US embassy cable - 05MANILA4338

UNCLAS SECTION 01 OF 03 MANILA 004338 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB/IFD/OIA, EB/ESC and EAP/PMBS 
STATE PASS EXIM, OPIC, AND USTR 
STATE PASS USAID FOR AA/ANE and AA/G 
TREASURY FOR OASIA 
USDOC FOR 4430/ITA/MAC/ASIA & PAC/KOREA & SE ASIA/ASEAN 
DOE for Tom Cutler 
 
E.O. 12958: N/A 
TAGS: ENRG, EINV, ECON, RP 
SUBJECT: GROWING FRENZY TO MITIGATE RISING OIL PRICE 
 
Ref:  Manila 1819 
 
Sensitive but Unclassified - Not for Internet - 
Protect Accordingly. 
 
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SUMMARY 
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1.  (SBU)  In its latest scramble to temper the impact of 
escalating oil prices (reftel), the Philippine Government 
has stepped up its campaign to conserve energy, promote 
bioethanol as a gasoline additive, and push passage of a 
renewable energy bill to reduce the country's dependence 
on imported oil.  In addition, the DOE has signed ten 
exploration service contracts to find more offshore gas 
and oil resources.  The President's suggestions to ride 
bikes, move to a four-day workweek, and shift mall hours 
of operation seem unlikely to gain momentum and Congress 
dismissed her request for emergency powers to ration 
fuel, limit air conditioning use, and restrict office 
hours.  If the Energy Department advances proposals to 
produce oil from underneath a major gas reserve and 
intervene in the downstream oil business, it could hurt 
the business interests of foreign business firms, 
including Chevron and Caltex.  End Summary. 
 
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President Imposes Energy-Saving Measures 
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2.  (U)  To combat the continuing climb of oil prices, 
President Arroyo recently directed all government offices 
to limit the use of petroleum products and reduce fuel 
consumption by 10%.  She also ordered fuel rationing for 
all government vehicles and suggested reinstating the 
four-day workweek for government employees imposed for 
April and May.  The DOE formed an energy audit team to 
oversee the program and gauge actual cost savings from 
these measures.  The Departments of Energy (DOE) and 
Trade and Industry (DTI) will work with business firms on 
voluntary energy conservation programs to cut electricity 
and petroleum use in the private sector and offer 
transport subsidies to employees.  In other fuel-saving 
efforts, Arroyo persuaded oil company representatives to 
close all gas stations from midnight to 4 a.m. and has 
called for greater use of bicycle transport. 
 
3.  (U)  Energy Secretary Raphael Lotilla also floated 
various proposals to save electricity this month, such as 
consolidating inter-Departmental meetings, reducing air- 
conditioning use, cutting back on neon billboards, and 
shifting back the hours of mall operation.  He is 
examining the four-day government workweek but admitted 
it would inconvenience businesses that deal with 
government offices.  Lotilla was less receptive to 
proposals for a "car-less" workday each week or a switch 
to daylight savings time. 
 
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Promoting Exploration, Pro and Con 
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4.  (U)  The DOE is intensifying its energy independence 
campaign by signing oil and gas exploration contracts and 
promoting the use of alternative fuels.  According to a 
recent Philippine Petroleum Resource Assessment, total 
recoverable petroleum resources could exceed 8.9 billion 
barrels of fuel oil equivalent.  Since the start of the 
year, the DOE has signed ten petroleum service contracts 
with foreign consortiums and downstream petroleum 
companies, including Unocal Sulu Limited, an American 
subsidiary.  The government is also soliciting bids for 
more on-shore exploration of geothermal and coal 
resources. 
 
5.  (SBU)  DOE Undersecretary Peter Abaya announced the 
GRP's desire to develop the oil resources associated with 
the Malampaya gas field, which is currently providing 270 
million cubic feet of natural gas per day to power three 
electricity generating plants south of Manila.  Abaya 
said that if the Malampaya consortium -- which includes 
Chevron, Shell, and Petron -- is unwilling to produce the 
estimated 40 million barrels of oil from the Malampaya 
"oil rim," he would contract it to other oil companies. 
Several newspapers reported that four foreign groups were 
prepared to take over the extraction.  Chevron 
representatives told Econoff that producing oil from 
underneath Malampaya was uneconomical even with the rise 
in oil prices and could do structural damage to the gas 
field.  They said drilling the oil rim without consortium 
permission is prohibited by their contract. 
 
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Switching to Ethanol, not CME 
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6.  (U)  To reduce fuel consumption in the transport 
sector, the GRP promoted the use of coco bio-diesel, 
ethanol, and compressed natural gas as alternative fuels. 
Coco bio-diesel, otherwise known as coco methyl ester 
(CME), is derived from coconut oil and is expected to 
promote better combustion and fuel efficiency.  According 
to the GRP, local tests have demonstrated that gas 
mileage could increase by 10% using a 1% blend of CME. 
Caltex Country Manager Randy Johnson told Econoff that 
during his meeting with Arroyo at the Palace, the 
president made a pitch for introducing CME as a fuel 
additive.  Johnson said the GRP overstated claims of 
increased mileage using CME and would make gasoline more 
expensive in the short run.  Instead of CME, Johnson said 
it made more sense to initially promote ethanol produced 
from the country's plentiful sugar resources as a 
replacement for imported oil, though it would take a few 
years to gear up sufficient local production. 
 
7.  (U)  Since the meeting with oil executives, the GRP 
has pushed ethanol as a gasoline blend.  Arroyo reduced 
the tariff rate from 10% to 1% on DOE-certified imports 
of ethanol.  Four small oil firms plan to sell ethanol- 
blended gas in 400 service stations by October.  The 
Development Bank of the Philippines is offering $1 
billion in financing for renewable and indigenous energy 
projects and is reviewing three private investment 
projects to put up ethanol plants in the country.  The 
DOE also expects about 200 compressed natural gas-run 
buses to ply routes around Metro Manila by year-end. 
President Arroyo declared "urgent" the proposed 
legislation providing incentives for investment in 
renewable and indigenous energy. 
 
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Economic Managers Proposes Emergency Powers 
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8.  (U)  President Arroyo had earlier requested Congress 
pass a law that would allow her to implement more 
restrictive energy conservation measures such as fuel 
allocation and rationing, regulate the use of private 
vehicles, require the distribution and sale of energy 
blends, stagger working hours of commercial and 
industrial establishments, and limit operating hours for 
business and entertainment establishments.  The previous 
law went as far as banning the use of lights for 
commercial advertising after 9:00 p.m. and prohibiting 
imports of high displacement motor vehicles.  Several 
investment analysts cautioned that these energy 
conservation proposals may not be necessary since there 
is no fuel shortage.  They recognized that despite the 
benefits of conservation, measures to stagger business 
hours could negatively affect sales of retailers and 
power distributors.  The high cost of fuel itself should 
encourage reduced fuel use and greater efficiency.  The 
Chairman of the Senate Committees on Economic Affairs and 
Trade and Industry Mar Roxas said current energy 
conservation measures would be sufficient to address the 
energy crisis. 
 
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Oil Import Dependent 
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9.  (U)  The Philippines is a net importer of oil, 
producing barely a third of its daily requirement of 
338,000 barrels.  Although oil consumption has been 
declining over the past years, it still accounts for 36% 
of the country's total energy requirement and 15% in 
power generation.  The transport sector consumes 
primarily imported oil so has been hurt most by the 
continuing surge in world oil prices.  Since December 
2004, domestic unleaded and diesel gasoline prices have 
risen by 16% and 30%, respectively.  During the first 
five months of the year, the country's oil import bill 
rose 27% despite an 8% drop in demand.  The Department of 
Energy (DOE) estimates that a dollar increase in the oil 
price adds another $126 million to the country's import 
bill.  The National Economic Development Authority (NEDA) 
recently estimated the inflation rate could rise above 8% 
and the GDP growth rate could fall below 5%, missing the 
5.3% target, if oil prices remain high through the end of 
2005. 
 
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Comment 
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10.  (SBU)  The GRP has determined that the continuing 
rise in oil prices is a top priority and over the past 
three weeks has taken some laudable steps toward energy 
independence.  Conservation measures and the replacement 
of imported oil with locally produced fuels and additives 
should help reduce the country's use of imported fuel. 
Embassy is wary of government efforts that may undermine 
contract sanctity (in the case of Chevron) or that 
influence price-setting at the pumps, either directly or 
through its state-controlled oil company, Petron.  Such 
steps could harm U.S. commercial interests and the 
country's investment climate. 
 
JOHNSON