PACIFIC REPORT : Philippine Gusher Hopes : Energy: Two recent finds suggest that the country is sitting on an oil and gas bonanza. If that is true, it could turn the whole economy around.

The Philippines, long considered a poor stepchild among its oil-rich Southeast Asian siblings, suddenly looks as if it could be sitting on a treasure trove of oil and gas.

Discovery of a potentially major oil field in December by Alcorn International of Texas and a potentially bigger find of natural gas by Occidental Petroleum in 1989 has riveted attention on this island chain and raised hopes of deliverance from its crippling economic problems.

If confirmed, what is being touted as the biggest finds in Philippine history could transform the beleaguered nation, whose oil import bills are virtually bankrupting the economy while frequent power shortages are paralyzing commerce.

“The whole stability of the government is threatened by the lack of oil,” said Guy Pauker, a consultant on Southeast Asia to RAND Corp. “If they really have found big oil, this would be sensational and a blessing--the greatest thing that could ever happen to them.”

The specter of tremendous energy wealth hidden below the deep seas off Palawan in the western Philippines could also brighten the picture for the Asia/Pacific region. By 2000, the East-West Center projects, Asia oil exports will drop by half--including a 73% decline from the Pacific petroleum power of Indonesia.

At the same time, the robust Asian economies are projected to increase their energy demand by 6% annually--the highest growth rate in the world. Demand will double in China, Thailand and South Korea in the next decade, the center predicts.

“We’re looking at a grim picture of increased demand and no oil internally,” said Fereidun Fesharaki, director of the East-West Center’s Resource Systems Institute in Honolulu. As a result, he said, Asia will become almost totally dependent on oil from the volatile Middle East by the end of the century.

Fesharaki and Pauker expressed some skepticism that the claims in the Philippines are valid. In the past, they said, companies have touted “major finds” as a way to drive up stock prices or lure more foreign investment. Eventually, the claims proved bogus.

And even legitimate strikes have quickly petered out. In 1979, Fesharaki said, oil was discovered in a field called Nido, and daily production reached 40,000 barrels, the largest in Philippine history.

But the bonanza lasted only one year. The field split, taking in massive water, and production plunged to the current 4,000 barrels a day, he said.

Fesharaki, a former energy adviser to the Shah of Iran, asserted that the geologic structures of the Philippines, like those of Thailand, are too small to contain the kinds of major oil and gas deposits now being touted.

“All around them is oil--in Borneo, Indonesia, Malaysia--but they have never found oil in the Philippines. It’s like a curse,” Pauker said. “I don’t want to be flippant, but they apparently put oil where Allah put Muslims.”

But plenty of others are bullish on the Philippines, including C. W. Alcorn Jr., the affable Texan whose Houston-based firm hit the Palawan field last December. Alcorn will go so far as to predict that the Philippines will not only become self-sufficient in energy but that it may also one day be an oil exporter.

“The East-West Center people are using old data. This is a big structure, and it contains a major amount of oil. And the key is that it’s not going to be the only one,” said Alcorn, chairman and chief executive of Vaalco Energy Inc. and its subsidiary, Alcorn International. “I’m a veteran oilman, and I know when you find one large field in an area, you’re generally going to find others. We think there’s a real good chance that this is the first of many discoveries in the Philippines.”

Alcorn maintains that the field he hit contains 100 million barrels of recoverable oil, which could boost the Philippines’ current daily production 10 times to 50,000 barrels. That would supply one-fourth the nation’s daily oil consumption, which is now met almost entirely by imports at an annual price tag ranging from $1.6 billion to $2 billion.

Those oil purchases eat up scarce foreign currency that the government could spend on machinery or technology to develop the economy. And public unrest has forced the government to subsidize nearly half the price of gas at the pump. When officials tried to reduce the subsidies last year after its oil subsidy fund went bankrupt, massive protests by drivers sent them into retreat.

But the discovery with even more potential impact on the Philippines is Occidental’s natural gas field. Wenceslao de la Paz, executive director of the Philippine Office of Energy Affairs, said officials hope that the field can provide the equivalent of 100,000 barrels of oil a day. The gas would primarily be used as industrial fuel for power plants. It could provide as much as a third of the nation’s requirements, he said.

Occidental has formed a joint venture with Royal Dutch Shell, which has taken over as the operator of the site, in the drilling of three more wells. The project will start next month.

“I’m one of those who believe that somewhere out there is a major field that needs to be discovered,” De la Paz said. “So the name of the game is to get the companies here with the technical expertise to do the exploration.”

Alcorn, Occidental and Shell are just three of several foreign firms that have responded to the Philippine challenge. British Petroleum, Atlantic Richfield Co. and smaller independents have all flocked back to the islands in the past few years.

Why are they back in an area once written off as a dry hole? Operators give two main reasons: the Corazon Aquino government’s aggressive marketing campaign and changing technology.

“We have opened up in a more aggressive manner so we can accelerate the day where we become self-sufficient,” De la Paz said. “We recognize to do that, we need risk capital, which is sorely lacking in the government and the domestic private sector, and also the technical expertise, which many foreign firms have.”

To capture foreign interest, the Aquino government has established a host of new exploration incentives, including the most generous profit-sharing program in Asia. After all exploration costs are recovered, the Philippines gives operators 40% of the take--compared to 20%, for instance, from Indonesia.

Other important incentives have encouraged operators to undertake the more expensive and riskier deep-water drilling. And they have paid off: Both Alcorn and Occidental made their discoveries in deep water. Alcorn said previous drilling in the Philippines had been largely limited to shallow water.

De la Paz also set up a one-stop shop for oil firms to get all of the necessary operating permits--allowing them to save valuable money and time. And even more generous incentives are being debated by the Philippine Senate.

“This really put out the welcome mat,” said Carter Montgomery, who helped advise De la Paz on the industry’s needs as president of C. M. Oil & Gas Corp. in Dallas. “They’re helping me as an individual oil and gas exploration person to solve my major problem: I’ve got this concession, I’ve got money tied up in it and I need to get working as quickly as possible.”

It was Caltex Petroleum Co., the largest retail gas operator in the Philippines, which led the way in arranging a meeting between the industry and Aquino in Dallas in late 1989.

“During the Marcos regime, there was a lot of anti-American sniping,” said James Brooks, president of the Institute for the Study of Earth and Man in Dallas, which sponsored the meeting. “Mrs. Aquino obviously realized she needed to reach out to developed countries. What she was really saying was that you really can operate successfully in the Philippines.”

The oil “explorationists,” as they call themselves, say the Philippines is also benefiting from advancing technology. New techniques and geological theories can “turn what was once an area of low priority into high priority,” Montgomery said. For instance, Occidental’s gas field is 2,300 feet underwater, 10 times deeper than most previous drilling in the Philippines. One reason that it took on Shell as a partner is that the Dutch oil giant has recently developed the technology to extract gas at such depths.

If the Philippines can begin to develop an indigenous energy industry, it would join other new producers in Asia--such as Vietnam and Papua New Guinea. But Fesharaki of the East-West Center said their additional production won’t begin to offset the declines projected over the next decade.

Most prominently, Indonesia’s exports of crude oil are projected to fall from 825,000 barrels a day to 224,000. One reason is that it is trying to expand its own refining capacity to export more valuable finished products, such as jet fuel. Another reason is that its own demand is growing, as industry in the island chain begins to explode.

Malaysia’s exports will also fall by half, while China’s will decline by a fourth. As a result, the East-West Center predicts that Asia’s reliance on Middle Eastern oil will skyrocket to 90% from the current 65%, compared to the United States’ shift to 60% from 45%. And that could bring consequences beyond mere economics, he said.

“Everyone will be more dependent, but the Asians will be super-dependent,” Fesharaki said. “In terms of business relations, they’ll have to undergo an even more massive change and increase linkages with the Middle East even stronger than those that exist today.

“Altogether, they won’t want to take sides in the Middle East. The Japans, the Koreas--they’ll want to be everyone’s friend.”

ASIA’S DECLINING OIL BALANCE

Oil exports from major Asian producers are expected to fall . . .

EXPORTS

Exports in thousands of barrels per day

China Indonesia Malaysia 1985 623 808 345 1990 450 825 485 1995* 660 693 440 2000* 350 224 220

. . . while Asian consumption if oil products is expected to rise.

DEMAND

Demand for oil products in thousands of barrels per day.

Thailand South Korea China Japan 1989 335 793 1,935 4,830 1996* 516 1,361 2,798 5,675 2000* 667 1,598 3,765 5,688

* projected

Source: East-West Center Resource Systems Institute