WHEREAS, Presidential Decree No. 8, dated October 2, 1972, was issued to promote the discovery and development of the country's indigenous petroleum resources and adopting therefore as part of the law of the land the provisions of Senate Bill No. 531 (An Act to Promote the Discovery, Production of Indigenous Petroleum and Appropriate Funds Therefor);
WHEREAS, it was found necessary for the national interest to amend Senate Bill No. 531 among other things to provide more meaningful incentives to prospective service contractors;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the Constitution as Commander-in-Chief of all the
Armed Forces of the Philippines, and pursuant to Proclamation No. 1081, dated September 21, 1972, and General Order No. 1, dated September 22, 1972, as amended, do hereby amend Presidential Decree No. 8 as follows:
AN ACT TO PROMOTE THE DISCOVERY AND PRODUCTION OF INDIGENOUS PETROLEUM, AND APPROPRIATING FUNDS THEREFOR.
SECTION 1. Short title. — This Act shall be known and may be cited as “THE OIL EXPLORATION AND DEVELOPMENT ACT OF 1972."
SEC. 2. Declaration of policy. — It is hereby declared to be the policy of the State to hasten the discovery and production of indigenous petroleum through the utilization of government and/or private resources, local and foreign, under the arrangements embodied in this Act which are calculated to yield the maximum benefit to the Filipino people and the revenues to the Philippine Government for use in furtherance of national economic development, and to assure just returns to participating private enterprises, particularly those that will provide the necessary services, financing and technology and fully assume all exploration risks.
SEC. 3. Definition of terms. — As used in this Act, the following terms shall have the following respective meanings:
Any reference in this Act to the value of any crude oil at the posted price or market price shall be construed as a reference to the amount obtained by multiplying the number of barrels of that crude oil by the posted price or market price per barrel applicable to that crude oil.
SEC. 4. Government may undertake petroleum exploration and production. — Subject to the existing private rights, the Government may directly explore for and produce indigenous petroleum. It may also indirectly undertake the same under service contracts as hereafter provided. These contracts may cover free areas, national reserve areas and/or petroleum reservations, as provided for in the Petroleum Act of 1949, whether on-shore or off-shore. In every case, however, the Contractor must be technically competent and financially capable as determined by the Board to undertake the operations required in the contract.
SEC. 5. Execution of contract authorized in this Act. — Every contract herein authorized shall, subject to the approval of the President, be executed by the Petroleum Board created in this Act, after due public notice pre-qualification and public bidding or concluded through negotiations. In case bids are requested or if requested no bid is submitted or the bids submitted are rejected by the Petroleum Board for being disadvantageous to the Government, the contract may be concluded through negotiation.
In opening contract areas and in selecting the best offer for petroleum operations, any of the following alternative procedures may be resorted to by the Petroleum Board, subject to prior approval of me President:
(a) The Petroleum Board may select an area or areas and offer it for bid, specifying the minimum requirements and conditions; or
(b) The Petroleum Board may open for bidding a large area wherein bidders may select integral areas not larger than the maximum provided in this Act. Only the best offer shall be accepted and the selection thereon shall be made by a weighted system of evaluating the different aspects of each bid; or
(c) An area may be selected by an interested party who shall negotiate with the Petroleum Board for a contract under the terms and conditions provided in this Act.
SEC. 6. Nature of service contract. — In a service contract, service and technology are furnished by the service contractor for which it shall be entitled to the stipulated service fee while financing is provided by the Government to which all petroleum produced shall belong.
SEC. 7. Special stipulation in service contract. — Where the Government is unable to finance petroleum exploration operations or in order to induce the Contractor to exert the maximum efforts to discover and produce petroleum as soon as possible, the service contract shall stipulate that if the contractor shall furnish services, technology and financing the proceeds of sale of the petroleum produced under-the contract shall be the source of funds for payment of the service fee and the operating expenses due the Contractor.
SEC. 8. Obligations of contractor in service contract. — The arrangement pursuant to the preceding Section seven shall be such that the contractor, which may be a consortium, shall undertake, manage and execute petroleum operations. The contract may authorize the Contractor to take and dispose of and market either domestically or for export all petroleum produced under the contract subject to supplying the domestic requirements of the Republic of the Philippines, on a pro-rata basis. The Government shall oversee the management of the operations contemplated in the contract and in this connection shall require the contractor to —
On the other hand, the Petroleum Board shall —
(1) On behalf of the Government, reimburse the Contractor for all operating expenses not exceeding seventy per cent of the gross proceeds from production in any year: Provided, That if in any year the operating expenses exceeds seventy per cent of gross proceeds from production, then the unrecovered expenses shall be recovered from the operations of succeeding years.
(2) Pay the Contractor a service fee the net amount of which shall not exceed forty per cent of the balance of the gross income after deducting the Filipino participation incentive, if any, and all operating expenses recovered pursuant to Section 8 (1) above.
(3) Reimbursement of operating expenses and payment of the service fee shall be in such form and manner as provided for in the contract.
SEC. 9. Minimum terms and conditions. — In addition to those elsewhere provided in this Act, every contract executed in pursuance hereof shall contain the following minimum terms and conditions:
(a) Every contractor shall be obliged to spend in direct prosecution of exploration work and in delineation and development following the discovery of oil in commercial quantity not less than the amounts provided for in the contract between the Government and the Contractor and these amounts shall not be less than the total obtained by multiplying the number of hectares covered by the contract by the following amounts per hectare:
Period On-shore Off-shore Year1 P 3.00 P 3.00 Year2 3.00 3.00 Year3 3.00 6.00 Year4 3.00 6.00 Year5 3.00 6.00 Year6 9.00 18.00 Year7 9.00 18.00 Year8 9.00 18.00 Year9 9.00 18.00 Year10 9.00 18.00Provided, That if during any contract year the Contractor shall spend more than
the amount of money required to be spent, the excess may be credited against the money required to be spent by the Contractor during succeeding contract: years: Provided, further, That in case the same Contractor holds two or more areas under different contracts of service, the total amount of work obligations for exploration required for the initial term of all the contracts may be spent within any one or more of them as if they are covered by a single contract of service: Provided, further, That should the Contractor fail to comply with the work obligations provided for in the contract, it shall pay to the Government the amount it should have spent but did not in direct prosecution of its work obligations: Provided, finally.That the Contractor shall drill a minimum footage of test wells before the end of periods of time as may be specified in the contract with the Petroleum Board in order to be entitled to the extension of the exploration period for 3 years as provided for in paragraph (e) herein.(b) In case the Contractor renounces or abandons wholly or partly the area covered by his contract within two years from its effective date, it shall in respect of the abandoned area pay the Government the amount it should have spent, but did not, for exploration work during said two years, for which payment, among other obligations, the performance guarantee posted by the Contractor shall be answerable.
(c) Every contract shall provide for the compulsory relinquishment of at least twenty-five per cent of the initial area at the end of five years from its effective date and in the event of an extension of the contract from seven to ten years, an additional relinquishment of at least twenty-five per cent of the initial area at the end of seven years from its effective date. But the portion already delineated as production area pursuant to the succeeding paragraph shall not be taken into account in ascertaining the extent of relinquishment required. Any area renounced or abandoned under Sec. 9 (b) above shall be credited against the portion of the area subject to the contract which is required to be surrendered hereunder.
(d) The Contractor shall, from the discovery of petroleum in commercial quantity, delineate the production area within the period agreed upon in the contract.
(e) The exploration period under every contract shall be seven years, extendible for three years if the Contractor has not been in default in its exploration work obligations and other obligations after which the contract shall lapse unless petroleum has been discovered by the end of the tenth year and the Contractor requests a further extension of one year to determine whether it is in commercial quantity, in which event, another extension of one year for exploration may be granted If petroleum in commercial quantity has been discovered, the Contractor may retain after the exploration period and during the effectivity of the contract twelve and one-half per cent of the initial area in addition to the delineated production area: Provided, however, That the Contractor shall pay annual rentals on such retained area which shall not be less than ten pesos per hectare or fraction thereof for on-shore areas and not less than twenty pesos as determined by the Petroleum Board per hectare or fraction thereof for off-shore areas: Provided, further, That such rentals can be offset against exploration expenditures actually spent on such area.
(f) Where petroleum in commercial quantity is discovered during the exploration period in any area covered by the contract, the contract with respect to said area shall remain in force for production purposes during the balance of the ten year exploration period and for an additional period of twenty-five years, thereafter renewable for a period not exceeding fifteen years under such terms and conditions as may be agreed upon by the parties at the time of renewal.
(g) All materials, equipment, plants and other installations erected or placed on the exploration and/or production area of a movable nature by the Contractor shall remain properties of the Contractor unless not removed therefrom within one year after the termination of the contract.
(h) The Contractor shall be subject to the provisions of laws of general application relating to labor, health, safety, and ecology insofar as they are not in conflict with the provisions otherwise contained in this Act.
(i) Every contract executed in pursuance of this Act shall contain provisions regarding the discovery, production, sale and disposal of natural gas and casinghead petroleum spirit that shall be in line with the rules herein prescribed for crude oil except that:
(1) The market price shall be the basis for tax and all other purposes;
(2) After meeting requirements in secondary recovery operations priority shall be given to supplying prospective demand in the Philippines.
SEC. 10. Contract areas. — Subject to Section eighteen hereof, a contractor or its affiliate may enter into one or more contracts with the Government. Contracts for off-shore areas may cover any portion beneath the Philippine territorial waters or its continental shelf, or portion of the continental slope, terrace or areas which are or may be subject to Philippine jurisdiction: Provided, That for off-shore areas beyond water depths of 200 meters, the Petroleum Board may provide for more liberal terms than that provided for herein with respect to contract area, exploration period and relinquishment.
SEC. 11. Transfer and assignment. — That rights and obligations under a contract executed under this Act shall not be assigned or transferred without the prior approval of the Petroleum Board: Provided, That with respect to the transfer or assignment of contractual rights and obligations under this Act to an affiliate of the transferor, the approval thereof by the Petroleum Board shall be automatic, if the transferee is as qualified as the transferor to enter into such contract with the Government: Provided, further, That the affiliate relationship between the original transferor or a company which holds at least fifty per cent of the Contractor's outstanding shares entitled to vote and each transferee shall be maintained during the existence of the contract.
SEC. 12. Privileges of contractor. — The provisions of any law to the contrary notwithstanding, a contract executed under this Act may provide that the Contractor shall have the following privileges:
SEC. 13. Repatriation of capital and retention of profits abroad. — The Contractor shall be entitled to (1) repatriate over a reasonable period the capital investment actually brought into the country in foreign exchange or other assets and registered with the Central Bank; (2) retain abroad all foreign exchange representing proceeds arising from exports accruing to the Contractor over and above (a) the foreign exchange to be converted into pesos in an amount sufficient to cover, or equivalent to, the local costs for administration and operations of the exported crude and (b) revenues due the Government on such crude: Provided, however, That the Government and the Contractor shall stipulate in the contract the currency in which the Government revenues arising under (b) above are to be paid; (3) convert into foreign exchange and remit abroad at prevailing rates no less favorable to Contractor than those available to any other purchaser of foreign currencies, any excess balances of their peso earnings from petroleum production and sale over and above the current working balances they require, and (4) convert foreign exchange into Philippine currency for all purposes in connection with its petroleum operations at prevailing rates no less favorable to contractor than those available to any other purchaser of such currency.
SEC. 14. Full disclosure of interest in contractor. — Interest held in the contractor by domestic mining and petroleum companies and/or the latter's stockholders may be allowed to any extent after full disclosure thereof to, and approved by the Petroleum Board.
SEC. 15. Arbitration. —The Petroleum Board may stipulate in a contract executed under this Act that disputes in the implementation thereof between the Government and the Contractor may be settled in accordance with generally accepted international arbitration practice.
SEC. 16. Performance guarantee. — In order to guarantee compliance with the obligation of me Contractor in contracts executed under this Act, the Contractor shall post a bond or other guarantee of sufficient amount in favor of the Government and with surety or sureties satisfactory to the Petroleum Board, conditioned upon the faithful performance by the contractor of any or all of the obligations under and pursuant to said contracts.
IMPLEMENTING A GENCY
SEC. 17. There is hereby created a Petroleum Board composed of the Secretary of Agriculture and Natural Resources, as Chairman, and the Secretary of Finance, the Secretary of Justice, the Chairman of the Board of Investments, the Governor of the Central Bank, the Secretary of Trade and Tourism and the Director of Mines as members. The Director of Mines shall be its Executive Officer. The Board shall be attached to the National Economic Development Authority.
SEC. 18. Functions of Petroleum Board. — In accordance with the provisions and objectives of this Act, the Petroleum Board shall:
TAX PROVISIONS
SEC. 19. Imposition of tax. —The Contractor shall be liable each taxable year for Philippine income tax on income derived from its petroleum operations under its contract of service, computed as provided in Sections 20 through 25.
SEC. 20. Determination of gross income. — The gross income shall consist of:
SEC. 21. Deductions from gross income. - In computing the taxable net income, there shall be allowed as deductions:
(1) Filipino participation incentive; and
(2) Operating expenses reimbursed pursuant to Section 8(1) which includes amortization and depreciation as provided in Section 22.
SEC. 22. Amortization and Depreciation. — Intangible exploration costs may be deductible in full; all tangible exploration costs such as capital expenditures and other recoverable capital assets are to be depreciated for a period of ten years.
SEC. 23. Deductions not allowed. — In ascertaining the taxable net income, no deduction from gross income shall be allowed in respect of any interest or other consideration paid or suffered in respect of the financing of its petroleum operations.
SEC. 24. Return and payment of tax. — Every party
to a service contract shall render to the Petroleum Board a return for each
taxable year in duplicate in such form and manner as provided by law
setting forth its gross income and the deductions herein allowed. The
return
shall be filed by the Petroleum Board with the Commissioner of Internal Revenue
or his deputies or other persons authorized by him to receive such return within
the period specified in the National Internal Revenue Code and the Rules and
Regulations promulgated thereunder. Every party to a service contract shall be
subject to tax separately on its share of taxable income arising from such
contract.
SEC. 25. Applicability of the provisions of the National Internal Revenue Code. — All provisions of the National Internal Revenue Code and rules and regulations promulgated in relation therewith which are not inconsistent with the provisions of this Act shall be applicable to the Contractor.
SPECIAL PROVISIONS
SEC. 26. Option of exploration concessionaires. — A holder of a valid and subsisting petroleum exploration concession under the Petroleum Act of 1949 may, at his option enter into a contract of service under the rules of the Petroleum Act of 1949, subject to constitutional restrictions, with any local or foreign oil company under such terms and conditions as may be agreed upon by the concessionaire and the service contractor. As an alternative the concessionaire may convert his concession rate a service contract as provided in this Act through negotiations, with all the rights and privileges herein authorized: Provided, That the contract which may be concluded after said negotiation shall contain at least the minimum terms and conditions provided in this Act and shall take into account terms and conditions more favorable to the Government contained in contracts involving exploration pursuant to this Act: Provided, further, That the exploration period shall commence to run from the effective date of the original concession, except when the concession has been effective for a period of seven years or more, in which case the contractor shall be required to commence exploratory drilling operations within a period of not exceeding eighteen months from the date of effectivity of the service contract. If the contractor is not in default in the drilling operations as hereunder required, an extension of the exploration period may be granted as provided in Section nine, paragraph (e) of this Act.
SEC. 27. Alternative option of exploration concessionaire. —The concessionaire referred to in the preceding section may form a consortium with another company or companies and jointly enter into a service contract with the Government under this Act, with the right to assign to the consortium, subject to the approval of the Petroleum Board, the area covered by his concession which shall thereupon be governed by the provisions of this Act: Provided, That the voluntary relinquishment of the concession and its assignment, as well as all technical data on the area resulting from studies conducted by the concessionaire and subsisting improvement introduced by him thereon, shall be evaluated and given a fair value which may constitute his contribution, wholly or in part, to the consortium: Provided, however. That the exploration period under the new contract shall commence to run from the date of the effectivity of the contract if it covers areas in addition to the assigned areas; otherwise the provisions of the preceding section shall apply: Provided, further, That duly published applications, for exploration concessions or bids therefor already awarded by the Secretary of Agriculture and Natural Resources under the provisions of the Petroleum Act of 1949 shall be recognized and the corresponding deeds of concessions issued accordingly: Provided, finally, That exploration concessions on which the holders thereof failed to perform for three consecutive years the exploration work required under the provisions of the Petroleum Act of 1949, as amended by Republic Act Numbered Five Thousand Eighty-Six shall be considered automatically cancelled.
SEC. 28. Filipino Participation Incentive. —The Contractor under a service contract in which Philippine citizens or corporations have a minimum participating interest of fifteen per cent in the contract area may subject to reasonable conditions imposed by the Petroleum Board be granted a government subsidy, commensurate with the scope of Filipino participation, i.e., a Filipino participation incentive, not exceeding seven and one-half per cent, which shall be computed by deducting the said allowance from the posted or market price, whichever is the higher, of crude oil exports produced in the contract area, and from the market price of crude oil produced in the contract area, sold or disposed of for consumption in the Philippines.
SEC. 29. Publicity. — Negotiation with the Government for the conclusion of a contract under this Act and every contract concluded hereunder shall be given publicity consistent with the best interest of the Government.
SEC. 30. Provisions of Petroleum Act applicable. —The provisions of the Petroleum Act of 1949, as amended, shall not be applicable to the service contract provided in this Act, except the, following Articles:
SEC. 31. Preference to Local Labor. — The Contractor shall give priority in employment to qualified personnel in the municipality or municipalities or province where the exploration or production operations are located.
SEC. 32. Foreign Assistance. — Nothing in this Act or of any other law shall preclude the Government of the Republic of the Philippines, through the Petroleum Board or any other proper office or agency, from negotiating or entering into any agreement with any foreign country or government for assistance in terms of equipment, technical know-how and financing for the exploration and production of indigenous crude oil and its byproducts.
SEC. 33. Funds. — To carry out the purpose of this Act, there is hereby appropriated, out of any funds in the National Treasury not otherwise appropriated, the sum of five hundred thousand pesos for the fiscal year nineteen hundred seventy-three. Hereafter, the necessary appropriations shall be included in subsequent General Appropriations Act.
SEC. 34. Repealing Clause. — All laws, executive orders and regulations inconsistent with the provisions of this Act are hereby repealed, provided that no existing rights shall be prejudiced thereby.
SEC. 35. Effectivity date. — This Act shall take effect upon its approval.
Done in the City of Manila, this thirty-first day of December, in the year of
Our Lord,
nineteen hundred and seventy-two.
(Sgd.) FERDINAND E. MARCOS
President
Republic of the Philippines
By the President: (Sgd.) ALEJANDRO MELCHOR Executive Secretary