Convergence of LNG, Imported Coal, Renewable Energy in Oriental Mindoro and the Strategic Electrification of the Philippine Western Corridor

This concept paper is an off-shoot of a previous paper entitled "Mindoro's Role in the Burgeoning Philippine LNG Sector" dated May 2015. It provides an update and critique on recent developments in the Philippine LNG sector, observations on the substantial renewable energy potential in Oriental Mindoro and the tremendous power generating capacity that could be exported from Semirara Island (using imported coal), which brings back the author to the original thesis on Mindoro's role in the burgeoning Philippine LNG sector and the strategic electrification of the Philippine Western Corridor.

Recent Developments in the Philippine LNG Sector

(1) First Gen LNG Corp. (FGEN LNG, a partnership between First Gen and Tokyo Gas)
First Gen has four (4) natural-gas fired power plants in commercial operations with an aggregate generating capacity of about 2,000 MW located within the First Gas Complex in Batangas.

In a press release dated March 6, 2020, First Gen announces the following:

FGEN LNG Corp. (FGEN LNG) is seeking the Department of Energy’s (DOE) approval to allow it to start the construction of its planned liquefied natural gas (LNG) terminal.

The wholly owned subsidiary of Lopez-led First Gen Corp. (First Gen) filed Thursday an application for a Permit to Construct, Expand, Rehabilitate and Modify (PCERM) an Interim (emphasis/underscore mine) Offshore LNG Terminal within the First Gen Clean Energy Complex in Batangas City.

The permit, when issued, will allow the company to modify an existing liquid fuel jetty that will enable it to become multiple-use, allowing the receipt of large and small-scale LNG vessels, as well as liquid fuel vessels, and build an adjunct onshore gas receiving facility.

“FGEN LNG anticipates that, if the PCERM is granted by the DOE, it will be able to commence construction as early as May of this year, in order to be able to receive LNG as early as the third quarter of 2022,” it said.

FGEN LNG is the most advance (perhaps the only real) LNG storage and regasification project in the Philippines, because it is the only one that may have enough critical mass in terms of 2,000 MW of baseload demand for LNG from the get-go. At this time, no other LNG project proponent in the Philippines has this edge, thereby rendering the "others" as aspirational endeavors at best.

Below is an illustration of the customers of FGEN LNG:

Four (4) power plants are affiliated First Gen power plants and the fifth (which is NOT yet certain to purchase gas from FGEN LNG) is the 1,200 MW baseload Ilijan combined-cycle power plant (owned by KEPCO today), which will be owned by SMC GPH in June 2022--see (2b) below. That said, it is in the interest of FGEN LNG to supply gas to Ilijan as this would increase substantially the critical mass of the baseload demand of LNG from 2,000 MW (from First Gen plants only) to as much as 3,800 MW (from First Gen plants, Ilijan plant and Ilijan plant expansion), thereby also deriving a lower overall unit cost of gas ($ per MMBtu) supplied to the power plants (i.e., lower purchase price of gas per MMBtu and lower cost of gas logistics (shipping and delivery infrastructure) per MMBtu), which will benefit First Gen, SMC GPH and, ultimately, all electricity consumers in the Philippines.

(2a) Excelerate Energy and Luzon LNG Project

As of September 2019, the Department of Energy of the Philippines (the "DOE") appears to have given Excelerate Energy the Notice to Proceed to develop a floating liquefied natural gas (LNG) import terminal in Batangas Bay. Excelerate's press release states, "The project, Luzon LNG, will supply natural gas, sourced from LNG, to existing and new gas-fired power plants in the region that provide electricity to Luzon including the area of Metro Manila. This abundant and secure source of gas supply will augment the existing gas production from the domestic Malampaya fields, as reserves from these fields begin to deplete."

Further, the press release continues, "Luzon LNG will combine all necessary elements to meet the region’s natural gas requirements including a fully-integrated turnkey floating LNG terminal, arranging the necessary supply of LNG and distribution of natural gas to end-users across Luzon. Excelerate will develop, design, permit, construct, finance, and operate the terminal."

(2b) Off-Taker of Luzon LNG Project

Who will be the off-taker of Luzon LNG to enable the project to secure financing?

In the article entitled "LNG Dash" dated January 2020, it appears the power subsidiary of San Miguel Corporation, SMC Global Power Holdings Corp. (SMC GPH), will require long-term natural gas supply for existing and future gas-fired plants with a total baseload capacity of up to 1,800 MW. This is consistent (at least partially) with the expected transfer of ownership of the 1,200 MW Ilijan combined-cycle power plant to SMC GPH in June 2022. The presumption is that SMC GPH will expand Ilijan by another 600 MW, thereby requiring a long-term natural gas supply contract for a total of 1,800 MW of baseload capacity.

The question is, which gas supplier will SMC GPH select: Luzon LNG or FGEN LNG? This assumes that Luzon LNG and FGEN LNG are NOT working together on the development/deployment of a single Floating Storage and Regasification Unit (FSRU). In other words, the assumption is that Luzon LNG and FGEN LNG are each pursuing a distinct and separate FSRU. In this case, FGEN LNG would have a distinct advantage over Luzon LNG because it (FGEN LNG) already has an assured baseload demand of 2,000 MW and should be able to secure more competitively priced LNG by supplying gas to an additional baseload demand of 1,800 MW of Ilijan (1,200 MW existing and 600 MW expansion)--for a total gas demand of 3,800 MW of baseload capacity.

Thus, unless Excelerate Energy/Luzon LNG is able to convince FGEN LNG that it (Luzon LNG) can import LNG into the Philippines and supply gas to the First Gen plants and Ilijan plants more reliably and more competitively than FGEN LNG, then Luzon LNG is likely fizzle out of the picture.

(3) Lucio Tan's MacroAsia Corp. in partnership with Gen X Energy, a company backed by Blackstone Energy Partners
In the LNG Dash article, DOE Undersecretary Donato Marcos stated, "Since Tan holds interests in the airline, banking, liquor, tobacco, real-estate industries and education, the LNG project is expected to be viable because of its prospective off-takers." Marcos continued, "Their business model, or captive market, to assure viability are Tanduay, Asia Brewery, Eton, JG Summit and others."

Marcos is correct in highlighting the need for off-takers or a captive market to ensure the viability of Tan's LNG Project. The question is, whether or not the aggregation of the Tan's affiliated off-takers plus other non-affiliated off-takers like the petrochemical complex of JG Summit plus a contemplated greenfield 1,000 MW combined-cycle power plant would be enough demand to justify another (in this case, a third) LNG Project?

Probably NOT. In addition, there are too many moving parts involved in Tan's LNG Project, including the additional logistics of delivering gas to Tan's affiliated off-takers and the uncertainty of supplying non-affiliated off-takers.

(4) Tanglawan Philippine LNG, a joint venture between Phoenix Petroleum (Dennis Uy) and CNOOC Gas and Power Group Co.

In the LNG Dash article:

The power sector is closely watching the next move of the Malampaya consortium, which is seeking DOE approval for an extension of the service contract, particularly because Phoenix and partner CNOOC have separately asked the DOE to suspend their planned LNG project.

“The extension of the contract is a separate matter. Indeed, there are many things that are unfolding now. Bottom line, we want to develop our LNG and find another gas discovery,” said Cusi.

For the suspension request filed by Phoenix and CNOOC, Cusi commented that the two firms merely wanted to reassess and submit a new concept that will most likely integrate the planned LNG terminal and UC’s participation in the Malampaya project. “They want to revisit their LNG terminal program in lieu of the Malampaya development. I think they are going to tie it together. They are pursuing LNG albeit on a different approach and we welcome this,” said the energy chief.

The latest estimates on the remaining gas reserves of Malampaya suggest that the existing gas plants of First Gen and Ilijan may be supplied up to 2030; hence, the proposed suspension of the Tanglawan Philippine LNG Project until such time that imported LNG is required to replace the depleted reserves of Malampaya.

That said, none of the existing off-takers of Malampaya gas (existing gas plants of First Gen and Ilijan) are contractually obligated to purchase gas from Tanglawan Philippine LNG after the gas from Malampaya is depleted. Indeed, both First Gen and SMC GPH (inchoate owner of Ilijan) have either contracted or are in the process of contracting gas supply for their gas plants today in anticipation of the depletion of Malampaya gas in 2030 or sooner (i.e., the supply from Malampaya gas from now to 2030 will progressively decrease and become less reliable). Thus, while Tanglawan Philippine LNG may "submit a new concept that will most likely integrate the planned LNG terminal and UC's (Dennis Uy) participation in the Malampaya project," the LNG component of this "new concept" appears dead in the water in the absence of any off-taker or captive market, unless First Gen, SMC GPH, JG Summit Petrochemical, Tan et al are forced to purchase gas exclusively from Tanglawan Philippine LNG after the depletion of Malampaya gas.

Philippine LNG Scenarios

Based on the foregoing background on the evolving landscape of the LNG sector in the Philippines, below are three (3) hypothetical Philippine LNG Scenarios.

Philippine LNG Scenario 1

FGEN LNG would supply First Gen plants (2,000 MW existing baseload) by way of one (1) Floating Storage and Regasification Unit (FSRU) delivered through the First Gen jetty (retrofitted to deliver gas) directly to the First Gen plants within the First Gen Energy Complex in Batangas.

Luzon LNG (Excelerate Energy) would supply SMC GPH plants (1,800 MW baseload comprised of 1,200 MW existing baseload plus 600 MW baseload expansion) by way of one (1) FSRU (distinct and separate from the FSRU of FGEN LNG) delivered through the Ilijan jetty (retrofitted to deliver gas) directly to the Ilijan plants within the Ilijan Power Plant Complex in Batangas.

JG Summit Petrochemical, Tan et al would purchase gas from either FGEN LNG or Luzon LNG. Gas would be delivered via the existing pipeline of Shell Malampaya, which would charge a tolling fee (regulated by the ERC).

Shell Malampaya would continue to supply gas to existing gas plants until gas from Malampaya is depleted. Thereafter, all existing and future gas plants will be fueled by imported LNG, unless additional gas reserves are discovered in the Philippines.

The above Philippine LNG Scenario 1 seems to get the job done. The supply and demand of gas of the industrial stakeholders appear to be addressed before and after the depletion of Malampaya gas. The seeds of the Philippine LNG Sector have been planted. Problem solved. However, even a superficial understanding of the LNG sector would indicate that one FSRU for 2,000 MW baseload demand and another FSRU for 1,800 MW baseload demand might NOT be exploiting economies of scale (a critical factor in the LNG sector) and, therefore, might NOT be deriving the lowest possible cost per MMBtu of gas delivered ex-plant--perhaps the most important consideration for Philippine consumers.

Is it possible that a single FSRU servicing the demand of 3,800 MW of baseload capacity, among other gas off-takers (JG Summit Petrochemical, Tan et al) and utilizing the existing pipeline of Shell Malampaya would result in a lower and more competitive cost per MMBtu of gas delivered ex-plant to all the off-takers, generate less expensive electricity for Philippine consumers and satisfy the ROI of the LNG project proponents and service providers? This would be a win-win situation for nearly all the stakeholders involved, which leads us to the Philippine LNG Scenario 2 below.

Philippine LNG Scenario 2

To wit, FGEN LNG would supply First Gen plants (2,000 MW existing baseload) and SMC GPH plants (1,800 MW baseload comprised of 1,200 MW existing baseload plus 600 MW baseload expansion)--or a total of 3,800 MW of baseload capacity--by way of a single Floating Storage and Regasification Unit (FSRU) delivered through the First Gen jetty (retrofitted to deliver gas) directly to the First Gen plants within the First Gen Energy Complex and via the existing pipeline of Shell Malampaya to the Ilijan power plants within the Ilijan Power Plant Complex.

JG Summit Petrochemical, Tan et al would purchase gas from FGEN LNG. Gas would be delivered via the existing pipeline of Shell Malampaya, which would charge a tolling fee (regulated by the ERC).

Shell Malampaya would continue to supply gas to existing gas plants until gas from Malampaya is depleted. Thereafter, all existing and future gas plants will be fueled by imported LNG, unless additional gas reserves are discovered in the Philippines.

The question is, why FGEN LNG and not Luzon LNG? Because FGEN LNG is already assured of off-takers--its affiliated First Gen plants with 2,000 MW of baseload capacity. On the other hand, Luzon LNG has yet to secure an off-taker. It is the classic first-mover advantage that allows FGEN LNG to supply gas to non-affiliated plants like Ilijan, among other customers, and lower the unit cost per MMBtu of delivered gas ex-plant to all off-takers--not just First Gen affiliates.

The next question is, won't the FGEN LNG affiliated First Gen plants have a competitive advantage over the non-affiliated Ilijan plants? Left on its own, without any regulation, of course FGEN LNG would be tempted to charge any competitor of its affiliated First Gen plants a higher price of gas. This is called predatory pricing and this is where the government needs to apply a touch of regulation to ensure a level playing field among gas power plants.

There are proven regulatory regimes in the gas and power sectors all over the world, including the evolving deregulation of the electricity sector in the Philippines, that could be emulated to the extent applicable to our particular situation--the most basic concept of which is to unbundle the cost of gas and the cost of processing and delivering the same ex-plant. Moreover, the additional tolling fee (Shell Malampaya) charged for the transport of gas from the FGEN LNG FSRU to the Ilijan plants (which may not apply to the First Gen plants due to its proximity to the FGEN LNG FSRU) should NOT be permitted to tip the market in favor of the First Gen plants. Again, the key concept is for regulation to ensure a level playing field among gas power plants.

In the meantime, Luzon LNG (Excelerate Energy) can bide it's time in case FGEN LNG needs help or, for that matter, needs replacement.

The above Philippine LNG Scenario 2 addresses the supply and demand of gas of the industrial stakeholders before and after the depletion of Malampaya gas by way of a single FSRU servicing a total of 3,800 MW of baseload capacity, among other off-takers, which exploits economies of scale and, therefore, derives the lowest possible cost per MMBtu of gas delivered ex-plant. Appropriate regulation should ensure a level playing field among gas power plants. Problem solved.

Yes and No.

Philippine LNG Scenario 3

At this point in the discussion, noteworthy is the role of the Energy Regulatory Commission (ERC) in approving the electricity rates of existing and future gas plants fueled by imported LNG after the gas from Malampaya has been depleted. Assuming the ERC fulfills its mandate intelligently, it should motivate existing and future gas power plants to secure the most competitively priced gas delivered ex-plant, which should redound to the benefit of Philippine consumers.

In other words, the above shift from Philippine LNG Scenario 1 to Philippine LNG Scenario 2 is the logical, if not unavoidable, progression or realization of the nascent Philippine LNG sector, if the ERC fulfilled its mandate properly and transparently.

Similarly, the Department of Energy is mandated to formulate and implement energy programs, especially a nascent and strategic energy component of the country--such as the burgeoning LNG sector--that will have far-reaching reaching implications on the quality of the life of every Filipino. Thus, it is not enough for the DOE to take the path of least resistance with respect to the convenience and profitability of investors and business enterprises.

In light of the substantial investments and infrastructure required in establishing the LNG infrastructure in the country (which is akin to the development of the Camago-Malampaya Gas-to-Power Project over 20 years ago), it is paramount that the DOE create and spread economic opportunities beyond the immediate confines of these projects as it reinforces the energy security of the country and expands access to basic energy/electricity services in neglected regions of the country. It's an old concept more recently encapsulated in the catchphrase "economic inclusion."

The Philippine LNG Scenario 2 exemplifies a major infrastructure project that once again concentrates the benefits to the National Capital Region (NCR) and CALABARZON, which are already the most affluent regions in the country--NOT exactly economically inclusive. Hence, the need for the DOE, among other government agencies, to take a broader view of the nascent LNG sector and determine if it can do more to spread the economic opportunities to less developed regions of the country.

The Philippine LNG Scenario 3 attempts to provide this broader view as follows:

Note that the approach of both FGEN LNG and Luzon LNG in establishing the initial LNG infrastructure in the country is by way of a Floating Storage and Regasification Unit or FSRU, which is usually intended as an INTERIM step to a more permanent and substantial land-based LNG storage and regasification complex. Hence, the Philippine LNG Scenario 2 could, in fact, be viewed as an INTERIM phase that segues to the eventual establishment of a more permanent land-based LNG complex (Philippine LNG Scenario 3)--hopefully in a less developed region of the Philippines that would have the greatest economic impact rather than just saturating relatively developed areas like CALABARZON and the NCR.

In this regard, the Municipality of Mansalay, located in the southeast quadrant of Oriental Mindoro and having a naturally deep and safe harbor approximately 20 kilometers from the undersea gas pipeline of Shell Malampaya, poses an ideal location for the said permanent land-based LNG complex, which could very well include an adjacent 1,200 MW of baseload capacity at the time of construction (with more area for future expansions), thereby providing a total of at least 5,000 MW of baseload capacity by the time the entire LNG + CCGT (combined-cycle gas turbine) complex is completed (circa 2030 to 2035).

The order of magnitude of the key components of the LNG infrastructure in the Philippines would be similar to the Futtsu LNG/CCGT Complex in Japan (see picture below), except that 3,800 MW of the baseload capacity would be located in Batangas, receiving gas in the same way it has been receiving gas from Malampaya and the interim FSRU of FGEN LNG--via the existing Shell Malampaya pipeline.

Futtsu LNG/CCGT Complex (2015) providing TEPCO 5,040 MW of baseload capacity.

The scale and the opportunity for expansion of the permanent land-based LNG/CCGT complex in Mansalay coupled with its naturally deep and safe harbor could indeed fulfill the vision of DOE Secretary Cusi of "putting the Philippines in the value chain of LNG" in the region.

“We are acting as a de facto transshipment point for gas that is going to China (North Asia, which broadly includes China, Japan, South Korea and Taiwan) . . . Now, we are closer to the realization of this project . . . the country now will become part of the LNG value chain because we can receive and export gas,” commented Cusi. (LNG Dash article)

That said, the Philippine LNG Scenario 3 component of "The Big Picture" above is only one of several important components that converge in Mansalay, which includes the following:

I.  An abundance of renewable energy resources, including wind (land-based on the mountain ridges dividing Oriental and Occidental Mindoro and offshore between Southern Mindoro and Semirara Island, in the order of magnitude of the wind resource in Ilocos Norte) and hydroelectric potential (in the order of magnitude of the Binga, Ambuklao and San Roque hydroelectric plants).

So much wind power potential but no means to export to the main island of Luzon.

This is just one low lying fruit for immediate development--if only the power can be exported to the main island of Luzon.

Equally promising hydro electric power projects (and eco-tourism sites)--if only the power can be exported to the main island of Luzon.

II. A mega-coal power plant complex in Semirara Island AFTER it has depleted its local coal reserves. Although Semirara Island is the largest producer of coal in the country, its reserves may be depleted in less than 10 years. That said, the existing infrastructure (ports, jetties, conveyors and other material handling equipment, vehicles, personnel, etc.) on the island could be re-purposed for a mega-coal power plant complex (using imported coal like most coal plants in the Philippines) developed over a period of 10 to 20 years (in tranches of say 600 MW up to a total installed capacity of 3,000 MW--possibly more) in accordance with the growing electricity demand of the country. Semirara Island is particularly ideal for this purpose given (a) its windy location in the middle of the sea, which aids in the plume dispersion of large capacity coal power plants, and (b) its depleted open pit mines, which could be repurposed as depositories of coal ash from the same.

III. Under-utilized eco-tourism potential in the entire Philippine Western Corridor, from Northern Mindoro to the Southern Tip of Palawan, which is in large part due to the thoroughly inadequate electricity supply in the region--which, I reiterate, is particularly ironic considering a significant portion of the national government’s share in the natural gas proceeds from Malampaya (which is ongoing and very substantial) should be allocated to energy-related projects and infrastructure (like a high-voltage transmission line from Ilijan to Puerto Princessa) for the benefit of the Philippine Western Corridor, including Mindor, Palawan and Western Visayas.

The untapped eco-tourism potential in the Philippine Western Corridor alone could easily double the current 7 million tourist arrivals in the Philippines (as of 2018). One of the major impediments in the development of tourist resorts in the region is the utter lack of reliable and competitively-priced electricity, which the NPC-SPUG is woefully unable to deliver. It is high time that the Philippine Western Corridor be integrated into the national transmission network of the National Grid Corporation of the Philippines (NGCP) and be rid of the thoroughly inadequate NPC-SPUG.

IV. Maintaining the strategic gas infrastructure already built by the Camago-Malampaya Gas-to-Power Project, which is in the national interest of the Philippines, particularly in the event that (a) additional gas reserves are discovered in the West Philippine Sea and (b) the TRANS-ASEAN gas pipeline becomes a reality--both of which are just a matter of time even if it takes 2 to 3 decades to happen. If the Philippine LNG Scenario 2 does NOT progress to the Philippine LNG Scenario 3, then ALL OF THE ABOVE (I, II, III and IV) will remain latent and untapped--much to the disadvantage of the Philippine economy.

Unlocking the BIG Picture (including Philippine LNG Scenario 3)

The solution is actually quite simple--HIGH VOLTAGE TRANSMISSION LINE (at least 230 kV for starters and upgradeable to 500 kV) from Ilijan to Puerto Princessa, commissioned in time for the permanent land-based LNG + CCGT complex in Mansalay (i.e., Philippine LNG Scenario 3). This will enable all of the above latent energy/economic potential that converges in Mansalay (easily in the range of 7,000 MW of additional electricity generating capacity--relatively substantial considering the available generating capacity of the entire country today is less than 17,000 MW--over a development period of 10 to 20 years) to be unleashed and exported to the main island of Luzon (constitutes about 70% of the total electricity demand in the country), Palawan and Western Visayas, which will likewise ensure and sustain the development of the virtually unlimited potential of eco-tourism and related enterprises within the Philippine Western Corridor over the next generation (or two). Hence, the strategic installation of the said HIGH VOLTAGE TRANSMISSION LINE together with the development of:

1. the Philippine LNG Scenario 3, while maintaining the existing strategic gas infrastructure of the country (for future gas reserves and connection with the TRANS-ASEAN gas pipeline),
2. the substantial renewable energy projects in Mindoro and
3. the mega coal power plant complex in Semirara Island

will most assuredly net exponential dividends to the national economy and, at the same time, "spread the wealth" to less developed regions of the country. The Philippine Government just needs to exercise some degree of visionary leadership to nudge the private sector in the right direction. Yes, the private sector will enthusiastically undertake these mega-infrastructure projects, given the right signals (i.e., legislation, policies and directional guidance) from the government.

The author was a former energy executive of Enron Corp. responsible for business development in Southeast Asia and asset management of Enron's private power projects in the Philippines. For inquiries, email manuelpgallego@yahoo.com.