In a letter sent to Energy Secretary Raphael P.M. Lotilla, the Petroleum Association of the Philippines (PAP) indicated that some major upstream oil companies have taken impression that "there is no stability of contracts with the government and that in the Philippines, agreements can be canceled by the issuances of Executive Orders as EO 556."

The two provisions being frowned upon by investors are Sections 1 and 7 of EO 556 which both imply that any contracts entered into with the government, including that of the Philippine National Oil Company (PNOC) can be cancelled or quashed if deemed not within the purview of EO.

Section 1 states that "there shall be no farm-in or farm-out contracts awarded by any government agency, including the PNOC, including the contract for the exploration, development and production of crude oil from the Camago-Malampaya reservoir."

Section 7, in addition, states that "any and all negotiations or arrangements entered into by any government agency, including the PNOC, which violates the Executive Order, shall be immediately discontinued or cancelled."

The investors warned that with these "unfriendly terms" of the EO, they might once again avoid the Philippines among their preferred sites for oil and gas exploration ventures.

PAP chairman Alfredo C. Ramos went further in interpreting that since there is a blanket move to disallow "farm-in" and farm-out" contracts entered into by PNOC, all its previous undertakings including its entry as a minority stakeholder in the Malampaya project can be rendered effectively discontinued or cancelled.

The investors further raised that "there are also many other upstream projects which involve the farm-in and farm-out by PNOC-EC (Exploration Corporation) which have become questionable because of the Executive Order."

They added that because of the cloud of doubt stirred by the issuance of the EO, "our members have found it very difficult to invite prospective partners in their own exploration ventures and in the bidding for petroleum contract areas in the on-going PECR-3."

The Philippine Energy Contracting Round 3 was concluded latter part of 2006 and the award of service contracts should have been concluded by the middle of this year.

A supplemental policy issued by the energy department that time also proffered partnership by selected investors with the PNOC-EC; but given the policy uncertainty under the EO; the implications could be that no investor may even consider to come in.

The petroleum exploration companies explained that investments on oil and gas exploration are typically high risk and capital intensive; thus, the need for them to spread these out and soften their capital burden through "farm-out" agreements.

"Without such alliances, much-needed oil drilling, which are prerequisites to the discovery and development of the Philippines’ indigenous oil resources become severely constrained," Ramos said.

But since critical issues on the stability of investment contracts are being raised, the investors warned that "there could be adverse effects on the whole socioeconomic development program of the government"; and this would eventually translate to higher political risk for the country.

In that view, the PAP has been seeking the government’s immediate attention to clarify the provisions which might run counter to the government’s goal of positioning the oil and gas sector among its priority areas for investments.