United States Agency for International Development (USAID) has contributed to the preparation of the IRR on transmission, distribution, and supply of natural gas. JICA has supported the preparation of the master plan study on the development of natural gas in the Philippines (para. 3). Building on the work carried out the previous TAs provided by ADB, USAID, and JICA, this TA seeks to strengthen DOE s institutional capacity to implement the IRR and the master plan study so as to promote public-private sector partnership in developing the natural gas industry, particularly the downstream gas infrastructure in the Philippines. 6 ADB Technical Assistance to the Philippines for Gas Sector Policy and Regulatory Framework. Manila.

5 3 III. THE TECHNICAL ASSISTANCE A. Purpose and Output 8. The TA aims to strengthen DOE s institutional capacity to implement the master plan on the development of the natural gas industry through public-private partnership. The TA will make recommendations for streamlining DOE s planning and policy-making functions, and ERC s regulatory functions in developing the natural gas industry efficiently. Introduction of technical and safety standards as well as compliance with environmental and social safeguard policies in the Philippines will ensure the sustainable development of the natural gas industry. 9. The TA will have three main components: develop planning and policy tools for administering and regulating the natural gas industry, develop needed standards for the downstream areas of the natural gas industry, and transfer technology by providing economic, financial, and technical training to DOE and ERC staff. The TA will also identify areas that require further assistance from development financing institutions in the medium term. B. Methodology and Key Activities 10. The TA will adopt a participatory approach where DOE staff will be directly involved in a hands-on manner, to build core competency and establish the necessary tools that will aid in administering and implementing activities for downstream development of the natural gas sector. The ERC staff will also be trained in carrying out regulatory functions effectively. 11. To develop the planning and policy tools for administering and regulating the natural gas industry, the TA will have the following key activities. (v) (vi) Analyze the legal and regulatory environment and formulate recommendations to clarify ERC s regulatory function and DOE s policy-making role in the natural gas sector. Undertake institutional analysis and formulate recommendations to strengthen DOE s natural gas office to perform its policy making mandate, including the promotion of private sector investment in downstream infrastructure in the natural gas sector. Propose an integrated planning methodology for the natural gas sector that includes (a) reviewing the overall energy sector framework including legislation, regulation and contractual arrangements; (b) developing relevant base case for natural gas, covering exploration, development, production, and utilization; and (c) formulating/adopting appropriate fiscal incentives to promote private sector investment in petroleum and gas E&P activities. Review the demand forecasts of natural gas in the country and recommend measures that will promote efficient use of natural gas. Formulate recommendations on modalities of public-private partnership to develop the necessary downstream natural gas infrastructure in the medium term. Review the existing assessment of medium-term investment requirements, identify areas that require further assistance from development financing institutions, and prepare an assistance plan for the natural gas sector.

6 4 (vii) Organize workshops, conferences, consultations, and road shows to promote investment opportunities in the downstream areas of the natural gas sector in the Philippines. 12. To develop the needed technical standards for downstream projects in the natural gas sector, the TA will include the following key activities. Prepare an inventory of international technical, safety, and environmental standards which could be applied for downstream infrastructure for the natural gas sector (including pipelines, LNG terminals, natural gas vehicles, CNG refueling stations, cylinders, ancillary equipment, and other related facilities) in the Philippines. Develop technical, safety, and environmental standards for downstream gas infrastructure. Promote the use of natural gas in ecozones 7 and develop manuals for evaluating technologies (cogeneration technologies, as well as heating and cooling systems) with respect to technical performance, environmental impact, and social and economic viability. Recommend strengthening of environmental and social safeguard policies, specifically for indigenous peoples, due to the projected rapid growth of gas industry. 13. For technology transfer, the TA will include the following key activities. (v) (vi) Assess the training needs of DOE and ERC. Recommend integrated (upstream and downstream infrastructure) planning methodology for natural gas (e.g., pipeline, LNG terminals, natural gas vehicles, CNG refueling stations, ancillary equipment, other related facilities, markets routing, etc.), and on-the-job training. Recommend best international practices for evaluating applications for permits for using natural gas-related infrastructure facilities based on defined criteria (economics, market demand, existing capacity, upstream and downstream capacity, eminent domain, etc.). Arrange a study tour for DOE and ERC officials to selected developing and developed countries that have successfully experienced the E&P of natural gas resources, administered and regulated the gas sector. Conduct training courses on evaluating technologies for E&P of natural gas, and natural gas use in industrial ecozones covering technical, economic, and environmental aspects. Conduct training courses on economic and financial assessment of natural gasrelated projects. C. Cost and Financing 14. The total cost of the TA is estimated at $1.15 million equivalent, comprising foreign exchange of $716,000 and local currency of $434,000 equivalent. ADB will provide $800,000 equivalent on a grant basis through the Japan Special Fund to finance the entire foreign exchange cost and $84,000 equivalent of the local currency cost. The Government will 7 Ecozones are administered by the Philippine Ecozone Administration under the Department of Trade and Industry to promote foreign investments in the industry and manufacturing sectors.

7 5 contribute the remaining cost in kind, including office accommodation in Manila, counterpart staff time input, secretarial support, and workshops. Detailed cost estimates and financing arrangements are presented in Appendix 2. D. Implementation Arrangements 15. DOE will be the Executing Agency for the TA and will work in close collaboration with ERC and other relevant government agencies. DOE will assign a project coordinator before contract negotiations, and counterpart staff to work with the consultants. 16. The TA will cover 24 months starting in December 2003 with completion by December Consultants' inputs will be about 38 person-months (22 international and 16 domestic). The international consultants (22 person-months) will comprise an energy economist/team leader with extensive experience in natural gas planning and management (9 person-months), a downstream expert specializing in technical, safety, and environmental standards of downstream natural gas industry infrastructure and facilities (7 person-months), an upstream expert specializing in contractual issues in exploration and production (1 person-month), an energy economist with experience in natural gas pricing and project evaluation (3 personmonths), and (v) a legal/regulatory specialist (2 person-months). The domestic consultants will be an energy economist with experience in the natural gas industry (8 person-months ), an information technology expert on databases (6 person-months), and a social development specialist (2 person-months). ADB will engage the consultants through a firm using the quality- and cost-based selection method in accordance with its Guidelines on the Use of Consultants and other arrangements satisfactory to ADB for engaging domestic consultants. The simplified technical proposal format will be used. Equipment for use by the consultants will be procured in accordance with ADB's Guidelines for Procurement. The outline terms of reference for the consultants are in Appendix The consultants will submit short monthly progress reports summarizing project activities, issues, and constraints for the duration of the TA. In addition, five major reports will be submitted: an inception report within 2 weeks from start of the TA; three interim reports on TA progress in months 6, 12 and 18, respectively; and a draft final report toward the end of the TA. After receiving the inception report, ADB will form an inception mission to discuss and agree with the Executing Agency and the consultants on the various milestones of TA implementation. TA review missions will be fielded after the receipt of each interim report to monitor the progress of TA implementation and make necessary adjustments. A tripartite meeting will be held at the end of TA implementation to discuss the consultants draft final report. The final report will be prepared by the consultants within 15 days after the tripartite meeting has taken place among DOE, the consultants, and ADB to discuss the draft final report. 18. All computer models, databases, and training materials developed by the consultants including office equipment purchased during the TA will be transferred to DOE upon completion of the TA, and will remain the property of the Government. IV. THE PRESIDENT'S DECISION 19. The President, acting under the authority delegated by the Board, has approved the provision of technical assistance not exceeding the equivalent of $800,000 on a grant basis to the Government of the Philippines for Institutional Strengthening for the Development of the Natural Gas Industry, and hereby reports this action to the Board.

8 6 Appendix 1 TECHNICAL ASSISTANCE FRAMEWORK Design Summary Performance Indicators/Targets Monitoring Mechanisms Assumptions and Risks Goal Help achieve sustained economic growth and poverty reduction by improving the quality, reliability, security, and affordability of energy supply Purpose Increased gross national product per capita Reduced national debt Reduced unemployment Annual economic statistics published by the Government United Nations Development Program human development report Enhancing quality and affordability of electricity supply will improve economic outcomes. Economic benefits will accrue to all sectors of the economy, especially the poor. Strengthen Department of Energy s (DOE) institutional capacity to fulfill its new mandate in managing the natural gas industry DOE s policy-making functions strengthened Energy Regulatory Commission s (ERC) regulatory functions defined Periodic economic and energy reports Implementation of power sector restructuring plan is timely. Private sector investors have confidence in the Philippine economy. Outputs Supply of natural gas to power plants sufficient to meet the power demand beyond 2007 Formulation of recommendations to streamline DOE and ERC s roles Planning tools and databases developed for DOE s natural gas office and ERC 2-3 models proposed on appropriate and competitive fiscal incentives for gas exploration and production and on public-private sector partnership to develop the downstream gas infrastructure Downstream natural gas industry technical, safety, and environmental standards developed for pipelines, liquefied natural gas terminals, natural gas vehicles, compressed Asian Development Bank (ADB) and DOE to ensure fielding of consultants as per the terms of reference (TOR) by December 2003 Approval by the Government of recommendation for promoting public-private partnership A number of DOE/ERC officials trained Submission of the final report by the consultants in November 2005 and completion of TA by December 2005 Final report reviewed and accepted by the Government and ADB in Consultants reports Technical assistance (TA) review missions TA completion report Satisfaction level of trainees determined through survey Government counterpart support is available.

9 Appendix 1 7 Design Summary Performance Indicators/Targets Monitoring Mechanisms Assumptions and Risks natural gas refueling stations, cylinders, and other related equipment accordance with the TOR Technology transferred with training of about 30 DOE/ERC officials on economic, financial, and technical aspects Key Activities Assess governance of natural gas sector Develop technical, safety, and environmental standards for natural gas sector Organize workshops, conferences, and roadshows to promote investment opportunities Develop manuals for evaluating technologies for natural gas E&P and natural gas application ADB and DOE to ensure fielding of consultants as per the TOR by December 2003 Submission of the final report by the consultants in November 2005 and completion of TA by December 2005 Final report reviewed and accepted by the Government and ADB in accordance with the TOR Consultants reports TA review missions TA completion report Qualified consultants are selected in accordance with ADB s Guidelines on the Use of Consultants. Provide training to DOE and ERC staff Inputs 38 person-months: 16 domestic, and 22 international. The consultants will field a team with expertise in energy economics and natural gas planning, upstream and downstream experts, legal/regulatory expert. ADB TA grant of $800,000 and Government contribution of $350,000 in kind ADB and DOE to ensure fielding of consultants per the TOR by December 2003 Submission of the final report by the consultants in November 2005 and completion of TA by December 2005 Consultants reports TA review missions TA completion report Qualified consultants are selected in accordance with ADB s Guidelines on the Use of Consultants.

10 8 Appendix 2 COST ESTIMATES AND FINANCING PLAN ($'000) Foreign Local Total Item Exchange Currency Cost A. Asian Development Bank Financing a 1. Consultants a. Remuneration and Per Diem i. International Consultants ii. Domestic Consultants b. International and Local Travel c. Reports and Communications Software, Equipment b Training, Seminars, and Consultations c Miscellaneous TA Administration Cost Contingencies Subtotal (A) B. Government Financing 1. Office Accommodation Counterpart Staff d Secretarial Support and Communication Consultation and Workshops Subtotal (B) Total ,150 a Financed by the Japan Special Fund. b Relevant computer software and hardware will be acquired to support a computer-based planning tool for the management of the natural gas industry. All the software and equipment procured will be turned over to the Department of Energy upon completion of the technical assistance. c This component includes provisions for up to four officials to participate in contact visits in selected developing and developed countries for up to 2 weeks to learn from the experience of other developing countries and promote private sector investment in the natural gas sector in the Philippines. d Counterpart staff, including their remuneration, transport, and per diem. Source: Asian Development Bank staff estimates.

11 Appendix 3 9 A. International Consultants OUTLINE TERMS OF REFERENCE FOR CONSULTANTS 1. International consultants will have expertise in five areas. 1. Energy Economist/Team Leader (9 person-months) 2. As team leader, the energy economist should have extensive gas sector-related policy formulation and planning experience, including experience in assisting developing member countries in those areas. The expert will undertake the following tasks. (v) (vi) (vii) (viii) (ix) Coordinate technical assistance (TA) implementation and ensure timely delivery of all tasks by team members. Recommend an integrated planning methodology for natural gas based on review of an energy sector framework including legislative, regulation and contractual arrangements, and provide on-the-job training to develop a relevant base case for natural gas covering exploration, development, production, and utilization. Assess governance and formulate recommendations to clarify the regulatory function of the Energy Regulatory Commission (ERC) and the policy-making role of the Department of Energy (DOE) in the natural gas sector. Analyze the training needs of DOE and ERC. Review the existing assessment of investment requirements in downstream activities in the natural gas industry with focus on medium-term requirements. Formulate recommendations on modalities of the public-private partnership to develop the necessary natural gas infrastructure, including areas that require assistance from development financing institutions. Identify areas that require assistance from development financing institutions and prepare a plan for assistance to the natural gas sector. Organize workshops, conferences, consultations and road shows to promote investment opportunities in the downstream areas of the natural gas sector in the Philippines. Develop databases and microcomputer-based policy planning tool for developing downstream activities of the natural gas sector and provide the relevant training. 2. Downstream Expert (7 person-months) 3. The downstream expert must have specialized in technical standards. The consultant will undertake the following tasks. Prepare an inventory of international technical, safety, and environmental standards for the downstream infrastructure of natural gas facilities (pipelines, liquefied natural gas [LNG] terminals, natural gas vehicles, compressed natural gas [CNG] refueling stations, cylinders, ancillary equipments, and related facilities) in the Philippines. Develop technical, safety, and environmental standards for the downstream infrastructure of the natural gas sector. Participate in adapting manuals to evaluate technologies for natural gas use in industrial ecozones in the Philippines and provide relevant training.

12 10 Appendix 3 Offer training courses on evaluating technologies (cogeneration technologies as well as heating and cooling systems) for natural gas use in industrial ecozones including technical and environmental aspects. 3. Upstream Expert (1 person-month) 4. The upstream expert must have specialized in regulation, administration and contractual issues for the exploration and production (E&P) of gas resources. The expert s tasks are as follows. Review options for a natural gas supply to meet medium-term requirements. Review existing E&P terms for gas exploration in the Philippines and compare them with international practices. Formulate recommendations on appropriate and competitive fiscal terms and incentives to promote private sector investment in E&P activities. Provide relevant training to DOE and ERC staff. 4. Energy Economist (3 person-months) 5. The energy economist with experience in natural gas demand analysis and natural gas pricing will undertake the following tasks. Assess the natural gas demand and investment requirements for downstream areas of the natural gas industry. Recommend best international practices for evaluating applications for permits for natural gas-related infrastructure facilities based on defined criteria (economics, market demand, existing capacity, upstream and downstream capacity, eminent domain, etc.). Develop the economic sections of manuals for evaluating technologies for natural gas application in industrial ecozones and for evaluating technologies for converting power plants to natural gas fired ones. Offer training courses on economic and financial assessment of natural gasrelated projects. 5. Legal/Regulatory Specialist (2 person-months) 6. The legal/regulatory specialist with experience in the natural gas industry will undertake the following tasks. (v) Undertake legal and regulatory analysis and formulate recommendations to clarify the ERC s role in regulating the natural gas industry. Assess governance and formulate recommendations for DOE s natural gas office to assume its policy-making mandates to promote private sector investment in the downstream infrastructure of the natural gas sector. Formulate recommendations to streamline the respective roles of ERC and DOE in managing the natural gas industry. Formulate legal and regulatory recommendations on modalities of the publicprivate partnership to develop the necessary natural gas infrastructure. Provide legal advice in workshops, conferences and road shows to promote investment opportunities in downstream areas of the natural gas sector in the Philippines.

13 Appendix 3 11 B. Domestic Consultants 7. The domestic consultants will include an energy economist with experience in the natural gas industry (8 person-months), an information technology expert on databases (6), and a social development specialist (2). The domestic consultants will assist the international consultants and will undertake the following tasks in particular. (v) (vi) (vii) Collect data and information as input in assessing the natural gas demand in the country. Organize workshops, conferences, and road shows to promote investment opportunities in the downstream areas of the natural gas sector in the Philippines. Prepare an inventory of the existing local technical standards for the downstream infrastructure of the natural gas sector (pipelines, LNG terminals, natural gas vehicles, CNG refueling stations, cylinders, ancillary equipment and related facilities). Identify environmental and social safeguard concerns, specifically for indigenous peoples, in compliance with the existing environment and social safeguards policy. Develop a microcomputer-based policy planning tool for developing downstream activities in the natural gas sector and provide relevant training. Integrate a natural gas database with the national energy database. Procure and install the necessary software, computers, office equipment, and field vehicles for DOE s natural gas office.