Law on Oil Exploration and Development

October 2, 1972

PRESIDENTIAL DECREE NO. 8

DECREEING THE LAW TO GOVERN OIL EXPLORATION AND DEVELOPMENT

WHEREAS, the discovery and the development of the country's indigenous petroleum resources are vital to the overall national development program;

WHEREAS, in view of the huge amount of capital and investment and the technology and experience required in oil exploration, and of the fact that such capital, technology and experience are not available within the country, it is necessary that foreign companies which have the capital, the technology and the experience should be attracted into exploring and developing the country's oil resources, either in partnerships or joint ventures with the Government or the private sector;

WHEREAS, given the constraints of existing laws, the foreign oil exploration companies have not been sufficiently attracted into coming in and investing in oil exploration ventures;

WHEREAS, there was pending before Congress before the promulgation of Proclamation No. 1081, dated September 21, 1972, an oil exploration measure entitled "AN ACT TO PROMOTE THE DISCOVERY AND PRODUCTION OF INDIGENOUS PETROLEUM AND APPROPRIATING FUNDS THEREFOR" and dominated as Senate Bill No. 531, which I have certified as one of the urgent measures necessitating immediate enactment;

WHEREAS, this measure is necessary to the attainment of the objectives of this Government to create a new social and economic order for the benefit of the country and its people;

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the Constitution as Commander-in-Chief of all the Armed Forces of the Philippines, and pursuant to Proclamation No. 1081, dated September 21, 1972, and General Order No. 1, dated September 22, 1972, as amended, do hereby order and decree that the above mentioned oil exploration measure entitled "AN ACT TO PROMOTE THE DISCOVERY AND PRODUCTION OF INDIGENOUS PETROLEUM AND APPROPRIATING FUNDS THEREFOR" which is attached herewith and made a part hereof, shall be, as it is hereby, adopted in toto and shall henceforth be part of the law of the land.

This decree shall take effect immediately.

DONE in the City of Manila, this 2nd day of October, in the year of Our Lord, Nineteen Hundred and Seventy-Two.

ATTACHMENT

SEVENTH CONGRESS OF THE REPUBLIC

OF THE PHILIPPINES

FIRST SESSION

SENATE

S. No. 531

AN ACT TO PROMOTE THE DISCOVERY AND PRODUCTION OF INDIGENOUS PETROLEUM AND APPROPRIATING FUNDS THEREFOR

Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:

SECTION 1.  It is hereby declared to be the policy of the State to hasten the discovery and production of indigenous petroleum through the utilization of government and/or private resources, local and foreign, under the alternative arrangements embodied in this Act which are calculated to yield the optimum benefits to the Filipino people and the maximum revenues to the Philippine Government for use in furtherance of national development, and to assure equitable returns to participating private enterprises, particularly those that will provide the necessary services, financing and technology and fully assume all exploration risks.

SECTION 2.  Unless the context otherwise indicates, the following terms shall have the following respective meanings:

(a) "Posted prices" refers to the FOB price published by a petroleum company for each grade, gravity and quality of crude oil offered for sale to buyers generally for export at the relevant point of export, which price shall be established with due regard to geographical location and other posted prices for crude oil of comparable grade, gravity and quality in the nearest crude oil export terminal and/or other relevant major crude oil export terminals.

(b) "Market price" is the price of crude oil if sold locally.

(c) "Petroleum" shall include any mineral oil, hydro-carbon gas, bitumen, asphalt, mineral wax and all other similar or naturally associated substances with the exception of coal, peat, bituminous shale and/or other stratified mineral fuel deposits. cIACaT

(d) "Crude oil" or "crude" means oil in its natural state before the same has been refined or otherwise treated and does not include oil produced through destructive distillation of coal, bituminous shales or other stratified deposits, either in their natural state or after the extraction of water, sand or other foreign substances therefrom.

(e) "Natural gas" means gas obtained from boreholes and wells consisting primarily of hydrocarbons.

(f) Any liquid hydrocarbons obtained from natural gas by separation or by any chemical or physical process is casinghead petroleum spirit.

(g) "Petroleum operations" means searching for and obtaining petroleum through drilling and pressure or suction or the like, and all other operations incidental thereto, including transportation within the Philippines of petroleum so obtained except processing and refining at a refinery and/or any dealings with the products so refined.

(h) "Production costs" refers to the cost involved in petroleum operations.

(i) "Special allowance" means the allowance, if any, as may be agreed upon, from time to time between the Government and the relevant petroleum company in respect of crude oil won by the relevant contractor from its petroleum operations.

(j) "Export reference price" means the posted price per barrel reduced by any special allowance per barrel.

(k) "Filipino participation incentive" means either the allowance which may be given to service contractors with Filipino equity participation or the transfer by the Government to the Philippine citizens or enterprises of part of its sixty per cent equity that may be allowed in the joint venture arrangement.

(l) "Government" means the Government of the Republic of the Philippines.

(m) "Petroleum Company" means a company having a place of business in the Philippines which is or has been engaged in petroleum operations or in the purchase of petroleum from the Government or from another petroleum company for export, or for sale or disposal without further processing in the Philippines.

(n) "Contractor" means the contractor in a service contract or the private operator or co-venturer in a joint venture and shall include a consortium.

(o) "Contract" refers to either service contract or joint venture.

(p) "Barrel" means forty-two U.S. gallons or nine thousand seven hundred two cubic inches.

SECTION 3.  Any provision of law to the contrary notwithstanding, but subject to existing private rights, the Government may directly explore for and produce indigenous petroleum or indirectly undertake the same under service contracts or joint ventures as hereinafter provided covering free areas, national reserve areas and/or petroleum reservations, whether onshore or offshore, as defined in Republic Act Numbered Three hundred and eighty-seven: Provided, That in the case of free areas, the Petroleum Board, created under this Act, shall notify the Director of Mines about the selection of such area or areas for the purpose of closing the same to application by other person or persons. STaCIA

SECTION 4.  Every contract herein authorized shall be entered into by the President of the Philippines after public bidding conducted by and upon the recommendation of the Petroleum Board: Provided, That in case no bid is submitted or the bids offered are rejected by the Petroleum Board for being disadvantageous to the Government, the contract may be concluded through negotiation.

SECTION 5.  In a service contract, services and technology are furnished by the service contractor for which it shall be entitled to the stipulated service fee while financing is provided by the Government to which all petroleum produced shall belong exclusively.

SECTION 6.  Where the Government is unwilling or unable to finance the petroleum operations, the service contractor shall, under the terms and conditions provided in this Act, furnish services, technology and financing: Provided, That the service contract shall stipulate that the service fee shall be paid out of the proceeds of petroleum produced and sold by said service contractor and that all losses occasioned by failure to discover and produce petroleum shall be borne by the contractor. The Government does not guarantee the existence of petroleum or undertake, in any case, title warrantly.

SECTION 7.  The arrangement provided in the preceding section, requires that the contractor shall undertake the petroleum operations. A trading company or companies chosen by the contractor shall have the option to buy at a special price the crude oil produced for and on behalf of the Government by the contractor in which event the contractor shall:

(a) Provide all necessary services, equipment and materials, and technology;

(b) Advance the requisite financing;

(c) Perform the minimum exploration work obligations prescribed in accordance with this Act;

(d) Once a commercial discovery of petroleum is made, operate the field on behalf of the shareholders in line with good oil field practice and in accordance with a program of operations submitted to the Petroleum Board in advance for approval shall not be unreasonably withheld;

(e) Assume all exploration risks such that if no crude oil in commercial quantity is discovered and produced, it will not be entitled to reimbursement;

(f) Furnish the Government with geological and other relevant information; and

(g) Maintain detailed technical records and account of its operations, and where crude oil is discovered and produced by the contractor, the trading company or companies which elect to buy the crude oil from the Government shall: TIaCHA

(a) Reimburse, on behalf of the Government, the contractor for all production costs and pay said contractor the service fee due from the Government;

(b) Give the Government per barrel of crude oil a "stated payment" of twelve and one-half per cent of posted price or market price, whichever is higher, as to crude oil exported or twelve and one-half per cent of market price, in the case of crude oil locally disposed of;

 

(c) Pay the Government a petroleum income tax of fifty per cent of posted price less agreed special allowance or market price, whichever is higher as to crude oil exported; or fifty per cent of market price as to crude oil locally disposed of, after deducting in either case properly attributable costs, i.e., the "stated payment," reimbursement of contractor for production costs, and payment of service fee;

(d) Maintain detailed records and accounts of their operations; and

(e) Together with other trading companies and contractors under this Act and companies operating under the Petroleum Act of 1949 and producing indigenous crude oil or buying the same from the Government, fill on pro rata basis Philippine requirements for crude oil before exporting any quantity thereof.

SECTION 8.  In a joint venture, a private contractor with forty per cent interest and a Government agency designated by the President with sixty per cent carried interest (less any private Filipino interest assimilated in said sixty per cent) shall proportionally finance the petroleum operations and share in any petroleum produced. The contractor shall provide all services, technology and financing without right to reimbursement from the Government if no crude oil in commercial quantity is discovered and produced; however, if crude oil is discovered and produced, the contractor shall purchase sufficient amount of the Government's share of any crude oil produced at the export reference price or the market price, which ever is higher, in respect of crude oil destined for export and at the market price in respect of crude oil destined for sale or disposal for consumption in the Philippines (a) to pay to the Government ten per cent of the proceeds and (b) thereafter to retain from the proceeds an amount sufficient to reimburse the private contractor for such costs, including interest due, incurred on behalf of the Government. The Government shall also have the option to sell the remainder of its share of crude oil to the private contractor at the export reference price or the market price, whichever is higher, in the case of crude oil exported and the market price in the case of crude oil sold or disposed of for consumption in the Philippines.

The Government may enter into an agreement with the private contractor to pay interest on the Government's outstanding capital debt, but such interest shall not commence to accrue until a field has been declared commercial.

SECTION 9.  Except as provided in the preceding sections, the contractor shall have the same obligations as the contractor in a service contract as specified in Section 7(a) to (e) and in addition, in respect of its share of crude oil it shall pay the Government:

(a) a royalty of twelve and one-half per cent; and

(b) a petroleum income tax of fifty per cent of posted price less agreed special allowance or market price, whichever is higher, as to crude oil exported; or fifty per cent of market price as to crude oil locally disposed of, after deducting in either case production costs and royalty.

SECTION 10. In addition to those elsewhere provided in this Act, every contract shall contain the following terms and conditions:

(a) The contractor shall be entitled to just compensation as determined in accordance with the provisions of this Act. TCcDaE

(b) Every contractor shall be obliged to spend in the amounts provided for in the contract between the Government and the contractor and these amounts shall in no case be less than the total obtained by multiplying the number of hectares covered by the contract by the following amounts per hectare:

Period	Onshore	Offshore
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

(c) In case the contractor renounces or abandons wholly or partly the area covered by his contract within two years from its effective date, it shall in respect of the abandoned area pay the Government the amount it should have spent, but did not, for minimum exploration work during said two years.

(d) Every contract shall provide for the compulsory relinquishment of at least fifty per cent of the initial area at the end of five years from its effective date, and an additional relinquishment of at least twenty-five per cent of the initial area at the end of seven years from its effective date. But the portion already delineated as production area pursuant to the succeeding section shall not be taken into account in ascertaining the extent of relinquishment required.

(e) Within one year from the discovery of petroleum in commercial quantity, the contractor shall delineate the production area.

(f) The exploration period under every contract shall be five years, extendible for three years if the contractor has not been in default in its exploration work obligation and other obligations, after which the contract shall lapse unless crude oil in commercial quantity has been discovered, in which event the contractor may retain during the effectivity of the contract twelve and one-half per cent of the initial area in addition to the delineated production area: Provided, however, That if at the end of the eighth year, there are clear indications that crude oil is about to be discovered, then another extension of one year for exploration may be granted subject to the same conditions herein-above provided.

(g) Where crude oil in commercial quantity is discovered during the exploration period in any area covered by the contract, the contract with respect to said area shall remain in force for production purposes during the balance of the ten-year exploration period and for an additional period of twenty-five years, thereafter renewable for a period not exceeding twenty-five years under such terms and conditions as may be agreed upon by the parties at the time of renewal.

(h) All materials, equipment, plants and other installations erected or placed on the exploration and/or production area by the contractor, except roads, bridges, piers, boreholes, wells and like improvements, shall remain properties of the contractor, unless not removed therefrom within one year after the termination of the contract.

(i) The contractor shall be subject to the provisions of laws of general application, including those specially relating to labor, health, safety and the general welfare, unless otherwise herein provided. cHAaEC

(j) Every contract executed in pursuance of this Act shall contain provisions regarding the discovery and production of natural gas which shall be in line with the rules herein prescribed for crude oil, except that the market price shall be the basis for tax and all other purposes.

SECTION 11. A contractor may enter into one or more contracts with the Government but the contracts shall not cover contiguous areas. Contracts for offshore areas may cover any portion of the territorial waters or the continental shelf, or its analogue in an archipelago seaward from the shores of the Philippines which is not within the territories of any other country.

SECTION 12. The rights and obligations under a contract executed under this Act shall not be assigned or transferred without the prior approval of the Petroleum Board, which shall not be unreasonably withheld.

SECTION 13. The provisions of any law to the contrary notwithstanding, a contract executed under this Act may provide that the contractor, including the trading companies in proper cases, shall have the following privileges:

(a) Exemption from laws, regulations and/or ordinances relating to: (1) importation of machinery, equipment, accessories, spare parts, supplies and/or materials reasonably necessary for petroleum operations; (2) construction, installation and operation of power plants, if no local enterprise can supply within a reasonable period and at reasonable cost the power needed by the contractor in its petroleum operations; (3) sale of crude oil to industrial users; (4) exportation of machinery and equipment which were imported solely for its petroleum operations, when no longer needed therefore; and (5) business licensing and investment requirements;

(b) Exportation of petroleum subject to the prior filling of domestic needs as elsewhere provided in this Act;

(c) Upon approval of the Petroleum Board, employment which shall not be unreasonably withheld, of highly technical and specialized personnel and executive staff from abroad who may exercise their professions solely for the operations of the contractor: Provided, That if the employment or connection of any such alien with the contractor ceases, the applicable laws and regulations on immigration shall apply to him and his immediate family: Provided, further, That Filipinos shall be given preference to positions for which they have adequate training: And Provided finally, That the contractor shall adopt and implement a training program for Filipinos along technical or specialized lines; and

(d) Exemption from taxes other than the taxes and other financial obligations specifically imposed upon the contractor by authority of this Act, which obligations shall be net and in lieu of all other taxes during the effectivity of the contract.

SECTION 14. The contractor and trading companies shall be entitled to repatriate the capital investment they have actually brought into the country in foreign exchange or other assets registered with the Central Bank; retain abroad all earnings of foreign exchange over and above those needed to cover day-to-day expenditures in local currency, including all royalties, taxes and other revenues due the Government; and convert into foreign exchange and remit abroad at prevailing rates any excess balances of their peso earnings from petroleum production and sale over and above the working current balances they require.

SECTION 15. The provisions of existing laws to the contrary notwithstanding, interest held in the contractor by mining companies and/or the latter's stockholders may be allowed to any extent after full disclosure thereof to, and approval by, the Petroleum Board.

SECTION 16. The Petroleum Board may stipulate in a contract authorized under this Act that disputes between Government and the contractor or trading company may be settled by arbitration as provided in Republic Act Numbered Eight hundred seventy-six.

SECTION 17. There is hereby created a Petroleum Board composed of the Secretary of Agriculture and Natural Resources, as Chairman, and the Undersecretaries of Finance and Justice, the Chairman of the Board of Investments, and the Director of Mines as members. The Director of Mines shall be the Executive Officer of the Board.

SECTION 18. In accordance with the provisions and objectives of this Act, the Board shall:

(a) Define and give public notice of the areas available for service contract or joint venture; aAHSEC

(b) Enter into contracts herein authorized with such terms and conditions as may be appropriate under the circumstances: Provided, however, That no depletion allowance shall be granted: Provided, further, That no contract shall cover less than fifty thousand nor more than two hundred and fifty thousand hectares for onshore areas, or less than eighty thousand nor more than eight hundred thousand hectares for off-shore areas: And provided, finally, That in no case shall the average annual net revenue or share of the Government, exclusive only of fees paid by the contractor or trading company for actual government services, be less than sixty per cent of the total net proceeds from the petroleum operations, that is, total petroleum produced and disposed of or its value determined on the basis of market price, less costs of production;

(c) Make specific proposals for the grant of subsidy to contractors at least sixty per cent of the capital of which is owned by Philippine citizens, to be derived from the revenue or share that will accrue to the Government in pursuance of this Act;

(d) Prescribe implementing rules and regulations, including those that will govern the ascertainment of production costs and gross and net revenues, the treatment of amortization and depreciation, and the resolution of other relevant questions in accordance with generally accepted petroleum accounting practices. The rules and regulations shall be issued by the Petroleum Board within one hundred twenty days from the effective date of this Act and shall take effect sixty days after their publication in the Official Gazette; cCTAIE

(e) Appoint, discipline and remove, and determine the compensation of, its technical staff and other personnel: Provided, That except as to positions which the Board may declare to be highly technical or primarily confidential, all positions in the Board shall be subject to the Civil Service Laws and Rules, but exempt from the regulations of the Wage and Position Classification Office;

(f) Within four months after the close of every fiscal year, submit to the President and Congress an annual report on its activities, with appropriate recommendations; and

(g) Generally, exercise all powers necessary or incidental to attain the objectives of this Act.

SECTION 19. A holder of a valid and subsisting petroleum exploration concession under the Petroleum Act of 1949 may, at his option, conclude a joint venture with the Government on the area covered by his concession or convert his concession into a service contract as provided in this Act thru negotiations, with all the rights and privileges herein authorized: Provided, however, That the contract that may be concluded after said negotiations shall contain the minimum terms and conditions provided in this Act and shall require the contractor to commence exploratory drilling operations within a period not exceeding eighteen months from the date of effectivity of the service contract or joint venture agreement.

SECTION 20. As an alternative, the concessionaire referred to in the preceding section may from a consortium with another company or companies jointly enter into a service contract or joint venture with the Government under this Act, with the right to assign to the consortium, subject to the approval of the Petroleum Board, the area covered by his concession which shall thereupon be governed by the provisions of this Act: Provided, That the voluntary relinquishment of the concession and its assignment, as well as all technical data on the area resulting from studies conducted by the concessionaire and subsisting improvements introduced by him thereon, shall be evaluated and given a fair value which may constitute his contribution, wholly or in part, to the consortium.

SECTION 21. The contractor under a service contract or joint venture which has an equity participation of strictly Philippine citizens or enterprises with at least sixty per cent Filipino equity, may be granted a government subsidy, i.e., a Filipino participation allowance not exceeding ten per cent which shall be computed in the same manner as a special allowance: Provided, That said Filipino participation shall be at least five per cent of the capital firmly committed by the contractor for petroleum operations within the area covered by the contract.

SECTION 22. The holder of a valid and subsisting petroleum exploration concession under the Petroleum Act of 1949, who is a Philippine citizen or a company at least sixty per cent of the capital of which is owned by Philippine citizens, and who has not been guilty of violation of any provision of said Act or any rule or order duly issued in pursuance thereof, may relinquish his concession for the purpose of making the area covered thereby available for joint venture between the Government and some other company or companies. In such event, the Government may allocate to said holder a portion, not exceeding ten per cent, of the sixty per cent carried interest of the Government in the joint venture, under such terms and conditions as may be reasonable and just under the circumstances, in consideration of the relinquishment made. For sharing purposes under this Act, the income appertaining to the allocated portion of the Government carried interest shall be deemed Government income: Provided, That at least fifty per cent of said income shall be expended for conservation and maintenance of the ecological balance of the environment, infrastructure and other permanent community improvements, and massive technological resources projects. CSIcHA

SECTION 23. Negotiations with the Government for the conclusion of a contract under this Act and every contract concluded hereunder shall be given publicity consistent with the best interests of the Government.

SECTION 24. The applicable provisions of the Petroleum Act of 1949, including those concerning public and private easements, shall have suppletory effect insofar as they are not. inconsistent with the provisions of this Act.

SECTION 25. For the purpose of carrying out the provisions of this Act during the Fiscal Year nineteen hundred seventy-one, the amount of three hundred thousand pesos is hereby authorized to be appropriated from funds in the National Treasury not otherwise appropriated. Thereafter, the necessary appropriations shall be included in subsequent General Appropriations Acts.

SECTION 26. All laws, executive orders and regulations inconsistent with the provisions of this Act are hereby repealed.

SECTION 27. This Act shall take effect upon its approval.