Question & AnswerQ&A (PRESIDENTIAL DECREE NO. 87)
The Act is known and may be cited as the "Oil Exploration and Development Act of 1972."
The policy is to hasten the discovery and production of indigenous petroleum using government and/or private resources to maximize benefits for the Filipino people and Government revenues while assuring just returns to private enterprises providing services, financing, and technology.
Petroleum includes any mineral oil, hydrocarbon gas, bitumen, asphalt, mineral gas, and similar naturally associated substances, excluding coal, peat, bituminous shale, or other stratified mineral fuel deposits.
Petroleum operations mean searching for and obtaining petroleum within the Philippines through drilling, pressure, suction, and all operations incidental thereto, including transportation, storage, handling, and sale of petroleum obtained but excluding transportation outside the Philippines and refining or processing.
The Government may undertake exploration and production directly or indirectly under service contracts, and the contractors must be technically competent and financially capable as determined by the Petroleum Board.
A service contract involves the contractor supplying services and technology for which they receive a stipulated service fee while financing is provided by the Government to which all petroleum produced belongs.
The contractor must spend specified minimum amounts per hectare on exploration work annually, with different amounts for on-shore and off-shore areas over ten years and drill minimum test well footage within contractually specified time periods.
The exploration period is seven years, extendible for three years if the contractor fulfils obligations without default, plus a possible further one-year extension to confirm commercial quantity discovery, with potential for another one-year extension thereafter.
Contractors enjoy tax exemptions except for income tax, exemptions from tariffs on importation of equipment and materials, approval for alien technical personnel entry, exportation of petroleum subject to domestic supply priority, and protection of contract rights among others.
Contractors have rights to repatriate capital investments, retain foreign exchange from exports beyond local costs and Government revenues, convert peso earnings into foreign exchange, and convert foreign exchange into Philippine currency at favorable rates.
If the contractor renounces or abandons the contract area within two years, it must pay the amount it should have spent on exploration in the abandoned area, secured by the performance guarantee posted.
Contractors with at least fifteen percent Filipino participation may receive a government subsidy, computed as a deduction from posted or market price, not exceeding 7.5%, to encourage Filipino involvement in petroleum operations.
The Petroleum Board is composed of various secretaries and officials including the Secretary of Agriculture and Natural Resources as Chairman. It administers contracts, defines contract areas, approves assignments, promulgates rules, and oversees compliance.
Contractors must operate using modern and scientific methods to maximize production, avoid hazards to life and property, prevent pollution, maintain safety standards, and comply with health, labor, and ecological laws not inconsistent with this Act.
Contractors are liable for Philippine income tax on income from petroleum operations, with gross income computed from sales at posted or market prices and allowed deductions including Filipino participation incentives and reimbursed operating expenses.