GROWING FRENZY TO MITIGATE RISING OIL PRICE

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