PETROLEUM REGULATION, LAWS, & JURISPRDENCE

Compiled by: Jeff Edilee L. Corpuz

ENVIROMENTAL JUSTICE EXPLAINED. People of the world, though living in the same
country or even city differ in race wealth and language, most of the time they are grouped as
such. In a video by Grist (2016)1, it has been discussed that in America, those living in wealthier
and bigger cities tend to have greener space, grocery stores filled with nutritious fruits,
vegetables, and other organic foods and are often more far away from pollution, while the part
that are poorer and more diverse tend to have industrials sites, diesel polluted ports, and
highways and hazardous wastes, all the things that the city rely on to run properly heavily pollute
air and water, and even if they have all those groceries stores which provide the nutritious foods,
they cannot afford it anyway.

vs

The harm that comes from with the rising seas and contaminated water systems isn’t evenly
distributed. Those who are already disadvantaged by race, wealth and income are usually the
most affected by the environmental disasters. Without recognizing that inequality, were not
always solving the problems in ways that serve the people who need it most. It is this gap in both
benefits and negative effects that create that which they call environmental injustice. In the end,
people in the same place, differ in life and therefore take different toll on its effects.

According to Miller (2016)2, Environmental Justice is important part of the struggle to improve
and maintain a clean and healthful environment, especially for those have traditionally lived,
worked and played closest to the sources of pollution.

The petroleum has, on its own, become one

of the reasons for environmental injustice.
The Philippines whose electric power,
transportation and other needs largely depend
on the use of petroleum portray such
injustice.

So, what is petroleum? W.A.S.P.3 in its

video explained the oil and gas formation. It
is said that it took millions of years to form.
From the marine organisms like algae and microscopic animals and plants that died and settled
and descended on the ocean floor. Beneath are the sediments in the ocean and in the absence of
oxygen, these fossils changed into a substance called Kerogen, and the heat and pressure, it
gradually changes into oil or gas. The same substances which we extract from deep the ground is
what makes up the petroleum we burn into energy today. Its importance is further explained in
the video by climateexperiment.com titled The importance of Oil.

It is of no secret that the Philippines has many areas inland and offshore rich in petroleum oil.
But what are the laws that allow the government to regulate the extraction and use of these
natural riches?

With respect to energy development, the Petroleum Act of 1949 (RA 387) was enacted to
promote the development of petroleum resources. Republic Act no. 387 salient features provide
that an act to promote the exploration, development, exploitation, and utilization of the
petroleum resources of the Philippines; to encourage the conservation of such petroleum
resources; to authorize the secretary of agriculture and natural resources to create an
administration unit and a technical board in the bureau of mines; to appropriate funds therefor;
and for other purposes;

Why is there a need to explore for Oil and Gas resources?According to the Department of
Energy, Fossil fuels (oil and gas) are still the primary source of energy and are vital to the daily
energy requirement for power, different industries, and transport, without which there can be no
economic progress. So, how is exploration, development, exploitation, and utilization of the
petroleum resources of the Philippines promoted?
ARTICLE 5 of RA 387 Granting of petroleum rights provide thst the right to explore for,
develop, exploit or utilize the petroleum resources described in article three hereof may only be
granted to duly qualified persons by means of concessions in accordance with the provisions of
this Act. xxx

ARTICLE 10 of the same law provides the Kinds of Concessions Granted Under the Law.
a. Non-Exclusive Exploration Permit, which grants to the permittee the nonexclusive right to
conduct geological or geophysical exploration on specified areas; b. Exploration Concession,
which grants to the concessionaire the exclusive right to explore for petroleum within specified
areas; c. Exploitation Concession, which grants to the concessionaire the exclusive right to
develop petroleum production within the specified areas; d. Refining Concession, which grants
to the concessionaire the right to manufacture or refine petroleum, or to extract its derivatives; e.
Pipe Line Concession, which grants to the concessionaire the right to provide and operate pipe
line systems for transporting petroleum.

Obligatory concessions in Section 11 states that the granting of the following concessions shall
be obligatory upon the Government:
a. Exploitation Concession, to the holder of an Exploration Concession, for such parcels as he
may select for exploitation and to the holders of Petroleum Drilling Leases issued under the
Petroleum Act Numbered Twenty-nine hundred and thirty-two (2932), or of petroleum mining
claims located and held under the Act of Congress of July first, nineteen hundred and two, which
are existing and in force at the time of the enactment of this Act, when said holders shall apply to
have the same governed by the provisions of this Act, and be given the privileges granted
thereby; b. Refining Concession and/or Pipe Line Concession, to the holder of an Exploitation
Concession, when the manufacturing or transportation is directly related, although not
necessarily restricted, to the Exploitation Concession; and c. Refining Concession, to the holder
of a Pipe Line Concession, or Pipe Line Concession to the holder of a Refining Concession,
when the two concessions are directly, although not restrictively, related.

ARTICLE 103 also provides that during the first five years following the granting of any
concession, the concessionaire may import free of customs duty, all equipment, machinery,
material, instruments, supplies and accessories and ARTICLE 104 thereof says that no export
tax shall be levied upon petroleum produced from concessions granted under this Act.

There are thirty two (32) Service Contracts (SC) granted to chosen Contractors... three (3) areas
of which are in the Cagayan Valley Region4. In the following figures are the present petroleum
service contracts in the Philippines as published by the Department of Energy.

Figure 2.1. List of Petroleum Service Contracts indicating the name of contractor.
Figure 2.2. The petroleum service contract map showing the areas of the service contracts
In the case of COMMISSIONER OF CUSTOMS, petitioner, vs. ESSO STANDARD
EASTERN, INC., (Formerly: Standard-Vacuum Refining Corp. (Phil.) on the issue of the
payment of special import tax, the SC ruled that “xxx We are convinced that R.A. No. 387,
The Petroleum Act of 1949, was intended to encourage the exploitation, exploration and
development of the petroleum resources of the country by giving it the necessary incentive in the
form of tax exemptions. This is the raison d etre for the generous grant of tax exemptions to
those who would invest their financial resources towards the achievement of this national
economic goal. xxx”

What are the fiscal terms in the Philippines? According to the Department of Energy, Our fiscal
system is considered as one of the most lenient and attractive in the world, considering the
various provisions and incentives that a petroleum company can receive. The Philippines fiscal
regime is defined as follows: 1. No royalty paid, 2.Cost recovery is 70% of gross income, 3.
Depreciation is double declining balance or straight line method, 4. The 32% income tax is paid
out of government take/share, 5. Net revenue or profit oil is shared at 60% - 40% (government-
contractor). This is way above than that of Indonesia, which is considered to be the most harsh
fiscal regime, wherein a company can only take a minimum of 15% of the net revenue, A
Filipino Participation Incentive Allowance (FPIA) wherein a maximum of 7.5% is given to a
contractor with a maximum of 30% Filipino company participation A petroleum exploration
company can bid or apply for a service contract in an area that ranges in size from 800 to 15,000
square kilometers in offshore, and 500 to 7,500 square kilometers over onshore areas. The
Service Contract (SC) term is seven (7) years of exploration activities that is extendible for
another three (3) years, and 25 years of production period, which can be extended for additional
fifteen (15) years. The maximum contract term or period is fifty (50) years.

SECTION 3. STATE OWNERSHIP. All natural deposits or occurrences of petroleum or natural

gas in public and/or private lands in the Philippines, whether found in, on or under the surface of
dry lands, creeks, rivers, lakes, or other submerged lands within the territorial waters or on the
continental shelf, or its analogue in an archipelago, seaward from the shores of the Philippines
which are not within the territories of other countries, belong to the State, inalienably and
imprescriptibly.

It is a reiteration of the regalian doctrine; 1987 Constitution, Section 2 of Article XII (National
Economy and Patrimony) provides that except for agricultural lands for public domain which
alone may be alienated, forest or timber, and mineral lands, as well as all other natural resources
must remain with the State, the exploration, development and utilization of which shall be
subject to its full control and supervision albeit allowing it to enter into coproduction, joint
venture or production-sharing agreements, or into agreements with foreign-owned corporations
involving technical or financial assistance for large-scale exploration, development, and
utilization.

SECTION 4. TITLE TO LAND. The ownership or the right to the use of lands for agricultural,
industrial, commercial, residential, mining, or for any purpose other than for petroleum
exploration, development or exploitation does not include the ownership of, nor the right to
explore for, exploit, or utilize the petroleum or natural gas deposits in, on or under the surface of
such land.
Imposition of the limitation of property ownership. While the civil code provides that ownership
is the independent right of a person to control, that is to enjoy and dispose, of a thing particularly
in his possession, this one of those limitations to such rights.

WHO IS IN-CHARGE OF THE IMPLEMENTATION OF THE LAW? ARTICLE 94 thereof

provides that the The Secretary of Agriculture and Natural Resources as executive officer. —
The Secretary of Agriculture and Natural Resources shall be the executive officer charged with
carrying out the provisions of this Act, through the Director of Mines who shall act under his
immediate supervision and control. As such executive officer, the Secretary of Agriculture and
Natural Resources shall be vested with the authority to prescribe rules and regulations and issue
orders which he may find necessary to effectuate the provisions and purposes of this Act.

However, on August 25, 1975, PRESIDENTIAL DECREE No. 782 repealed this provision
of the law placing under a single governmental authority all activities relating to the
discovery, development and production of indigenous petroleum resources.

Section 1 thereof vested the duties of the Secretary of Natural Resources (formerly Secretary of
Agriculture and Natural Resources) to the Petroleum Board thereby created by PD 87.

PRESIDENTIAL DECREE No. 87. Oil Exploration and Development Act of 1972 The Act,
conferred by Presidential Decree 87, provides the legal basis for the exploration and
development of indigenous petroleum resources authorizing the grant of service contracts
entered into thru public bidding, or through negotiations.

Who is responsible for the implementation of the law? Section 17. There is hereby created a
Petroleum Board composed of the Secretary of Agriculture and Natural Resources, as Chairman,
and the Secretary of Finance, the Secretary of Justice, the Chairman of the Board of Investments,
the Governor of the Central Bank, the Secretary of Trade and Tourism and the Director of Mines
as members. The Director of Mines shall be its Executive Officer. The Board shall be attached to
the National Economic Development Authority.

How does it work? Section 4. Government may undertake petroleum exploration and production.
Subject to the existing private rights, the Government may directly explore for and produce
indigenous petroleum. It may also indirectly undertake the same under service contracts as
hereinafter provided. These contracts may cover free areas, national reserve areas and/or
petroleum reservations, as provided for in the Petroleum Act of 1949, whether on-shore or off-
shore. In every case, however, the contractor must be technically competent and financially
capable as determined by the Board to undertake the operations required in the contract.

Section 5. Execution of contract authorized in this Act. Every contract herein authorized shall,
subject to the approval of the President, be executed by the Petroleum Board created in this Act,
after due public notice pre-qualification and public bidding or concluded through negotiations. In
case bids are requested or if requested no bid is submitted or the bids submitted are rejected by
the Petroleum Board for being disadvantageous to the Government, the contract may be
concluded through negotiation.

In opening contract areas and in selecting the best offer for petroleum operations, any of the
following alternative procedures 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 and offer it for
bid, specifying the minimum requirements and conditions; or (b) The Petroleum Board may open
for bidding a large area wherein bidders may select integral areas not larger than the maximum
provided in this Act. Only the best offer shall be accepted and the selection thereon shall be
made by a weighted system of evaluating the different aspects of each bid; or (c) An area may be
selected by an interested party who shall negotiate with the Petroleum Board for a contract under
the terms and conditions provided in this Act.

The law also listed a number of privileges of the contractor under Section 12 thereof including
(a) Exemption from all taxes except income tax, (b) Exemption from payment of tariff duties and
compensating tax on the importation of machinery and equipment, and spare parts and all
materials required for petroleum operations subject to conditions xxx, (e) Exportation of
petroleum subject to the prior filing pro-rata of domestic needs as elsewhere provided in this Act;

Other laws which affect the regulation of petroleum in the Philippines are the following:

RA 8479 - Downstream Oil Industry Deregulation Act • ensure a truly competitive market for
petroleum products under a regime of fair price, adequate and continuous supply of
environmentally, clean and high quality petroleum products • Use of clean and safe (environment
and worker-benign) technologies Standardization Mandate

RA 8749 - Clean Air Act of 1999 • set the specifications for all types of fuel and fuel-related
products (Sec.26) • set every two (2) years or thereafter or as the need arises, the specification of
ULG and diesels shall be reviewed and revised (Sec. 26)

RA 9367 - Biofuels Act of 2006 • establish technical fuel quality standards for biofuels and
biofuel-blended gasoline and diesel which comply with the PNS (Sec. 7c)

Republic Act No. 8479- ‘An Act Deregulating the Downstream Oil Industry, and for other
Purposes’ Salient Features of RA 8479 are 1. Removal of 4% tariff differential, 2.Minimum
inventory requirements, 3. Simplification of entry, 4. Inclusion of provision of promoting retail
competition and investments, 5. Spelling out what constitutes predatory pricing, 6. Providing
other incentives to new firms entering the industry.

Purpose of the law: To ensure a truly competitive market under a regime of fair prices, adequate
and continuous supply of environmentally-clean and high quality petroleum products.

After years of imposing significant controls over the downstream oil industry in the Philippines,
the government decided in March 1996 to pursue a policy of deregulation by enacting Republic
Act No. 8180 (R.A. No. 8180) or the Downstream Oil Industry Deregulation Act of 1996.
R.A. No. 8180, however, met strong opposition, and rightly so, as the Supreme Court concluded
in its November 5, 1997 decision in Tatad v. Secretary of Department of Energy to struck down
the law as invalid because the three key provisions intended to promote free competition were
shown to achieve the opposite result; contrary to its intent, R.A. No. 8180s provisions on tariff
differential, inventory requirements, and predatory pricing inhibited fair competition, encouraged
monopolistic power, and interfered with the free interaction of market forces.

In the case of Garcia vs The Executive Secretary, Et al., Garcia asks the Court to examine the
constitutionality of Section 19 of Republic Act No. 8479 (R.A. No. 8479), otherwise known as
the Oil Deregulation Law of 1998) through the petition for certiorari. He raises once again the
propriety of implementing full deregulation by removing the system of price controls in the local
downstream oil industry, a matter that the SC have ruled upon in the past.

Petitioner Garcia contended that implementing full deregulation and removing price control at a
time when the market is still dominated and controlled by an oligopoly[5]would be contrary to
public interest, as it would only provide an opportunity for the Big 3 to engage in price-fixing
and overpricing. He averred that Section 19 of R.A. No. 8479 is glaringly pro-oligopoly, anti-
competition, and anti-people, and thus asked the Court to declare the provision unconstitutional.

Petitioner Garcia argues against full deregulation implemented through the lifting of price
control, as it allows oligopoly, overpricing and price-fixing.
R.A. No. 8479, however, does not condone these acts; indeed, Section 11 (a) of the law expressly
prohibits and punishes cartelization, which is defined in the same section as any agreement,
combination or concerted action by refiners, importers and/or dealers, or their representatives, to
fix prices, restrict outputs or divide markets, either by products or by areas, or allocate markets,
either by products or by areas, in restraint of trade or free competition, including any contractual
stipulation which prescribes pricing levels and profit margins.

This definition is broad enough to include the alleged acts of overpricing or price-fixing by the
Big 3. R.A. No. 8479 has provided, aside from prosecution for cartelization, several other anti-
trust mechanisms, including the enlarged scope of the Department of Energy’s monitoring power
and the creation of a Joint Task Force to immediately act on complaints against unreasonable rise
in the price of petroleum products.
Petitioner Garcia’s failure is that he failed to show that he resorted to these measures before
filing the instant petition. His belief that these oversight mechanisms are unrealistic and
insufficient does not permit disregard of these remedies.

Wherefore, the petition is dismissed.

The audio video presentation of World Finance5 is a testimonial of the effect of the oil
deregulation law to Philippine local investors. While some laws appear to be futile, others might
appear to be useful

1
Grist, Environmental Justice Explained, 2016; video retrieved from http://amara.org/v/QTKI.
2
Renee Skelton, Vernice Miller, March 17, 2016; article retrieved from
http://nrdc.org/stories/environmental-justice-movement.
3
Woodside Australian Science Project, Oil and Gas Formation; video retrieved from
http://www.woodside.com.au
4
http://www.doe.gov.ph
5
World Finance, http://worldfinance.com