By Joey Sarte Salceda
Chair, Institute for Risk and Strategic Studies, Inc.
President Marcos on January 19 announced the discovery of Malampaya East-1, the country’s first significant natural gas find in over a decade. The reservoir holds an estimated 98 billion cubic feet of gas, enough to power 5.7 million households for a year. This is a welcome development for our energy security and a testament to the technical capability of Filipino workers who led the drilling without a single accident or environmental incident.
This discovery presents a timely opportunity. As we enter a new phase of petroleum development in the country, we should also modernize the fiscal framework that governs it. The current regime, built on Presidential Decree No. 87 of 1972 and amended piecemeal over the decades, has served its purpose. However, the MAE-1 find and the Phase 4 drilling campaign that will follow give us a chance to adopt a framework that is simpler, cleaner, and more transparent.
During my tenure as Chairman of the House Committee on Ways and Means, the longest in that Committee’s history, we passed more fiscal measures than any previous chairmanship. We also planted seeds for the future. One of the dozens of works in progress was a comprehensive study of the extractives tax regime, conducted with experts in petroleum economics and fiscal policy. The goal was to identify how we could streamline the system to benefit both the government and legitimate investors.
PD 87 established the service contract system that has governed petroleum operations for over fifty years. The law guarantees the government at least 60 percent of net proceeds, which is a sound principle. Over time, however, the implementing framework has grown complex. It now includes a 70% cost recovery ceiling, service fees, the Filipino Participation Incentive Allowance, corporate income tax, special fund contributions, cross-recovery provisions for deepwater operations, and various administrative levies. Each layer was added with good intentions, but the cumulative effect is a system that would benefit from simplification.
Consider the Filipino Participation Incentive Allowance, or FPIA. Designed to encourage foreign contractors to partner with Filipino companies, it allows a deduction of up to 7.5% from gross proceeds before the government share is computed. The policy objective is laudable, as we want Filipino participation in our petroleum industry. However, the mechanism could be improved. When FPIA is applied, the effective government share can fall below the 60% we expect. More importantly, we now have better tools to achieve Filipino participation, including direct ownership requirements in the bidding process, technology transfer provisions, and local content policies that deliver real capacity building rather than nominal partnerships.
For investors, a streamlined regime means greater certainty. When the fiscal terms are clear and predictable, companies can model their returns with confidence and commit to the long-term, capital-intensive investments that petroleum exploration requires. This benefits both the industry and the country.
The reform I propose is straightforward. Gross revenue, less a closed list of allowable development expenses, would be split 60-40 between the government and the contractor.
This approach would consolidate the FPIA, the SEDP charges, the corporate income tax on petroleum operations, the excise tax, the withholding taxes, and the special trust fund contributions into a single fiscal instrument. The 60% government share would become the comprehensive take, with no separate layers and no room for unintended erosion.
The policy structure would turn on one question: what expenses are allowable? I propose an exhaustive list that includes drilling and well completion costs, platform and facility construction, pipelines and infrastructure directly serving the field, operating expenditures for extraction and processing, environmental compliance and decommissioning reserves, insurance directly related to operations, and depreciation of capital assets on a straight-line basis with defined useful lives. Expenses not on the list, such as head office overhead outside the Philippines, interest and financing costs, and marketing expenses beyond the delivery point, would not reduce the base. The rule would be simple: if the expense is not enumerated, it is not deductible.
The benefits of this approach are substantial. Simplicity would come from having one computation and one remittance point, allowing the Bureau of Internal Revenue, the Department of Energy, and the Commission on Audit to verify compliance efficiently. Contractors would know exactly what they keep from day one. Transparency would improve because the entire fiscal relationship would be captured in a single percentage split, making it easier for Congress and the public to monitor whether we are getting fair value for our natural resources. Investment certainty would increase because the 40% contractor share after legitimate development expenses is globally competitive for high-risk deepwater plays, and clear, non-negotiable rules attract serious investors. Finally, the 60-40 split would achieve constitutional coherence by echoing the constitutional framework on natural resource utilization. We would not be inventing a new ratio but rather giving full effect to the principle we have always upheld.
The legislative vehicle could take several forms. These include a targeted amendment to PD 87 and its amendatory decrees, a stand-alone Extractives Fiscal Regime Act, or a comprehensive Extractives Code that harmonizes the petroleum and mining regimes under a single framework. The choice is a matter for the Committee on Ways and Means to deliberate. What matters is the policy direction: a clean split that delivers real revenue to the government while providing genuine certainty to investors.
As for Filipino participation, we should mandate it directly through qualification requirements rather than subsidize it through fiscal mechanisms. If we want meaningful Filipino ownership in service contracts, we should require it as a condition for contract award and pair it with genuine technology transfer and capacity-building provisions that develop our domestic petroleum industry for the long term.
The Malampaya East-1 discovery reminds us that the Philippines sits on significant hydrocarbon potential. The Malampaya field alone has generated some P374 billion for the government since 2001. With a modernized fiscal framework, we can attract the investment needed to unlock more of this potential and ensure that the Filipino people receive their fair share, clearly and without complication. xxxx