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Report No. 3199a-PH la LFILE C OP Y

PhilippinesEnergy Sector Survey(In Two Volumes) Volume 1: Main ReportFebruary 12, 1982

East Asia and Pacific Regional OfficeProjects Department; in association withThe Asian Development Bank

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be Llsed by recipientsonly in the performance of their official duties Its contents mav not otherwisebe disclosed without World Fank authorization.

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ABBREVIATIONS AND ACRONYMS

ADB - Asian Development BankBED - Bureau of Energy DevelopmentBEU - Bureau of Energy UtilizationBISUDECO - Bicolandia Sugar Development CorporationBOE - Board of EnergyBOI - Board of InvestmentsBPD - Barrels per (calendar) dayBTU - British thermal unitCASUCO - Cagayan Sugar CorporationCNED - Center for Nonconventional Energy DevelopmentDBP - Development Bank of the PhilippinesEDC - Energy Development CorporationENERCON - Energy conservation (an industry-sponsored energy

conservation movement)ENMAP - Energy Management Association of the PhilippinesGDP - Gross Domestic ProductGNP - Gross National ProductGOP - Government of the PhilippinesGWh - Gigawatt hourISA - International Sugar Agreementkm - KilometersKV - Kilo voltkWh - Kilowatt hourLPG - Liquid petroleum gasLRMC - long run marginal costMMBOE - Million barrels of oil equivalentMECO - Manila Electric CompanyMOE - Ministry of EnergyMTOE - Thousand tons of oil equivalentMW - MegawattNASUTRA - National Sugar Trading CorporationNCA - National Coal AuthorityNEA - National Electrification AdministrationNEDA - National Economic Development AgencyNGO - Non-governmental organizationNPC - National Power CorporationOMS/OMY - Output per manshift (output per manyear)PAEC - Philippine Atomic Energy CommissionPANELCO - Pangasinan Electric CooperativePCCP - Philippines Chamber of Coal Producers Inc.PGI - Philippine Geothermal, Inc.PHILSUCOM - Philippine Sugar CommissionPNAC - Philippine National Alcohol CommissionPNB - Philippine National BankPNOC - Philippine National Oil CompanyR&D - Research and DevelopmentSWIP - Small-scale water impounding projectsTOE - Tons oil equivalentTPA - Tons per annumUSAID - United States Agency for International DevelopmentWASP - Wien Automatic Systems Program

FOR OFFICIAL USE ONLY

Page 1 of 2

Table of Contents

Page

Preface

SUMMARY AND RECOMMENDATIONS ....................................... i - xiii

- 1. INTRODUCTION TO THE SECTOR .................................... 1

Origins of the Survey ......................................... 1The Energy Background ......................................... 2Commercial Energy Consumption ................................. 2Consumption of Petroleum Products ............................. 5Consumption of Electricity .................................... 7Noncommercial Energy Consumption .............................. 8

2. COMMERCIAL ENERGY SUPPLY ...................................... 11

Overview . ...................................................... 1The Supply of Petroleum Products .............................. 12Refined Products .............................................. 13Coal: Present Levels of Production and Consumption .... ....... 15The Supply of Electricity ..................................... 17Hydroelectricity .............................................. 18Geothermal Electricity ........................................ 19Transmission and Distribution ................................. 20

3. ENERGY PRICING, TAXES AND SUBSIDIES ........................... 22

Introduction .................................................. 22Petroleum Products ............................................ 22Fiscal Contribution of the Sector ............................. 23The Power Sector .............................................. 25NPC Wholesale Rates ........................................... 25Retail Power Rates ............................................ 27

4. ENERGY SECTOR ORGANIZATION AND INSTITUTIONS ................... 29

Overview . ...................................................... 29The Ministry of Energy ........................................ 29The Hydrocarbon Sector ........................................ 31

The Philippine National Oil Company ....................... 31The Power Sector .............................................. 31

National Power Corporation ................................ 31National Electrification Administration ................... 32

Other Organizations ........................................... 32The Philippine National Alcohol Commission ................ 32Noncommercial Energy ...................................... 33

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Batik authorization.

Page 2 of 2

Table of Contents (Cont'd.)

Page

5. ENERGY DEMAND IN THE 1980s ..................................... 34

Overview ............ ........................................... 34Sectoral Composition of Demand ................................. 34The Consumption of Petroleum Products .......................... 35The Demand for Coal ............................................ 39The Demand for Electricity ..................................... 40

6. ENERGY SUPPLY IN THE 1980s ..................................... 43

Overview ............ ........................................... 43The Supply of Petroleum ........................................ 44The Supply of Coal ............................................. 46Nonconventional, Renewable Energy .............................. 48The Electric Power Expansion Program ........................... 48The Alcogas Program ............................................ 50

CHARTS:

1. Organizational Chart, Ministry of Energy2. Functional Chart, Bureau of Energy Development3. Functional Chart, Bureau of Energy Utilization4. Organizational Chart, Philippine National Oil Company5. Functional Chart, Board of Energy

ANNEXES appearing in Volume II:

1. The Outlook for Biomass Alcohol Production

2. The Coal Sector

3. Petroleum: Exploration and Production

4. The Electric Power Expansion Program (1980-89)

5. The Outlook for Reducing Petroleum Demand in the Transport Sector

6. The Industrial Demand for Petroleum Fuels(Including Prospects for Conservation and Conversions)

7. Nonconventional Renewable Energy

Preface

More than a year and a half has elapsed between the date of the EnergySector Mission (May, 1980) and the issue of its final report. Duringthis period there have been some changes in the energy situation and insome of the Government's programs. Domestic oil production has fallenfar short of expectations, and projections of future output have beenradically reduced, which is disappointing; but oil consumption has alsobeen lower than expected, which is heartening. Indeed, the total demandfor commercial energy fell in 1980, and again in 1981, despite continuinggrowth in the economy. An important new open-pit coal deposit appearsto have been proved up on Luzon. The alcogas program has been trimmedback sharply, but a new coco-diesel program has been given high priority.Incentives for industries that invest in energy-conservation plant andequipment have been strengthened. The Government has recognized theneed to rationalize retail electricity rates, and to increase the bulktariffs of the National Power Corporation so that investment contributionsfrom the national budget can be phased out. There are signs of bettercoordination in investment planning between the National Power Corporationand the National Electrification Administration. Two new versions of theGovernment's energy program have been published, reflecting the Government'sclose monitoring of its energy problems and its willingness to make changesin targets and programs to make them more realistic.

No attempt has been made to rewrite the report to reflect all the changesthat have occurred since the field work was done. Some updating has beendone, sometimes in the text, sometimes in footnotes. But, except whereexplicitly stated otherwise, the report reflects the situation as of May,1980. Perhaps the most important updating fact to note is the continuingdifficulty being experienced by the Government in deciding how rapidly toinvest in new oil-replacing generating capacity. The Bank and the Govern-ment are in continuing discussions on this inherently difficult, andfinancially very important, problem.

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PHILIPPINES

ENERGY SECTOR SURVEY

SUMMARY AND RECOMMENDATIONS

Introduction

1. A joint World Bank/Asian Development Bank mission/l visited thePhilippines in April-May 1980 to conduct an energy sector survey in responseto a Government request to provide it with an independent review of thecountry's energy prospects. A secondary objective was to identify ways inwhich the two banks, singly or together, might assist the program during thenext few years. The Ministry of Energy (MOE) had already published a majoranalysis and target-setting document, the Ten Year Energy Program, 1980-89;the Survey used this as its point of departure and main fram of reference.In July, 1980, after the mission's return to Washington, the Government com-pressed its Ten-Year Program into a new Five-Year Program and issued a newdocument. A year later, an updated and revised version (The National EnergyProgram: 1981-86) was published. Some of the subsequent projections aremore optimistic than those in the 1980 Ten-Year Program (e.g. for oil explora-tion activity, proving up coal reserves, geothermal development, reduced oilconsumption in electricity generation, reduction in the overall demand foroil); other projections are less optimistic (e.g. 1985 coal output is cut bya third and oil output by over 50%). The mission's findings and recommenda-tions are not significantly affected by the new numbers presented in eitherthe 1980 Five-Year or 1981 Six-Year Programs.

Overview of Major Findings and Recommendations

2. The Government has in place a sound organization for energy plan-ning, has an adequate legislative basis for dealing with energy questions,and has an able staff of senior planners who have given the Government aclear sense of direction for the handling of its energy concerns. There is

/1 The mission consisted of:

B.K. Abadian, economistM. Ahmed, economistG.B. Baldwin, economist, Chief of MissionP. Bodora, transport economist (ADB)J. Cavallotti, power engineer/system plannerV.V. Desai, rural energy economist (ADB)

(M. Perlas, economist, ADB, assisted Mr. Desai)T.J. Goering, agricultural economistP.H. Halstead, geologist/geophysicist (consultant)R.J. Piggott, mining engineer (consultantR.H. Sheehan, power engineer/system planner

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a keen appreciation of the need to limit the demand for commercial energy,especially for oil, and to substitute domestic primary sources for importedenergy. Government has moved with commendable vigor to push up oil prices;it has moved much less vigorously to increase electricity prices or toeliminate inequities in the electricity tariff structure. One result iscontinuing chronic weakness in the financial condition of the National PowerCorporation (NPC), the country's largest public corporation; NPC will accountfor over half the country's energy investments during the coming decade.

3. There is little hope of major relief from the present heavy energy-pressure on the balance of payments. If anything, the pressure may increaseslightly. While unlikely to improve, the outlook is not grim, however:the country should be able to live with the high bills for energy importswhich world conditions have forced on many countries. The economy will re-quire several more years to adjust to the new facts of world energy scarcities.The Government must strengthen demand management by making all forms of energyprogressively more expensive for everyone, constantly pressing the limits ofpolitical acceptability and of the economy's need for more energy to supportgrowth. The conservation program may be starting to take effect, for commercialenergy consumption dropped slightly in 1980-81 despite continued, althoughslower, growth of the economy. In the spring of 1981 steps were taken tostrengthen the conservation activities. A new law imposed mandatory audits(paid for by the companies) on firms using more than 1 million liters of oilper annum; they must also submit annual reports on past and future energyconsumption. Earmarked concessional loan funds to encourage energy-donser-vation investments were introduced. The Government has also moved to re-align the relative prices of petroleum products in order to (i) forestallundesired substitutions and (ii) assure that domestic fuel oil (Bunker C)costs will be competitive with other industrializing countries of the region.On the supply side, the main need is to strengthen the move from general plansto detailed programming of sub-sectoral programs. More detailed comments onwhat needs to be done in each of the sub-sectors are presented at the end ofthe Summary and in the text.

Oil Dependence and Oil Imports

4. In 1979 the country depended on imported oil for 92% of its com-mercial energy supplies./l The main objective of the Energy Program is toreduce this high dependence on imported petroleum by (a) limiting the growthof demand for oil-derived forms of energy and (b) developing domestic energysources that can substitute for imported energy. The country appears tohave relatively favorable domestic energy resources (more favorable, in allprobability, than Thailand, Korea, or Japan although less favorable thanIndonesia, Malaysia, or Australia). The Energy Program has set ambitioustargets for energy-resource development. The Government has organized itsenergy program effectively and has adopted sensible and pragmatic policiesto guide its own and private-sector activities. The Survey neverthelessfound that the amount of balance-of-payments relief achievable by 1990

/1 With domestic oil production starting in 1979, rising in 1980, thenfalling steeply in 1981, dependence on imported oil has dropped toaround 85%.

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through development of domestic resources, while substantial, is much lesspromising than is suggested by the Ten-Year Program./l

5. Projecting future oil imports is highly speculative, since theywill depend on a number of factors all of which are undergoing rapid change(e.g. overall growth of energy consumption, substitution against oil in somemajor uses, the discovery and exploitation of domestic oil resources, themixing of oil with other liquid fuels). It is nevertheless possible to makesome plausible "guestimates." The starting point is 1980 when oil consump-tion was 77 mn. bbls. (57 mn. consumed in non-power uses, 20 mn. for powergeneration). It is reasonable to assume that power-sector use may fall to5-10 mn. bbls. by 1989. Non-power use should continue to rise, however, al-though at a rate slower than GDP. If we assume a 6% growth rate for GDP anda (low) 3% growth rate for non-power oil consumption, then the 57 mn. bbls.,used in 1980, would rise to 74 mn. bbls. in 1989, and total consumption wouldbe somewhere between 79-84 mn. bbls. Domestic oil production in 1980 was3.8 mn. bbls. or about 5% of total consumption (it fell to 1.8 mn. in 1981).Estimates of end-of-decade domestic oil output vary as widely as 1-20 mn. bbls.A figure of 5-6 mn. bbls. is perhaps a reasonable "most probable" estimate;this would be 6% of total needs, giving a 94% import requirement. Using theabove figures, oil imports in 1989 would come to some 74-79 mn. bbls., thesame level experienced in 1980-81. It is possible but unlikely that eventscould turn out so favorably that oil imports would actually be significantlylower in 1989 than in 1980. They might well be higher. Furthermore, therewill be some new energy imports, of coal and of nuclear fuel, beginning inmid-decade. Thus total energy imports seem likely to fall in the range of25-30% of total goods and service exports (vs. 35-40% in 1980-81). The im-provement in the ratio would come not from an absolute reduction in oil im-ports but from rising exports and rapid growth of non-oil energy sources.

6. The Ten-Year Energy Program of 1980 made projections of future oilproduction, and of imports, which the Bank judged far too optimistic. In1979, the first year of domestic oil production, domestic consumption wasabout 240,000 bbls. per day. The Government's 1980 projections of futurediscoveries and production looked forward to reaching an output of 120,000bbls. a day by mid-decade, a level that would have allowed all the growth ofdemand, plus some replacement of today's demand, to be met from domestic pro-duction. The Survey found that such an outcome is highly unlikely, mainlyfor geologic reasons: the three commercial finds made to date, and the mostprobable future finds, are small fields whose recoverable oil will be exhaustedquickly (the initial Nido field is believed to be the smallest producing off-shore oilfield outside the United States). There is a very small chance thata big find may be made, but this is not a prospect that can provide a basisfor planning; even if a big find were made early in the decade, it could notbe brought into production for seven or eight years. By the spring of 1981the Government had made tentative new estimates of domestic oil productionand consumption which were both somewhat lower than those the Survey had made

/1 Figures on future production in the Ten-Year Program are Government tar-gets, not predictions of what it expects will actually occur. WhileGovernment officials acknowledge that performance will almost certainlybe much lower than the targets, they believe it useful to have quanti-tative targets. The Bank agrees, but only to the extent that targetshave some chance of being met.

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a year earlier. The Government was even wondering if oil demand may havepeaked and might actually be lower in 1990 than in 1980. While possible,the Bank feels such a trend highly unlikely.

Energy Use

7. Not counting energy from humans and animals, total energy consump-tion is estimated to consist of about 75% commercial and 25% noncommercialforms; the latter is divided between household and industrial use and con-sists almost entirely of locally-available biomass materials (mainly fire-wood, rice hulls, and coconut husks). Noncommercial energy uses have notyet been well studied in the country, and relatively little attention hasso far been given to them beyond some technological experimentation fundedby the Center for Nonconventional Energy Development (CNED). Commercialenergy is consumed primarily in three sectors, commercial/residential (22%),industry (45%), and transportation (33%), with agriculture and residentialconsumption of non-electrical energy being small. As in many other countries,the use of commercial energy was growing much faster than GDP until the initialoil shock of 1973/74. Since then, the elasticity of commercial energy hasfallen from around 1.5 to well under 1.0./1 This figure is even reported tohave become negative in 1980 and 1981. Such sharp initial reductions in theelasticity figure are likely to be temporary, however. They reflect the adop-tion of relatively easy, low-cost adaptations throughout the economy to higherenergy prices. The elasticity figure may be expected to turn upward again asthe economy exhausts the available non-cost and low-cost conservation oppor-tunities. A reasonable estimate is that the Philippines should expect anelasticity ratio of between 0.75 and 1.0 over the coming decade; this rangewould still be a considerable improvement over the pre-1974 figure. One ofthe biggest gains in the decade will be a reduction in the degree of depend-ence on imported oil. By 1990 the present ratio of around 85% is expected tofall to 55-60%, reflecting slow or no growth in oil consumption but very rapiddevelopment of domestic energy sources, including some oil but, especially, ofgeothermal, coal, and hydro resources. Despite the expected gain in the oil-import dependency ratio, the bill for oil imports will probably continue togrow (as noted in para. 5 above).

8. The Government has relied primarily on the price system to encourageconservation and changes in energy use. The promptness and vigor with whichthe Government has increased domestic petroleum-product prices compares favor-ably with most other countries of the region. There have been 12 general in-creases in petroleum product prices since 1974 and today the index of suchprices (including new taxes which have been introduced) is well above thelevel to which world crude prices alone would have pushed them. Changes inrelative product prices have been carried too far, however, and have causeda reduction in gasoline consumption, and an increase in diesel, that has ledto gasoline surpluses that can probably be eliminated only by changing rela-tive gasoline/diesel prices. Electricity prices have also been raised sub-stantially (oil is used to generate 68% of the country's electricity); thelevel and structure of electricity tariffs are less satisfactory than inpetroleum, however. NPC, the country's largest public corporation, is ina weak financial condition: it needs a further increase in its wholesale

/1 Percentage growth in energy use over percentage growth in GDP.

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rates -- plus better control of costs -- to give it even a minimally accept-able cash flow; to permit higher wholesale rates, retail rates would alsohave to rise. Excessive inequities among regions and neighboring distribu-tion co-ops should be reduced; and the subsidies given to residential con-sumers in Metropolitan Manila appear unnecessarily large.

9. Both the Government and private industry have mounted educationcampaigns to encourage household and (especially) industrial and commercialusers to use and waste less energy. Energy-intensive industries have beenrequired to submit quarterly reports of their energy use and of steps theyintend to take to increase the efficiency of energy use. In mid-1981, theGovernment formally approved new tax incentives to encourage investment inenergy-saving plant and equipment. The big gains in industrial energy savingshave yet to occur; they will arise not from the cumulative effect of smallchanges widely spread throughout industry but from major changes made in thesmall number of industries that use large amounts of energy and in whichenergy forms a large part of total costs. The 1979 round of oil price in-creases has made investment in oil-saving equipment, or in conversion to coal,so profitable that several large companies are moving to take advantage of thenew cost-reducing opportunities. Much the largest potential reduction in oiluse in industry lies in cement manufacture, where only one or two of the coun-try s 17 cement plants now use coal. This is the one industry where the Govern-ment has ordered a shift from oil to coal; no shifts have yet taken place, buta program has been worked out which should see a substantial reduction in thatindustry's oil consumption by 1985. A large part of industry's future coalsupplies are likely to come from abroad, so the net savings in foreign ex-change from conversions will be far less than the savings on oil imports; theywill nevertheless be substantial (roughly one-third).

10. Saving foreign exchange through oil-to-coal conversion and conser-vation in industry will not be as large as in electricity generation, however.Although electricity uses about two-thirds as much oil as industry, the oppor-tunities for substituting other primary energy sources are larger in powerthan in manufacturing and mining. In addition, careful planning of theelectricity industry's investment program can save the country huge amountsof foreign exchange: electricity will account for two-thirds of the country'senergy investments during the next decade, is much the largest spender ofpublic capital, and receives much of its funding from foreign sources, whichinvolves heavy debt-service obligations. About 85% of capital spending inpower is carried out by the NPC, the Government corporation responsible forall new generating and transmission activity in the country. Although newmanagement is slowly strengthening NPC, its long-run planning, its finances,and its procurement practices all need improvement if this large program isto realize its potential contribution to national foreign exchange savings.A recent review of its program for investment in new generating facilitieshas shown how the program could be reduced or stretched out; uncertainty still ,)surrounds the size and composition of the program, however.

The Outlook for Developing Domestic Energy Resources

11. In addition to its (probably modest) oil and gas resources, thecountry has some excellent hydro potential, among the most promising geo-thermal reservoirs in the world, a considerable amount of coal, and a large

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and varied amount of biomass materials for the production of alcohols(ethanol and methanol), charcoal, and fuelwood. With its combination ofnatural and human resources, the Philippines has the capability of becom-ing a world ,leader in the development of both geothermal and biomass energyapplications.

12. In looking ahead at primary sources of electricity generation,geothermal, coal, and nuclear power all seem very close together, costwise,for base-load plants. This statement is based on 1980 prices. As coal isexpected to increase in relative price during the decade, geothermal andnuclear possibilities seem likely to become even stronger candidates fordevelopment (the country's first nuclear plant has resumed constructionafter an 18-month interruption following the accident at the Three MileIsland plant in the United States). The role of large-scale hydro storageprojects will not clarify until NPC extends its planning horizon from 10years to 15 years and commissions additional feasibility studies to increaseits inventory of projects available for final decision.

13. The Bank and NPC have examined intensively the question of howrapidly existing oil-fired base-load plant should be moved to higher posi-tions on the load curve or completely retired. It is clear that oil-firedunits are no longer the least-cost method of producing base or intermediateload electricity. Therefore, as soon as new non-oil fired power plants areconstructed to meet load growth the existing oil-fired units will graduallybe displaced to higher positions on the load duration curve, automaticallyreducing oil consumption. The key question facing NPC and the Government iswhether or not it is economically advantageous to increase the investment pro-gram over and above the level needed to meet load growth in order to speed upthe displacement and retirement of existing oil units. The Bank's analysisshowed that there would be no clear advantage to the economy in investingheavily for accelerated retirements: the present-value differences betweenthe most attractive programs to accomplish this objective, and limiting in-vestment to that needed only to meet load growth, are too small to give anyclear answer. Decisions must therefore be made on grounds of finance,/l NPC'sability to manage an accelerated program, and certain technical considerations.Even without an accelerated program, the power sector will be using 25-30%less oil in 1989 than it used in 1981. While many diesel sets (mostly private)will be retired when cheaper bulk supplies become available from NPC, a fewnew diesel units will continue to be built during the decade in remote loca-tions where no cheaper alternative exists.

14. Hydro energy: The main potential for large-scale development lieson the islands of Luzon and Mindanao. There are major differences in theresources of these two large islands: Luzon has more seasonal rainfall andis more mountainous; its major hydro opportunities consist of storage damswhose reservoirs, in almost all cases, would have to serve the needs ofirrigation as well as power generation. With irrigation holding priority,Luzon's prospective hydro sites can serve peak or intermediate loads butnot base-loads. The four projects under consideration for construction willbe large and very expensive and can be justified today only as multipurposeprojects. On Mindanao, on the other hand, a high annual rainfall is well-distributed through the year, permitting the construction of much cheaperrun-of-river generating plants. Five such plants, with a combined capacityof 600 MW, are under construction and will be commissioned by 1985.

/1 The Government is in fact under considerable financial pressure tolimit its public investment program.

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15. Mini-hydro plants of up to 5 MW constitute an important part ofthe generation program planned by the National Electrification Administra-tion (NEA) in order to make each rural co-op self-sufficient in its elec-tricity supply. While the self-sufficiency objective is highly question-able, there is no doubt that small-scale run-of-river hydro schemes (manyof about 1 MW) can produce power inexpensively at many locations, and deserveencouragement.

16. The geothermal resources of the Philippines are associated withits volcanic geology. Known and potential sites are widely distributed, anda subsidiary of the Philippine National Oil Company (PNOC) has already de-veloped three sites to the point where the country today has geothermal powergeneration second only to the United States. By the end of the decade, thePhilippines may well become the world's leading producer of geothermal elec-tricity. Such energy is not much cheaper than coal-fired or nuclear power, how-ever, since it requires heavy investment in wells and in steam-gathering pipes(a 55 MW geothermal plant needs 10-20 wells costing c.$1.5 mn. each, plus c.$15 mn.of piping). Some sites have been developed through use of a foreign firm, whichsells steam to NPC for US dollars (the dollar cost per kWh generated is aboutthe same as for coal-fired generation). To the extent that PNOC can developits own capability, the foreign exchange cost of geothermal steam will begreatly reduced (drilling and pipe costs will continue to require some for-eign costs). PNOC is already developing two sites under its own responsi-bility. One (at Tongonan, on Leyte) is among the largest geothermal fieldsin the world; the field's potential output of around 900 MW will be severelylimited until the time comes, perhaps soon, when an interconnection betweenLeyte and Luzon can be justified. In the Visayas, an interconnection is tenta-tively planned between southern Negros and Cebu which will permit use of Negros'geothermal steam on two islands now heavily dependent on oil-fired and dieselgeneration. The top priority area for near-term geothermal development iscentral or northern Luzon, where potential sites are close enough to thedominant Metro Manila market to use existing transmission lines.

17. Coal: The Ten-Year Energy Program set a target of 6.0 million tonsof output by 1989; the Five-Year "compressed program" aims at producing 2.3million tons by 1985. Both targets seem too ambitious; an output of 2.0 to2.5 million tons by 1989 would be more realistic and would represent a highlycreditable achievement./l In 1980, the industry produced about 300,000 tonsfrom 36 underground mines, none of which yet produces over 100 tons of coala day (25-30,000 tpa). Coal deposits are fairly widely distributed and, al-though not yet well inventoried, appear sufficient to permit at least 50years of exploitation at 2.5 million tons a year. Only two important sitesfor opencast mining have been identified, so the sector's ambitious target isunlikely to be met from this relatively quick-yielding and low-cost source.On fairly optimistic assumptions, two large opencast mines may be producing1.5 million tons by 1989. The most that can be expected from a modernizedset of about 10-12 of today's underground producers is another 1.0 tons. Theincrease of just over 2.0 million tons a year which is judged feasible willrequire investment of around US$100 per ton for a total of over US$200 mil-lion; this does not include investment in mine-to-market roads, a substantial

/1 This range represented the mission's views as of mid-1980. Increasedattention being paid to coal since then, plus apparent confirmation ofan important open-pit deposit in Central Luzon, suggest that the projected1989 output may be somewhat higher, say between 2.5 to 3.5 million tons.

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amount of which will be necessary to permit the volume of truck transportneeded to move the greatly-expanded volume of output. At present, no de-tailed program has yet been drawn up for expanding the industry and littlethought has yet been given to how the industry's needs will be financed.

18. With coal use expected to grow rapidly in the power, cement, anda few other industries, total consumption will probably fall between 4-6.5million tons by the end of the decade. Perhaps half this amount will haveto come from imports; the MOE has recently begun negotiations with Australiato secure necessary supplies under long-term contracts that will avoid thenecessity of buying on the spot market as needs develop. The importation,and domestic distribution, of substantial quantities of coal will be a newexperience for the country and is creating many requirements for new invest-ment in coalhandling facilities (loading and unloading at ports, mixing-plantand washeries, inter-island barge capacity, trucks). A study of these re-quirements, by Australian consultants, has recently been completed. Toremove some of the uncertainty that has held back the coal-conversion plansof cement producers the Government has guaranteed them that PNOC would supplythem with coal at a price no greater than 65% of the cost of Bunker C fueloil. In September, 1980, the Government established a new agency, theNational Coal Authority (NCA), to assume responsibility for coal importsand distribution (but not for domestic production). It now appears that theNCA will exercise an exclusive responsibility for coal imports and will resellto domestic buyers under a pricing policy yet to be determined (NCA is ex-pected to cover its costs from sales margins). Domestic coal will continueto be sold under private trading but probably within a price band set by NCA.

19. Alcogas: The existence of a large sugar industry has stimulatedGovernment interest in following Brazil's lead in mounting a major programfor alcohol production to displace about 20% of gasoline requirements./l TheTen-Year Energy Program fixed a target of nearly one billion liters of alcoholby 1989 from nearly 50 distilleries grouped into three classes (the "compressedprogram" aims at about 400 million liters, from 25 new sugar distilleries, by1985). The Philippine National Alcohol Commission (PNAC) has been establishedto direct the program and a small staff has been appointed. The program ishaving difficulty getting launched, however. A key problem has been weakinterest in the program on the part of the sugar industry which, prosperingwith the high world sugar prices of 1980, had little to gain by dedicatingeither present or expanded capacity to alcohol production at lower rates ofreturn. No good study has yet been made of the economics of the alcogas pro-gram; on the scattered figures now available, the Survey found reason to doubtthat the program would be economic when sugar prices are strong. Distillationtechnology is also changing rapidly, and it is reasonable to expect considerablereductions in investment requirements during the next few years. As a resultof these uncertainties, it would seem unwise to proceed now with the largeinvestments outlined in the initial program. But continuation of the programdeserves encouragement, although scaled down to a research and development,or pilot project, basis during the next few years.

20. Nonconventional energy: A Center for Nonconventional Energy Develop-ment (CNED) -- originally part of the MOE but transferred to PNOC late in1981) is supporting a number of R&D activities designed to identify innovative,

/1 Recently, the Government has greatly intensified its interest in producinga coconut oil that can be blended with diesel fuel. See Chapter 6.

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low-cost energy-producing or energy-saving devices that can be offered tothe private sector for manufacture and distribution. The Center is tooyoung for any of its projects yet to have resulted in any successful com-mercial products; nevertheless, the Center has had strong support from boththe United States and German Governments, and is a useful speculative in-vestment in broadening long-run energy options. An unrelated program fordeveloping nonconventional energy, in the electric power sector, has beenmounted by NEA. The NEA has launched an ambitious program for generatingelectricity in small-scale hydro and dendro-thermal (wood-fired) plants.More than US$60 million in bilateral loan assistance has been secured fromBritain and France, and a technical assistance agreement has been signed withthe Peoples' Republic of China. As much as 400-500 MW of new generating ca-pacity may be installed under this program by 1989; this would add about 15%to the capacity to be added by NPC. If NPC and NEA can coordinate their in-vestment and generating programs, and if NEA is willing to be selective in-stead of autarchic in its generating program, mini-hydro and dendro-thermalplants can make a useful contribution to reducing oil-dependence at acceptablecosts.

SUMMARY OF SPECIFIC RECOMMENDATIONS

21. The Survey's specific recommendations are summarized below:

A. ENERGY SUPPLY

(1) Coal

(a) Original plans for expansion of coalmining wereweak and unrealistic and relied mainly on under-ground production. In 1981 the Government wiselyincreased its attention to finding and exploitingnew open-pit deposits (as private mines). Withoutblending, open-pit coal is often unlikely to besuitable for uses other than power generation. Ittherefore remains important to help undergroundproducers to expand their output. We suggest theengagement of a small team of experienced miningengineers to assist in preparing a national programfor expansion of underground output. An initialcontract of three or four months, followed byperiodic visits over a three or four year period,should be sufficient.

(b) Coal industry expansion and modernization will re-quire substantial investments. The industry is notin a healthy financial condition and needs access tolong-term funds from one or more institutions thatunderstand the industry's problems. We are uncer-tain whether or not the industry will need prefer-ential financing; a study of the industry's financialneeds should be made while the operational programis being prepared.

x

(c) The Government should remove any remaining un-certainties in the minds of coal users as tothe relative roles of government and privateagencies in the expanding coal market. (Fornearly two years major private buyers did notknow whether or not they were free to enterinto direct negotiations with foreign or domes-tic producers or would be required to buy froma government agency and, if so, under whatpricing principles.) By mid-1981 the Governmenthad decided that coal importing would be a gov-ernment monopoly. Policy had not yet been estab-lished on the prices at which imported coal wouldbe sold to private buyers or on how much freedommajor buyers would have to enter into direct con-tracts with domestic producers.

(2) Electric Power

(a) The Government should continue to increase itsinvestment in finding and assessing domesticenergy resources; this is the only way to de-velop an inventory of candidate projects whoserelative attractiveness can be periodically com-pared for inclusion or exclusion from NPC's in-vestment program. For this decade, the problemis most urgent on Luzon, since there will be largeeconomies from identifying generating sites thatcan meet the needs of this large market withoutincurring heavier-than-necessary transmissioncosts.

(b) NPC should probably not attempt to implement, by1986, the Adjusted investment program which hasbeen proposed for reducing oil consumption by ex-ploiting the geothermal resources on Leyte. Thesame objectives will be achieved about four yearslater if investments are implemented not as a "crash"program to replace oil but on a stretched-out sched-ule that does not give quite so high a priority toaccelerated oil replacement. The financial costsof the proposed accelerated program appear heavierthan the Government should allocate to power gener-ation; the program would also severely tax NPC'splanning, design, and implementation capability.

(c) In addition to strengthening its work on domesticresources, the Government should accelerate detailedstudy of additional investment in atomic power,which may emerge as the lowest-cost source of base-load energy for large-scale plants. Cost will beonly one of several factors to consider, however.

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(d) NEA is planning to develop small-scale mini-hydro and dendro-thermal electricity genera-tion. The present policy of achieving gener-ating self-sufficiency for each cooperativeappears highly questionable, however. Werecommend a selective policy that would pursuelocal generation only if this is cheaper thanthe (economic) cost of NPC generated power.As the National Economic Development Agency (NEDA)has recognized, coordination between NPC andNEA must be improved; a joint technical liaisoncommittee should be set up.

(e) NPC should extend its planning horizon from 10to 15 years in order to assure more adequateand timely consideration of costly, long-ges-tating hydro and nuclear projects.

(3) Oil

(a) Future oil production is highly dependent onsuccessful drilling activity by internationaloil firms. The Bureau of Energy Development(BED) should review the terms of its standardservice contracts for the oil industry with aview to increasing incentives to acceleratedrilling rates.

(b) PNOC should engage a small team of experiencedseismic and aeromagnetic experts to increase itsdata-gathering and data-interpreting capability.

(4) "Nonconventional" Sources

(a) A vigorous research and development program forthe development of alternative and supplementaryliquid fuels is well justified. It would bepremature and potentially very costly, however,to invest heavily in alcogas production facilitiesthat go beyond the pilot-plant stage during thenext few years. The R&D program recommended hereshould be closely linked to work in other coun-tries both at the agricultural, distillation, andengine-manufacture levels. The work on coconutoil as a diesel substitute now going on alsodeserves encouragement, although coconut oil maybe more attractive as a market for surplus coco-nuts than as an economical substitute for diesel(unless petroleum prices go up considerably more).

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(b) Mini-hydra and dendro-thermal sources of powergeneration deserve encouragement; they shouldbe pushed selectively, however, since they willoften be more expensive than other modes ofgeneration.

(c) Recent changes in the leadership and organiza-tion of CNED reflect a transition status of thecountry's main instrument for organizing workin this area. In the past, CNED has needed aclearer sense of R&D priorities and more effec-tive policies and mechanisms for followingthrough when its work produced promising results.New plans to link CNED more closely to a largerand better-established institution (PNOC) mayovercome these past weaknesses. It is also im-portant that senior officials of the MOE paycloser attention to work-programs and perform-ance in nonconventional energy.

(d) Maximum encouragement should be given to private-sector participation in developing and spreadingnonconventional energy applications. Such encour-agement should include individuals, private firms,and voluntary agencies. "Encouragement" shouldinclude financial and tax incentives, the con-tracting-out of much of the Government's R&D work,a clear statement of policy on the role of privateagencies in this field, and assisting in the ex-change of information through publications andworkshops.

B. CONTROLLING DEMAND

(1) The Government should continue to place primary emphasis onthe price system to limit growth in energy demand and topersuade users to shift to cheaper sources of energy.

(2) "Social pricing" (i.e., the use of subsidies to favor thepoor) is well-justified, particularly if financed by cross-subsidization within the sector. There is a widespreadfeeling that subsidies on household electricity prices inMetro Manila are excessive and should be reduced. Thereis less appreciation of the adverse consequences that havedeveloped from the application of social pricing to dieseloil and industrial fuel oil. These two product pricesshould be allowed to rise moderately in relation to otherpetroleum product prices to reduce the structural gasolinesurplus that has developed and to increase industrial in-centives to save oil energy and to switch to coal.

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(3) Within the transport sector, this could be supplementedby the increased use of duties and taxes on fuel-ineffi-cient vehicles to encourage the growth of a more fuel-efficient fleet regardless of whether vehicles use.gaso-line or diesel fuel.

(4) The Government should frame a program of tax credits, andof earmarked financial assistance, to strengthen its in-dustrial oil-conservation efforts. No momentum has yetbuilt up for large-scale energy-saving in industry despitea three-year-old program of compulsory energy reportinglaid on some 90 energy-intensive firms. We suggest thatphased increases in the price of industrial fuel oil beannounced at the same time, to increase the attractivenessof oil-saving investments.

(5) Greater attention should be paid to household energy con-sumption, both urban and rural, commercial and noncommer-cial. This is needed to develop a better understanding ofthe interrelationships among LPG, kerosene, electricity,fuelwood, charcoal, and other biomass fuels, especiallythe effects of pricing decisions on household budgets onthe one hand and on environmental pressures on the other(through depletion of fuelwood resources). General re-sponsibility for expanding work on household energy shouldprobably be placed in the Bureau of Energy Utilization (BEU);much of the data-gathering work would of course be contractedout. One field of particular importance from a welfare view-point is the household cooking needs of poor people, bothurban and rural. The marriage of supply and demand consider-ations must reflect not only the technical concerns of econ-omists and environmentalists but contributions from sociol-ogists and/or home economists to help define what improve-ments are needed and to judge the acceptability of devices(such as the Lorena stove) that appear promising on purelytechnical grounds.

1. INTRODUCTION TO THE SECTOR

Origins of the Survey

1.01 Starting in 1978, the Government of the Philippines has publishedannually a Ten-Year Energy Program./l This document is a "rolling restate-ment" of the Government's plans for reducing the country's present very highdependence on imported petroleum as the primary source of all forms ofcommercial energy for industry, agriculture, electricity generation, trans-port, and households. In 1980 about 90% of the Philippines' commercialenergy had its origin in imported oil; with the oil price increases of thepast decade, the country's high oil-dependence now requires it to spendaround 35% of all import-payments for oil. In 1973, the figure was 12%.The Ten-Year Energy Program presents the Government's strategy for winninggradual relief from this mounting pressure. The Philippines has betterprospects than many other countries for winning such relief, for nature hasendowed it with a promising range of domestic energy resources only a fewof which have yet been developed.

1.02 In 1979 the Government invited the Bank to review the country'senergy situation and submit a report on the adequacy of the energy programas reflected in the latest (January 1980) Ten-Year Energy Program. The Banksuggested that the review be conducted jointly with the Asian DevelopmentBank (ADB), which has also been active in assisting power and energy develop-ment and which, like the Bank, expects to increase assistance to the sectorin the future. A joint Bank/ADB Energy Sector Survey mission visited thecountry from mid-April to mid-May, under an arrangement that assigned thelead role to the World Bank./2 In July, an Aide-Memoire was sent to theGovernment, giving it the mission's preliminary findings and recommenda-tions. The principal finding of the mission was that the targets set inthe Ten-Year Program had been set too high and that consequently the coun-try must expect to remain heavily dependent on imported energy considerablylonger than the Program assumes. Because the Government has recognized thegravity of the problem and has taken certain measures to restrain energydemand and to develop domestic resources, energy-pressure on the balanceof payments in 1990 should be no greater than it is today; no significantrelief is in sight, however. The mission's main recommendations were that(i) there appears room for additional constraint of electricity demandthrough removal of some excessive subsidies in the present price structure,

/1 In July, 1980, the January, 1980, Ten-Year Energy Program was reissued(with minor changes) as a Five-Year Program: 1981-85 (a compressed pro-gram for energy self-sufficiency). In August, 1981, the latter documentwas updated by publication of The National Energy Program: 1981-86.

/2 Unless indicated otherwise, the two participating banks will hence-forth be referred to as "the Bank."

(ii) an even higher priority should be put on the development of geothermalresources than the Government had set, (iii) the early retirement of exist-ing major oil-fired stations and construction of substitute capacity wouldcost more than it would save, and (iv) that in the ambitious coal and alco-hol programs less attention should be paid to target-setting and more toworking out the details of program design and implementation. Overall, themission gave the Government high marks for the measures it had already takento get on top of its energy problem. In May, 1981, discussions were heldwith the Government on the draft report; this revised report takes accountof those discussions.

The Energy Background

1.03 The 1980 Energy Sector Survey is not the first occasion on whichthe Bank has attempted an overall view of this sector. The 1975 EconomicReport, coming one year after the initial "oil shock," included an annexon "The Role of Energy in the Philippine Economy." That initial reviewnoted the rapid growth of energy consumption in the country (some 50% fasterthan the growth of GNP during the 'sixties), the sudden jump in the share ofoil in the country's import-bill (from 12% in 1973 to 21% in 1974), and theintroduction in 1974 of a new energy plan which, for the first time, gaveemphasis to oil conservation and to the development of domestic energy sources.The projected growth rate in the consumption of commercial energy, 1974-85,was 10%, with electrical energy projected to grow at 10.7%. With few possi-bilities for cutting out "luxury" uses of petroleum or substituting other fuelsin industry, and many years being required before the power industry couldshift to non-oil-based primary sources, the 1975 outlook was for an unavoid-able continuation of a relatively high growth in oil imports (the then as-sumption was that no domestic oil discoveries would be made, or could bebrought to production by 1985). Experience since 1975 has shown that energyusers (particularly in transport and industry) appear to have a considerablygreater ability to economize in energy use than was previously judged possi-ble, without slowing down the growth of the economy. As a consequence, the1980 Bank/ADB Survey is projecting growth-rates for total commercial energy,and for electric power, that are 25-30% lower than was thought feasiblefive years ago. These lowered projections, plus the discovery and bring-ing into production of modest domestic oil resources, will limit the furthergrowth of oil imports to a level the country should find manageable. TheSurvey's projections show oil accounting for 30-35% of total imports by theend of the decade; this is a modest improvement over today's 35-40%, a dra-matic improvement over the 50-60% it might have become in the absence ofsound energy policies, vigorously pursued.

Commercial Energy Consumption

1.04 Total Energy consumption is usually divided into commercial andnon-commercial forms. The former includes electricity, petroleum productsand coal; noncommercial energy includes everything else, e.g. firewood,charcoal, bagasse, animal power, and all other forms whose use is not

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determined primarily by exchanges in the cash economy. A large but minorityshare of firewood is regularly bought and sold throughout the country: itis nevertheless classified as a "noncommercial" energy. In the Philippinesnearly a third of total energy consumption comes from noncommercial sources;for millions of people, especially in the rural areas, this form of energydominates their experience of energy problems. The Survey has paid littleattention to noncommercial energy, partly because the problem has only aweak and indirect relation to the central balance of payments problem, andpartly because this aspect of the energy sector has not yet been given muchattention; consequently few data exist.

1.05 Despite the rapid growth in commercial energy consumption over thepast two decades, per capita energy consumption in the Philippines is stillonly about 40% that of other countries at similar income levels and onlyabout 5% of the average for industrialized countries. These figures showthe high "demand" potential for growth in energy consumption; but with over90% of such energy coming from imported oil, the country cannot afford inten-sified energy use unless a large part of it can come from domestic resources.

1.06 The rapid rise in commercial energy consumption in the past twodecades can be traced directly to the rate and structure of the country'seconomic growth. Gross domestic product (GDP) grew at over 5% a year inthe 1960s and, unlike many other developing countries, at an even higherrate (6.3%) during the 1970s. Moreover, much of this growth was spearheadedby the energy-intensive manufacturing sector which, as in most middle-incomecountries, has grown at above-average rates for the past two decades, liftingits share in GDP from 28% in 1960 to 35% in 1978. Finally, the growth inhousehold real incomes -- about 2.6% a year since 1960 -- has increased thedemand for commercial energy and energy-using appliances. Reduced access totraditional, noncommercial fuels brought about by increased urbanization hasbeen an added reason for the growth of commercial energy./l

1.07 The growth of commercial energy was much faster before the first"oil shock" of 1973 than it has been since, however. Prior to 1973, totalcommercial energy consumption was rising at rates well above the growth rateof GDP; as noted, the average growth elasticity was above 1.5./2 Since1973 this situation has changed radically. Energy consumption has grown at3.7% p.a., about half the rate of previous years even though GDP has con-tinued to grow at about 6%. The elasticity of energy growth has conse-quently declined to about 0.6. Much of this change is directly attributable

/1 The share of the population living in urban areas has increased from30% in 1960 to 36% in 1980; recent growth rates for the urban (andparticularly Metro Manila) areas continue to be well above the nationalfigure of 2.7% per annum.

/2 The elasticity of (commercial) energy growth is the ratio of two growthrates, i.e., the rate of energy growth over the rate of growth of theeconomy (GDP). It is a useful measure of energy intensity and efficiencyas measured at the margin of growth (it reflects, however, changes inenergy use and output throughout the economy, not only in new activities).

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to the Government's pricing policy for energy products which has, by andlarge, passed on the increased costs of energy to the final consumers (seeChapter IV). However, part of the low recent value reflects the once-and-for-all adjustment to sharply higher energy prices in 1973/74, when totalcommercial energy consumption actually declined by 4.8%. A more accuratepicture of recent trends can be obtained from the data relating to the period1975-79, when commercial energy consumption and GDP grew at 4.8% and 6.2%,respectively, resulting in an energy-output elasticity estimate of nearly0.8. Even this reduction represents a highly favorable development, tellingus that recent growth in GDP has been achieved with roughly half as muchgrowth in commercial energy as in the previous decade. The strength of thisadjustment (in the absence of any major structural change in the country'sgrowth) can only mean that the price elasticity of energy has been higherthan often assumed.

1.08 These favorable changes in the elasticity of commercial energy con-sumption have been accompanied by equally important changes in the sectoralpattern of energy use. As the following table shows, energy consumption inthe transport sector has grown at below-average rates in recent years, whilethe industrial sector has continued to exhibit above-average growth in energyconsumption, producing an increase in its share. The changing sectoralpattern of commercial energy consumption has been reflected in the demandpattern for the major commercial fuels -- petroleum and electricity. Theseare dealt with in turn below./1

/1 The consumption of coal in the Philippines has so far been both relativelysmall (less than 300,000 tons in 1980) and concentrated entirely in theindustrial sector. However, there are good prospects for increasing coalconsumption; these and the Government's program for coal development arediscussed in Chapters 5 and 6 below.

Table 1.1: SECTORAL DISTRIBUTION OF COMMERCIAL ENERGY CONSUMPTION

Percentage shareSector /a 1975 1979

Industry 47 49Transport 33 30Commercial/Residential 19 20Others 1 1

Total 100 100

/a Energy losses in electric power generationare allocated to end-use sectors on a pro-rata basis.

Source: Staff estimates based on data fromMinistry of Energy.

Table 1.2: PETROLEUM PRODUCT CONSUMPTION BY PRODUCT TYPE(Million Barrels)

Ave. Growthrate '73-80

Product type 1973 1974 1975 1976 1977 1978 1979 1980 %

Premium gasoline 4.2 4.2 5.1 5.5 6.1 6.8 6.7 5.9 5.0Regular gasoline 12.3 10.4 10.1 9.3 8.8 8.4 7.8 5.3 (-12.8)Diesel 12.8 12.2 13.2 14.0 14.8 15.6 17.0 17.4 4.5Fuel oil 28.3 27.1 30.5 32.0 36.6 37.6 38.6 40.0 5.0Kerosene 3.3 2.9 3.2 3.2 3.4 3.7 3.5 3.2 (- 0.5)LPG 1.8 1.8 2.1 2.2 2.4 2.6 2.7 2.4 4.2AVGAS 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 (-10.4)AVTURBO 2.0 2.0 2.2 2.1 2.3 2.6 2.7 2.6 3.9Non-energy products 2.1 2.1 2.7 2.7 2.7 2.8 3.0 2.4 1.9

Total product sales 67.0 62.9 69.3 71.2 77.3 80.2 82.1 79.6 2.5

Total petroleumconsumption /a 71.0 66.5 72.1 73.9 80.1 83.0 84.8 82.7 2.1

Daily averageconsumption /b 194.6 182.2 197.6 202.5 219.5 227.3 232.2 226.5 2.1

La Including refinery fuel and losses (typically around 4%).

/b In thousand barrels/calendar day.

Source: Ministry of Energy.

Consumption of Petroleum Products

1.09 Between 1973 and 1980 the final consumption of petroleum productsfor energy (i.e., excluding the small non-energy products) increased from64.9 mmboe to 77.2 mmboe, an annual rate of growth of approximately 2.5% (seeTable 1.2). At the same time there was a reallocation of petroleum consump-tion across sectors. In the transport and commercial/residential sectorshigher petroleum prices restrained consumption growth well below the average.This has not been the case for the industrial or power generation sectorswhere, despite a moderation of past trends, energy consumption has continuedto grow at fairly rapid rates.

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Table 1.3: SECTORAL DISTRIBUTION OF PETROLEUM PRODUCT CONSUMPTION

Percentage share Annual averageSector 1973 1975 1979 growth rate C73-79)

Industry 29 34.8 35.9 7.1Power Generation 19 21.0 23.0 6.8Transport 41 36.5 34.3 0,4Commercial/Residential 11 7.7 6.8 -5.0

Total 100 100 100

Total Energy (millionbarrels) 64.9 66.6 79.1 3.4

1.10 The other point to emerge from these figures is the high proportionof petroleum product consumption in the industrial and power generation sec-tors where the potential for energy conservation and interfuel substitutionis large, at least over the medium-term. The Government of the Philippineshas recognized this potential and launched major programs for conservationand the substitution of oil by other indigenous fuels; these are discussedin Chapter 6 below.

1.11 An important feature of the post-'74 changes in demand has beenmajor shifts in the growth of demand for different petroleum products. Theconsumption of kerosene, used mainly by households for cooking and lighting,has registered only a moderate increase, for example, even though its pricehas not been allowed to rise as fast as most other product prices. Gasolineconsumption has actually declined in absolute terms. On the other hand,diesel demand has grown significantly because of the Government's pricingpolicy, which has encouraged the substitution of diesel for gasoline in thetransport sector. Fuel oil consumption, limited to industry and power genera-tion, has also continued to grow at a rapid rate. These differential growthrates have led to product imbalances (mainly an excess of gasoline) thatcannot easily be remedied by changes in refinery runs, changing the types ofcrude imported, or by changing refinery configurations (often very expensive,if feasible). Thus surplus naphtha and its main derivative, gasoline, islargely unavoidable and must be dealt with by other means. We do not knowenough about the specifics of the problem in the Philippines (which is notalone in having a gasoline surplus problem) to make any useful suggestionsas to how it might be solved. We would only warn against over-reliance onhigh gasoline prices alone as a tool for achieving transport energy objec-tives, i.e., getting the desired "mix" of public/private transport, of fuel-efficient vehicle types and sizes, and of fuels (gasoline, diesel, LPG,charcoal, alcohol, alcogas). In addition to relative fuel prices, otherpolicy instruments have a legitimate role to play in achieving these objec-tives, e.g. import bans, tariffs, licensing fees, and manufacturing regula-tions. While the gasoline surplus might be eased slightly by a less

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punitive price for gasoline, the main solution will have to come from tradingstrategies, finding non-transport uses for naphtha, and reducing the overalldemand for oil.

Consumption of Electricity

1.12 Electricity consumption has been growing at about 9% a year since1975, somewhat slower than in the previous seven years but at a rate stillwell above that characterizing overall commercial energy growth, Over halfof the 1979 level of electricity sales, estimated at about 15.1 billionkilowatt-hours, was accounted for by industrial users; the commercial andresidential sectors each took roughly a fifth of the total.

Table 1.4: SECTORAL DISTRIBUTION OF ELECTRICITY CONSUMPTION

Percentage share Annual averageSector 1975 1979 growth rate

Industry 53 54 9.2Commercial 23 23 8,7Residential 19 19 8.7Others 5 4 2.8

Total (GWh) 10,778 15,056 8.7

Source: Staff estimates based on data from MOE/NPC/NEA.

1.13 As the figures show, there has been little change in the sectoralconsumption pattern in recent years with the three major sectors growing atmuch the same annual rate of about 9%. However, there have been changes inthe regional pattern of electricity consumption, with consumption growingat higher rates in the Visajas and Mindanao grids, albeit from a muchsmaller base. Two-thirds of total consumption was on Luzon, and withinLuzon, 85% of its consumption (over 50% of national use) occurred in MetroManila.

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Table 1.5: REGIONAL DISTRIBUTION OF ELECTRICITY CONSUMPTION

Percentage share Annual averageRegion 1975 1979 growth rate

Luzon 74 70 7.5Visajas 14 16 10.8Mindanao 12 14 12.8

Total 100 100 8,7

Source: Staff estimates based on data from MOE/NPC/NEA.

Noncommercial Energy Consumption

1.14 It is estimated that noncommercial energy sources account for nearlya third of total heat-energy supply /1 and meet about 65% of the nation'shousehold energy needs; data on their consumption by type of fuel or sectorof use are extremely sparse, however. The most recent statistics come froma sample survey of household energy use done in 1979 by the MOE; they aresummarized in Table 1.6. The preliminary data confirm the important roleplayed by noncommercial energy sources -- primarily firewood and bagasse --in meeting national energy needs. They also reinforce the need to fill inthe big gaps that still remain in knowledge about the sources and patternsof noncommercial energy use as a first step towards the formulation and imple-mentation of programs for their more efficient utilization (see para. 6.14 fftbelow). Table 1.6 summarizes the relative importance of the noncommercialenergy sources now in use and of their end uses. Two points can be made aboutthe above table: first, the only significant source of noncommercial energynow in use is biomass (i.e., vegetable) sources; there is as yet no significantcontribution from solar, wind, biogas, or other source, in contrast to theconsiderable attention being given these potential sources in R&D work. Amongthe present sources, firewood is dominant, as in many other developing coun-tries; it supplies more than half the total by weight, slightly less by heatvalue. The 1979 firewood consumption level implies a rate of extraction ofover 6.0 million tons of wood per year; this has an important bearing onthe overall prospects for the natural renewal of the country's forest re-sources. Over the past decade, the amount of land under forests has fallenfrom 55% in 1968 to 43% in 1978; some of this decrease is the result oflogging operations, but it also reflects the effect of the burning of cut-over forest areas for shifting cultivation and grazing which prevents naturalregeneration. In many areas of the Philippines -- Negros and parts of Ilocos

/1 Human and animal energy for motive power is excluded from thisanalysis.

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Norte, for example -- deforestation has already become a critical problemand its spread will grow if past trends continue unchecked, Strengtheningthe institutional framework of the forestry sector will be an essentialprerequisite to reversing these trends.

1.15 The second point that emerges from Table 1.6 relates to the highproportion of noncommercial fuels consumed outside the household sector.Firewood is used extensively for tobacco curing, and woodwastes for steamand power generation in the lumber industry. These examples serve to illus-trate not only that programs aimed at increasing the supply and improvingthe efficiency of noncommercial energy use have a wider range of benefici-aries than is sometimes assumed, but also that households are facing in-creasing competition from other sources of demand for noncommercial fuelspartly as a result of the increased cost of commercial energy. Data onregional variations in household consumption of different forms of commer-cial and noncommercial energy are presented in Annex 7, Appendix 4,

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Table 1.6: NONCONMERCIAL ENERGY CONSUMPTION (1979)

(Based on consumptionConsumption of in original units andoriginal units assumed heat values) /a

('000 m tons) ('000 BOE)

I. Household Consumption

Firewood 8,003 12,452

Woodwastes 64 100

Charcoal 1,137 5,310Coconut shells 788 2,454Rice hulls 236 367

2,225 8,231

Subtotal 10,228 20,683

II. Nonhousehold Consumption

Bagasse in industrial use 4,160 8,091

Woodwastes in industrial use 3,250 5,057

Firewood used in tobaccoflue-curing 2,600 4,045

Firewood and coconut shellsfor miscellaneousindustrial uses 1,460 3,408

Subtotal 11,470 20,601

Total 21,698 41,284

/a Assumed heat values for each biomass source:

BTU/lb.

Firewood 4,000Woodwastes 4,000

Charcoal 12,000Coconut shells 8,000Rice hulls 4,000Bagasse 5,000

Source: Ministry of Energy.

2. COMMERCIAL ENERGY SUPPLY

Overview

2.01 Since World War II commercial energy supply in the Philippineshas been characterized by a heavy and growing dependence on imported petro-leum on the one hand, and the presence of substantial, but as yet largelyundeveloped, indigenous energy sources on the other. Efforts to harness.the country's hydroelectric potential predate the 1973 oil crisis but, notsurprisingly, it is only since that year that the development of indigenousenergy resources to replace imported oil has assumed a central role in theGovernment's energy policy. The impact of this policy on national energysupply has already started to be felt: the country's first commercial oildiscovery has been made and brought on stream; coal production, althoughstill very small, has recovered production losses of the 'sixties andappears ready for a major expansion; and the first large-scale electricpower plants to be fueled by geothermal steam have recently been commis-sioned, making the Philippines the world's second largest user of this re-source; finally, in the field of hydroelectric power, the completion ofprojects started in the 1960s has resulted in a doubling of capacity since1972 and an increase in the share of hydro energy in commercial energysupply. In spite of these developments, the country's reliance on importedoil remains high, as the following figures show:

Table 2.1: COMMERCIAL ENERGY SUPPLY BY SOURCE

Percentage shareSource 1975 1979

Petroleum products /a 94.2 91.0Hydroelectricity /b 5.3 6.6Geothermal lb - 1.5Coal 0.5 1.0

Total 100 100

/a Excluding non-energy petroleum products.

|b Hydro and geothermal energy converted at fossilfuel equivalence for Theiral Electric Powergeneration.

Source: Staff estimates based on data from MOE.

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The Supply of Petroleum Products

2.02 Crude Oil. Prior to 1979, the country's crude oil requirementswere met entirely from imports. With the bringing into production of thecountry's first commercial field (Nido) domestic production now accountsfor a modest 5-10% /1 of the total crude oil supply of 75 million barrels.An important element of the Government's petroleum supply policy since 1973has been to encourage the geographical diversification of oil imports andto increase its control over them by transferring responsibility for thebulk of this trade from the private refining companies to the public sectorPhilippine National Oil Company (PNOC). The other important supply policyhas, of course, been to encourage domestic oil exploration and productionby both the public and private sectors. Oil exploration in the Philippineshas a long but sporadic history which can be divided into three phases. Thefirst phase, which concentrated on drilling where seepages occurred, beganin the 1890s; it tapered off soon thereafter, without much success. Thesecond surge in exploration activity took place in the late 1950s and early'sixties when the major international oil companies explored the onshoresedimentary basins, again without success. The current phase of activity,which commenced in 1970, has been the most intensive and the most successful.Exploration has concentrated offshore, particularly on the reefs near Palawan,where the first commercial discoveries were made.

/1 A precise figure is impossible, since initial domestic production hasbeen erratic.

Table 2.2: CRUDE OIL SUPPLY BY SOURCE

Supply (million barrels)Source 1973 1975 1977 1979

Domestic - - - 7.7Middle East 65.6 54.5 51.3 47.0Indonesia - 5.4 10.4 8.0Malaysia 3.1 4.3 3.0 3.1China - 3.3 6.1 7.1Brunei - - - 1.9

Total 68.7 67.5 70.8 74.8

Source: PNOC.

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2.03 The present resurgence in domestic exploration activity can beattributed partly, of course, to the tenfold increase in international oilprices and the consequent surge in exploration activity worldwide. However,two other factors have also been at work here. The first of these was thereplacement, in 1972, of the traditional concession agreement for oil ex-ploration by the production-sharing or service contract system, The newsystem set out more explicitly the work obligations of the contractor andincreased the Governments share of oil revenues. The second factor hasbeen the growing realization by international and domestic companies alike,that the prospects for commercial oil discovery in the Philippines had beenunderestimated in the past. Modern seismic analysis and drilling techniqueshave cast doubt on the validity of conclusions drawn from years of disappoint-ing drilling results, most based on the less promising onshore areas. Of thetotal of 377 wells drilled to date for hydrocarbons, less than 150 are reason-ably valid evaluations -- the rest were too shallow, prematurely abandoned oroffstructure. Thus the possibly prospective sedimentary area of the countryhas been tested only at the low rate of one valid exploratory well per 2,800square kilometers.

2.04 Since 1973, the number of exploratory wells drilled has increaseddramatically -- from 4 in 1974 to 33 in 1979 -- and it is these 84 wellswhich provide much of the evidence for estimating the country's oil pro-duction potential, The latter is still inadequately evaluated, however.Recent evidence suggests that the country has relatively certain remainingrecoverable reserves of between 100-500 million barrels in addition to theapproximately 30 million barrels of discovered but still unproduced reservesin three offshore fields -- Nido, Matinloc and Cadlao. The undiscovered butlikely reserves are not large by international standards but, if discovered,they would meet around 20% of the country's petroleum requirements for thenext decade. In addition, there is the small chance that one or more of themany gigantic offshore reefs would turn out to be oil-bearing and add 1 billionbarrels or more to reserves. While this would be a handsome bonus for thecountry, the chances of it happening are too small (less than 1%, on the basisof current information) to take it into account in drawing up national energyplans.

Refined Products

2.05 About 85% of the country's refined product requirements are metfrom three domestic refineries. However, net imports of refined productshave more than doubled since 1975, partly because domestic refinery outputhas not increased as fast as product demand, but more importantly, becausethe structure of demand has increasingly diverged from the mix which therefineries are capable of producing.

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Table 2.3: RECENT SUPPLY OF REFINED PETROLEUM PRODUCTS

(million barrels)1975 1977 1979

Domestic production 62.22 66.07 69.68Imports 6.05 9.85 14.07Exports 1.13 .92 .57Domestic supply 67.14 75.00 83.18

Ratio of domesticproduction todomestic supply 0.93 0.88 0.84

Source: MOE/PNOC data.

2.06 The bulk of refined product imports is accounted for by fuel oil,over 9 million barrels of which were imported in 1979 to meet local demand.Other products which were imported in large quantities in that year werediesel and LPG -- whose consumption has also been growing rapidly in recentyears -- and, somewhat paradoxically, gasoline. Gasoline consumption in1979 was actually lower than it had been in any year since 1973, and largequantities of it were being stockpiled by local refining/marketing companieswho were unable to sell it at the recently-increased prices. The reason be-hind this apparent paradox is that under the government-to-government contractfor crude oil purchases from China, the Philippines was also obliged to importa certain volume of gasoline. The Government hopes to resolve this problemin the near future by entering into swap agreements with neighboring countrieswhich would import this gasoline for fuel oil or diesel.

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Table 2.4: STRUCTURE OF PETROLEUM PRODUCT SUPPLY (1979)(million bbls.)

Domestic % Net Domestic %Product output share imports supply share

Gasoline-premium 6.42 9.2 .76 7.18 8.6-regular 8.18 11.7 - 8.18 9.8

Aviation fuels 2.21 3.2 .14 2.35 2.8Diesel 16.53 23.7 .95 17.48 21.0Kerosene 4.06 5.8 .05 4.11 4.9Fuel oil 29.28 42.0 9.29 38.57 46.4LPG 1.96 2.8 1.06 3.02 3.6Other nonenergy 1.06 1.5 1.24 2.30 2.8

Total 69.70 100.0 13.49 83.19 100.0

Source: MOE/PNOC.

Coal: Present Levels of Production and Consumption

2.07 Coal deposits of reasonably good steam-raising quality are foundon several islands of the archipelago. Because the coals were deposited onthe edge of an unstable shelf, the strata have been folded and faulted, lead-ing to wide variations in the thickness, lateral extent, and rank (combustioncharacteristics) of many of the deposits. The outcrops have been worked byindividual miners since the middle of the 19th century but organized under-ground mining did not begin until about 1900. A small coal mining industrydeveloped during the interwar and post-World War II years, with productionfluctuating erratically between 50,000 and 150,000 tons per year. In theearly 'seventies, annual production was between 105-125,000 tons. The sharpincrease in oil prices in 1974 stimulated increased interest in coal amongindustries and private utilities, and in 1977 the industry reached itshistorical peak output of 284,000 tons. 1979 output was 263,000 tons; theMOE's Ten-Year Energy Program has set a domestic production target of 6.0million tons for 1989 -- a figure that now seems far too high (see below,paras. 6.09-6.13). The industry is small, highly fragmented, and usesrelatively primitive technology.

2.08 There are some 33 coal mining companies, all domestically owned;these operate 36 small underground mines, plus a large opencast mine underdevelopment on Semirara Island. No underground mine produces more than100 tons per day; the average is 26 tons per day or 8,000 tons per year of300 working days. Total employment in the industry is around 4,000; outputper man-shift (OMS) is about 0.25 tons, a quarter of the underground minesof Europe. Despite the widespread occurrence of coal deposits, 80% of

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production comes from the island of Cebu, where 32 of the country's 37mines are located. In addition to the organized companies, there is along tradition of very small-scale operations along the outcrops by indi-vidual "camote" miners; the Government is now trying to phase out camotemining, however.

2.09 Historically, the market for coal has been extremely limited and

has been met entirely from domestic production. For example, almost all of1979 production went to 11 customers: five private power plants, four cementcompanies, one sugar mill, and one chemical company (see Annex 2, page 9).The National Power Corporation (NPC) has not had any coal-fired generatingcapacity: the first such plant, a 55 MW station at Naga near Cebu City, willbe commissioned in 1981; a large -- 300 MW -- dockside plant, at Batangas100 km southwest of Manila, is scheduled for construction 1981-84; a second300 MW coal-fired station is scheduled for commissioning in 1986 (it will be

built either alongside the first unit at Batangas or as a new mine-mouthplant in the Cagayan Valley).

Table 2.5: COAL PRODUCTION, 1973-79

1973 1975 1977 1979

Production ('000 tons) 39.0 105.1 284.6 263.0

Source: MOE.

2.10 A major increase in the scale of coal production is almost certainto occur in the 1980s. The country's coal reserves have been variouslyestimated at between 150 million and 1,000 million tons. This wide rangereflects both the lack of adequate technical data and the variety of defi-nitions used for the classification of 'reserves'. While further improve-ment in definition and measurements are clearly desirable, there is no doubtthat from a purely geological viewpoint, coal production could be expandedtenfold and sustained at that rate for half a century with no increase inthe present minimum estimate of proven workable reserves.

2.11 However, the pace at which this expansion could be achieved isless certain. It is unlikely that domestic coal production, coming aboutequally from open-cast and underground mines, can increase, by 1989, to morethan 2.0 to 2.5 million tpa from the 1980 level of almost 330,000 tpa. Thisprojection compares with a Ministry of Energy (MOE) target of over 6.5 mil-lion tpa by 1989./1 Even to expand production tenfold over the next decadewill require, in addition to doubling the labor force, a tripling of present

/1 The 1981 Six-Year Program projects 1986 output between 3.7-5.1 mn. tons("firm" and "probable" targets). The Bank is assiting the Government toprepare a coal exploration project, with emphasis on finding open-pitdeposits. One major such deposit has already been proven up, by a private

Filipino-Canadian-British joint venture, in Central Luzon.

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productivity. The reasons for mission projections so far below the Ministry'sare the limited opportunities for strip mining; the small size and faulteddeposits that must be worked as underground mines; the absence of any insti-tution to train skilled technicians and supervisors; the need to shift overfrom room-and-pillar to longwall working; the need to re-equip mines withhigher-capacity haulage and lifting equipment; expected difficulties in or-ganizing an adequate pit-prop supply; the difficulty of rapidly increasingthe present labor force of about 3,000 men; and the improbability that anindustry whose largest present mine produces less than 100 tpd can develop10 mines producing 200-300 tpd within 10 years. A large investment in accessroads will also be necessary at many sites. In view of the foregoing con-straints, a successful substitution of coal for oil in power and industrialuses will therefore require substantial coal imports. The Government hasrecently negotiated an initial 15-year supply contract with Australia. Gov-ernment policy is to distribute its overseas procurement over a number ofcountries.

The Supply of Electricity

2.12 Electric power supply in the Philippines has been characterized bya fairly rapid growth of installed capacity and generation; declining butstill very heavy reliance on oil-fired thermal generation; a complex andfragmented institutional structure; and marked interregional contrasts inthe structure and growth of power supply. Historical data for electric powergeneration, particularly by the small private utilities and self-generatingindustries which together have been responsible for about a fifth of totalsupply, are sparse and unreliable. On the basis of available information,the annual growth rate for electric power generation has been estimated atabout 10% since 1970, somewhat higher than the rate of growth for commercialenergy as a whole but about a third slower than Thailand or Korea. Nor hasthere been the same slowing down in the growth of electricity generation inthe last five years that has characterized the other energy forms. Between1975 and 1979, electricity generation continued to grow at just under 9% perannum when the supply of commercial energy as a whole was growing at half thatrate.

Table 2.6: ELECTRICITY SUPPLY BY PRIMARY ENERGY SOURCE

Generation in1975 1979 Annual Average

Source GWh % share GWh % share Growth Rate (%)

Thermal oil 9,947 81 12,601 74 6.1Thermal coal 24 - 177 1 64.8Hydro 2,250 19 3,500 21 11.7Geothermal - - 800 4 -

Total 12,221 100 17,078 100 8.7

Source: MOE, staff estimates.

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2.13 Over the same period, there was a significant shift in the sourceof electricity supply. Electricity from indigenous sources such as hydro-electricity and coal grew at above average rates and they were supplementedby the bringing on steam of the first large geothermal electricity gener-ating plant in 1979. Despite this shift, the absolute level of electricitygenerated in oil-fired thermal plants rose by 25%, requiring 18 millionbarrels of oil in 1979, about 22% of the country's total oil consumption.

2.14 These national statistics hide important regional differences.The industry presently consists of eight non-interconnected subsystems.The main Luzon grid accounts for 72% of the country's installed capacity;it interconnects virtually all generating plant on the island. Six systemson the six largest Visayas islands are in an early stage of development;together they account for only 13% of national capacity. Mindanao, with15% of capacity, is not well interconnected among its own components and hasno connections with other regions. As the following figures show, these threeregions rely in varying proportions on different primary sources.

Table 2.7: INSTALLED GENERATING CAPACITY BY REGION (1979)(MW)

Source Luzon Visayas Mindanao Total

Oil thermal 2,230 - 2,230Coal thermal - - - -Diesel 33 516 253 802Hydro 544 2 380 926Geothermal 220 - - 220

Total /a 3,027 518 633 4,178

Percentage 72.4 12.4 15.2 100.0

/a Generating capacity of captive plants is based on dependable capacityrather than on installed capacity. This helps explain minor dif-ferences from Table 2, Annex 4.

Source: MOE/NPC data.

Hydroelectricity

2.15 The country's many mountains and high average rainfall give it atheoretically large hydroelectric potential currently estimated at over7,000 MW (over seven times today's hydro capacity and much more than today'stotal installed power capacity). Only 926 MW of hydro capacity has yet beenbuilt, so the potential for expansion seems enormous. The big problem is

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cost: very few hydro sites permit continuous electricity production to meetbase-load demand. Most hydro power can be used only to meet daily or sea-sonal peaking demand, meaning that expensive dams have to lie idle much ofthe time. This loads heavy costs on low output, making each kWh generatedrelatively expensive. Run-of-river hydro plants do not suffer these dis-advantages but, except for Mindanao, there are few opportunities for large-scale run-of-river projects. Most large-capacity sites require dams andstorage reservoirs, which are very expensive. Sometimes the share of costswhich has to be borne by power can be reduced, if other benefits (e.g. irriga-tion or flood protection) will be produced. For all these reasons the eco-nomically useable hydro capacity is likely to fall far short of the 7,000 MWengineering estimate.

2.16 Recently, the Government has compiled, with the assistance of con-sultants, an inventory of 30 potential hydro sites and is preparing detailedprefeasibility studies for 10 of these./! Although the ranking of these sitesand the appropriate timing for their development must await the completion ofthese studies, it is clear that there is considerable potential for furtherdevelopment of this source, particularly on the island of Mindanao. Here mostof the hydroelectric sites are of the run-of-river type with a low unit cost(average $700/kW), relatively short construction times, and a high utilizationfactor. Unfortunately, this is not the case for Luzon where the bulk of thepower market lies. Most of the hydroelectric projects here are multipurposein nature -- with important other objectives in flood control, irrigation,and water supply -- have high capital costs for the electricity component(about $2,000 kW) and require long construction periods of up to eight years.In general, most of these projects have low utilization factors (about 30%)and electricity production is often limited by irrigation requirements. Thus,most large hydroelectric projects in Luzon would qualify only as peaking plants;while their attractiveness is generally enhanced by the rising price of alter-native fuels, each candidate site will need testing by careful economic justi-fication.

Geothermal Electricity

2.17 The Philippines' location in the so-called Pacific Fire Ring pro-vides it with a rich source of geothermal energy with an estimated ultimateproduction potential which would be adequate for about 2,000-4,000 MW ofelectricity capacity. Proven reserves are much smaller -- about 1,000 MW --but this mainly reflects the relatively early stage of the exploration anddevelopment effort. Firmly identified resources are concentrated in fourareas (two in Luzon and two in the Visayas) where about 140 exploration andproduction wells have been drilled to date. The first large-scale units tobecome operational were at Tiwi and Mak-ban in southern Luzon; both are

/1 The World Bank has assisted in the financing of a number of thesestudies through the loans for the Fifth and Sixth Power Projects(Ref. 809-PH and 1034-PH). Technical assistance has also been pro-vided by the Asian Development Bank.

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operated by a private company /1 under a contract with the NPC. Installedgenerating capacity in these fields was 220 MW in 1979 with an additional220 MW due to come on stream in 1980-81 and a further 110 MW in 1982.

2.18 The areas with the largest geothermal resources in the Visayasare located on the islands of Leyte and Negros. Responsibility for theirexploration and development lies with the PNOC subsidiary, the EnergyDevelopment Corporation (EDC), again under a service contract with NPC.Although both these fields have a high production potential (at least 900 MWin the case of Tongonan and 200 MW for Palinpinon), the early development oftheir full potential is hampered by their distance from existing load centers.The Tongonan field, where NPC is now installing 112 MW of generating capacityfor commissioning in 1982-83, will supply a copper smelter, now under con-struction, with a final electricity demand of some 60 MW. The remainingcapacity will be needed to meet other industrial demand only if the Govern-ment's policy for industrial decentralization -- inducing industries to locateoutside Metro Manila -- is successful or if an early interconnection betweenLeyte and Luzon can be justified.

2.19 The Palinpinon project is located in the southeastern part of theisland of Negros and has a production capacity of about 200 MW. Althoughthis region offers an important potential electricity market because of thepresence of a number of mines which generate their own electricity largelyfrom oil-fired units,/2 the rapid development of the Palinpinon project ishampered by the difficult terrain in which it is located and the delays in-volved in securing firm purchase commitments from industries that now producetheir own (diesel) power.

Transmission and Distribution

2.20 The electricity transmission system in the Philippines belongs toNPC, with the exception of the few lines owned by the private electricityenterprises and those that the electricity cooperatives have built in theareas where NPC is not yet providing power. In 1979, NPC had about 5,200 kmof transmission lines, nearly three-quarters of which were located on Luzon.A further 3,700 km (between 69 KV and 230 KV) is under construction and ex-pected to enter into service during 1980 and 1981.

2.21 Electric power distribution is primarily the responsibility of(a) the hundred or so electric cooperatives (affiliated to the NationalElectrification Administration [NEA]) which distribute power in the ruralareas and (b) the private utilities which cover urban areas, the largestof which is the Manila Electric Company (MECO). About 2.5 million house-holds or 43% of potential connections are connected to the electricitynetwork. However, the extent of coverage varies considerably across thedifferent islands and between rural and urban areas. As the following

/1 Philippine Geothermal, Inc., a subsidiary of Union Oil of California.The contract, drawn up in 1971, is for 25 years and renewable for asimilar term at the company's option.

/2 The largest of these, Marinduque Mining Corporation, generates about130 GWh a year, mainly from oil-fired units.

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figures show, the percentage of households with access to electricity inLuzon is twice as high as in the Visayas or Mindanao. Rural electrificationis still relatively low, but a large and vigorous program aims at 100%coverage by 1990 (see Annex 7).

Table 2.8: STATUS OF HOUSEHOLD ELECTRIFICATION 1979

Potential Connections Connections Electrified Percentage Coverage(000) (000)

Elec. Elec. Elec.Region co-ops Private Total co-ops Private Total co-ops Private Total

Luzon 2,400 1,400 3,800 720 1,360 2,080 30 97 55Visayas 800 200 1,000 167 18 185 21 9 19Mindanao 900 150 1,050 157 70 227 17 47 22

Total 4,100 1,750 5,850 1,044 1,448 2,492 25 83 43

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3. ENERGY PRICING, TAXES AND SUBSIDIES

Introduction

3.01 As an oil-importing country, the Philippines has not only adjustedthe domestic prices of petroleum products quickly to cover changing worldprices; it has gone further and imposed selective taxes to further discourageconsumption. Since 1973, the weighted average of petroleum product priceshas registered a sevenfold increase and despite some important anomalies inrelative product prices, the structure of prices is broadly satisfactory.This is unfortunately not the case for the power sector where the level andstructure of both wholesale and retail tariffs urgently need revision. Incoal, the new National Coal Authority (NCA) has not yet decided what pricingpolicy it will follow -- if, indeed, it decides that some or all coal pricesought to be brought under Government control.

Petroleum Products

3.02 Between January 1973 and May 1980 product prices were increasedten times.]L Because of increased taxation, prices have risen well aboveimport parity (see Table 3.1 below). In February 1980, the retail price ofa reconstituted barrel was just over $50, of which 20% was accounted for bysales taxes. These taxes are levied in varying proportions on the differentrefined products, with the bulk of the burden being placed on gasoline (seeTable 3.2). The intent has been to discourage private car transport and tocollect revenue from those better able to pay (car owners). Taxes have beenleft low on products widely used by the poorer classes (kerosene, LPG anddiesel for public transport) and important to the viability of industry (fueloil, whether used directly or as electricity). One important result of priceevolution has been a widening gap between prices, with diesel prices nowamounting to about half of gasoline. This differential is the result ofthe Government's explicit objective of shielding public transport usersfrom the full impact of higher international prices. Although the differ-ential can arguably be justified on grounds of the Government's social pric-ing objectives, its impact on relative product demand growth needs to beclosely monitored. There is already some evidence that the absolute declinein gasoline consumption of recent years and the emergence of surplus gasolinestocks in the country, was due not only to less discretionary driving by carowners but also to a large-scale shift from petrol to diesel powered vehiclesin the public transport sector. This would not be a problem if refinery runsor the crude feedstocks could be adjusted further to yield more diesel andless gasoline; but this is technically impossible for any of the country'sthree refineries without very large new investments. An alternative policywould be to impose tariff duties and licensing fees in a way that wouldencourage the use of fuel-efficient vehicles without regard for what fuelthey use (i.e., light vehicles with small engines, for their type); gasolineand diesel fuels could then be priced more flexibly so as to prevent the

/1 There have been two additional increases since May 1980 -- in August1980 and March 1981.

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development of chronic surpluses of particular fuels. The present policyreflects an undue bias against gasoline and puts the whole burden of fueleconomy on relative fuel prices instead of sharing it (through differentialtaxes and licensing fees) with the other costs of owning and operatingdifferent vehicle types.

Table 3.1: RETAIL PRICES FOR SELECTED PETROLEUM PRODUCTS (MAY 1980)11

Percentage Comparative PricesRetail increase Import parity Retail Pricesprice since (ex Singapore) Thailand Pakistan

Product US$ gal. Oct. 1973 $/US Gallon

Aviation fuel 1.96 900 1.04 -

Gasolineregular 2.18 1,200 0.99 1.79 1.63premium 2.28 1,060 - 1.89 2.33

Diesel 1.22 725 0.97 1.43 0.96Kerosene 1.22 775 1.04 1.30 0.76Fuel oil 0.85 735 0.65 0.70 0.40LPG 1.14 580 - 1.15 -

Source: PNOC/MOE data; staff estimates.

Fiscal Contribution of the Sector

3.03 Sales of petroleum products have traditionally been an importantsource of revenue for the national exchequer; today, they contribute nearly20% of total tax revenues. Since 1975 these revenues have risen dramaticallyboth because of the increase in the price of these products and because of therising proportion of taxes in the final sales price (28%, on average). Theapplication of these taxes has also been broadened. The traditional 'specifictax' whose proceeds augment the general revenues of the Government has beensupplemented since 1974 by a 'special fund' levy. The revenues from this fund,which are again generated primarily through gasoline sales, have in fact beenused for other energy-related projects although they are not earmarked forsuch.

/1 By March 1981 Philippine product prices had increased another 17-37%,depending on the product (industrial fuel oil and diesel were increasedabout 30%, regular gasoline 17%). Thus some of the "undue bias againstgasoline" has now been removed. In 1981, the Board of Investments re-vised its policy of encouraging diesel-car manufacture (begun in 1979)and decided not to permit further expansion.

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Table 3,2: STRUCTURE OF PETROLEUM PRODUCT PRICES (MAY 1980)

Pesos per liter

Oil Taxes as acompany /a Specific Special L Wholesale % of whole-

Product take taxes fund price sale price

Gasolineregular 2.803 0.91 0.438 4.15 32.5premium 2.860 1.000 0.483 4.34 34.1

Diesel 2.040 0.185 0.035 2.25 9,3Kerosene 2.165 0.070 0.035 2.27 4.6Fuel oil 1.448 0.045 0.038 1.53 5t4LPG 2.005 0.078 0.038 2,121 5.5Average 1.952 0.278 0.160 2.39 18.3

/a Includes crude equalization differential.

lb Includes "energy development impost" of P 0.19/liter on regular andpremium gasoline.

Source: MOE/PNOC.

3.04 The special fund has provided the Government with a valuable andgrowing source of revenues for its energy development program./l Since itsinception in 1974, the fund has disbursed over P 1.6 billion ($215 million)for a wide variety of energy-related projects. It has been used to provideequity capital for PNOC and its subsidiaries and to finance specific projectsundertaken by them; it has helped finance the purchase by the NPC of powerplants previously owned by the private MECO; and it has provided equity andproject finance for the NEA. Because of recent increases in product pricesand tax rates, the fund's revenues are rapidly growing. Collections in 1979were over P 1.4 billion ($185 million); in 1980 they were expected to riseto approximately P 2.0 billion ($265 million)./2

/1 Disbursements from the fund can only be made on the basis of a letterof instruction from the President of the Philippines to the Commissionerof the Budget, the Treasurer of the Philippines and the President ofthe PNOC.

/2 Additional revenues generated through the specific tax on petroleumproduct sales amounted to P 2.3 billion ($300 million) in 1979 andwere estimated to rise to P 3.2 billion ($425 million) in 1980.

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The Power Sector

3.05 Electric power pricing in the Philippines has historically beengoverned by social and political objectives which have limited the abilityof power generating utilities to earn a reasonable return on their assetsor adequately finance their investment programs from internal cash genera-tion. The result has been a retail tariff structure which is complex, dis-torted and often inconsistent with the Government's stated objectives ofequity and efficiency. The problem has been exacerbated by the multiplicityof regulatory authorities and distribution agencies, and the archipelagicnature of the country, which results in a fragmented power market and widedifferences in the cost of electric power supply.

3.06 Electricity tariffs are set at two levels. Wholesale rates forthe NPC, which generates 90% of national supply, are set by its Board withthe approval of the National Economic Development Agency (NEDA) and thePresident. Retail tariffs for the electricity cooperatives are approved bythe NEA. Tariffs for the private utilities are set by the Board of Energy(BOE), originally an independent three-man Board that was incorporated intothe MOE in 1979. This wholesale/retail distinction is by and large validwith the exception of direct NPC sales to large industrial consumers outsidethe Metro Manila area, a practice not always welcomed by the cooperatives inthose areas, who usually feel that they should be allowed to serve local in-dustries. Such conflicts, although not yet common, are a source of someinter-agency friction which needs to be resolved by a policy decision inthe near future./l

NPC Wholesale Rates

3.07 The deficiencies characterizing the existing tariff framework canalso be analyzed at these two levels. At the wholesale or NPC level the mainproblem has been financial. Despite a five-fold increase in its overall ratessince 1974, NPC still receives an average price for its power which is too lowto enable it to earn a reasonable return on its capital. Since 1968, NPC'srate of return on average net fixed assets in operation has ranged from 3% to6.4%, well below the 8% minimum target it has set for itself. As with all ratecovenants, this target serves the purpose of assuring sufficient internal cashgeneration so that the entity is able not only to service its debt but tomake a reasonable contribution to the financing of its ongoing investment pro-gram. In recent years, NPC has had difficulty covering its debt service outof its internally-generated cash flow; any surpluses have had to be used tocover growth in needed working capital leaving substantially no funds avail-able to finance investment. Consequently, the Government has had to makesubstantial injections of equity (on the order of P 1.3 to 2.3 billion a year)to cover the peso component of the investment program. The foreign exchangecomponent has been covered entirely by foreign borrowing. NPC has estimatedthat if it can reach an 8% return on its asset base during the years 1982-85,this would be sufficient to relieve the Government of any need to inject equityto cover the peso component of its investment program. There is room for doubt,however, that the modest tariff increases proposed by NPC for introduction oversix consecutive quarters starting in November, 1981, would be sufficient toachieve this objective, even if adjusted upward for inflation.

/1 See also paras. 5.13 ff.

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3.08 Partly as a recognition of its increasingly unsatisfactory finan-cial situation, NPC established a special unit in 1977 to prepare a revisedtariff based on the long-run marginal costs of supplying electricity to thevarious consumer categories. This study was completed in 1979 but no com-prehensive set of conclusions or recommendations for their implemuentationhas yet been drafted./l The results of the study also need to be updatedin the light of the sharp 1979 increases in fuel prices and revisions in thepower expansion program. Nevertheless, certain basic conclusions can alreadybe drawn from this analysis and appropriate tariff revisions initiated. Theseconclusions fall into four particular areas. Firstly, despite the substantialincreases in NPC tariffs in February 1980, these tariffs are on average still30% below the long run marginal cost (LRMC) of power supply.12 Secondly, theprincipal component which needs to be changed is the capacity rather than theenergy charge./3 Currently MECO does not pay any capacity charge, and thecharge for other NPC customers is too nominal to influence capacity require-ments. One manifestation of this is the fact that capacity charges constituteonly 15% of the current NPC tariff when their contribution to LRMC is of theorder of 60%. Thirdly, the wide difference in NPC's existing rates for Luzonand Mindanao (Luzon rates are about double the rates for Mindanao) is notjustified by differential costs of power supply (as reflected in LRMC). Finally,average rates for the Visayas should continue to be higher than in the otherareas so long as the region's heavy reliance on oil continues; when and if theregion is interconnectea to lower-cost sources, tariffs can be adjusted down-ward.

/1 Marginal Cost Analysis for NPC, Power Sector Tariff Study, NPC CorporatePlanning Department, January 1979.

/2 This concept can refer either to capital or operating costs, or both.Capital LRMC refers to the investment cost of meeting an increase inkW requirements of a system. This cost is best measured by referenceto peaking plants in process of being added to the system. The LRMCof supplying energy would be the variable cost of operating the sameplants. Total LRMC per kWh would be the sum of capital LRMC (annualizedand divided by estimated kWh output) and the LRMC of energy production(see Table 3.3).

13 A capacity charge is each customer's share of the capital cost of thegenerating, transmission and distribution capacity needed to providehim with energy during the period of maximum system demand. An energycharge covers the variable-cost element of supplying kWhs actually used.A capacity charge geared to peak-hour use encourages customers to arrangetheir power requirements so as to minimize their maximum demand; if every-one does this, system peaking requirements are minimized.

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Table 3.3: NPC WHOLESALE RATES AND MARGINAL COSTS OF POWER SUPPLY(in centavos/kWh at 1980 prices)

Marginal costs / Rates as aWholesale Capacity Energy % of marg.

Grid rates cost cost Total costs

Luzon 35.32 28 18 46 77Visayas 39.15 23 34 57 69Cebu & Panay 42.00Bohol & Negros 30.00Mindanao 17.00 lb 30 16 46 37Mindanao 17.00General Santos 40.00

Overall 33.81 28 20 48 70

/a NPC estimates for 1978 prices updated to reflect higher fuel costsof 1980. Energy costs increased by 100% and capacity costs by 8%per annum.

lb Excludes General Santos subgrid.

Source: Staff estimates based on data from NPC and NPC tariff study,op cit.

Retail Power Rates

3.09 Retail tariffs in the power sector reflect the Government's"isocialized pricing" policy which aims at cross-subsidizing the electricityconsumption of poorer households through the imposition of progressivelyhigher charges for the consumption of electricity by richer households andby commercial and industrial users. Although such a principle implies somemisallocation at the margin between electricity and other fuels, it can bejustified within the context of the Government's broader economic and socialobjectives; variants of the policy are in force in many other developingcountries. Having said that, there remain important and serious inequitiesin the existing retail electricity tariff structure.

3.10 These distortions fall into two groups. First, the extent of sub-sidies within the Metro Manila area is excessive, both in regard to thoseextended to consumers in other parts of the country and in relation to thegenerally accepted definition of "lower-income" households. Residential

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consumers in the Manila area with a monthly consumption level below 200 kWhpay rates varying from 2-14¢ kWh; above 200 kWh the rate is 63.94¢ (plus,since September 1979, an energy tax of 10-35%). The below-200 kWh price hasnot changed since 1974. Seventy percent of MECO's household customers fallin the below-200 kWh category. In addition to this highly liberal applicationof "social pricing," a new tax on electrical energy, passed in Setpember 1979,exempted all consumption under 650 kWh per month. MECO's low household ratescontrast markedly with the much higher rates found in a number of NEA cooper-atives that border on MECO's service area. The above facts have led manyobservers to feel that the application of social pricing principles has beenapplied too liberally in the important household electricity market of MetroManila.

3.11 The second area which urgently needs attention is the variationin the retail rate structure among the different cooperatives and privateutilities. Apart from MECO, other private utilities do not follow any dis-cernable policy of cross-subsidization; their residential tariffs are, inmost cases, higher than the rates for other consumer categories. Electric-ity cooperatives, on the other hand, generally subsidize their lower incomeresidential consumers and small business establishments, although there isconsiderable variation in the extent of subsidy. Further variations in co-op rates are introduced by differences in transmission losses and load fac-tors which result in different power costs among cooperatives. The essen-tial problem here stems from the excessively localized focus of tariffsetting (i.e., co-op-by-co-op) with the opportunities for subsidizingresidential consumption depending on the number of large consumers in eachfranchise area and not in the country as a whole (or in major regions).While interregional differences reflecting the different costs of producingand distributing power would continue to exist, the Government should con-sider the early rationalization of retail power tariffs within each region,perhaps through the establishment of a rate equalization fund.

3.12 The above changes can only be made gradually, but it is importantthat the Government prepare and stick by a timetable for their introduction.As a first step in this process, the role and interrelationship of the threeregulatory authorities in the power sector should be examined with a viewto their adopting a unified and coordinated approach to power pricing. Aninitial increase in N-PC's wholesale power rate, plus a timetable for furthergraduated increases, and removal of the excessive subsidies in MECO's resi-dential rates, should also be given urgent consideration.

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4. ENERGY SECTOR ORGANIZATION AND INSTITUTIONS

Overview

4.01 One of the Government's major responses to the altered inter-national energy situation of the 1970s has been to strengthen and consol-idate the institutional and organizational framework for the energy sector.In this its efforts have met with much success. The country now has animpressive central policy, planning and regulatory agency in the Ministryof Energy -- not the least of whose achievements have been the preparationand publication of a detailed Ten-Year Energy Program for the 1980s. Someinstitutional strengthening has also taken place at the subsector imple-menting agency level; but there remain weaknesses, particularly in the largepower sector, which need to be rectified if plans are to be translated intorealistic programs and successful projects.

The Ministry of Energy (MOE)

4.02 In October 1977 a Presidential Decree created a Department ofEnergy, establishing the current organizational structure of the energysector in the Philippines. Shortly thereafter the Department was trans-formed into a Ministry and its powers and responsibilities were extendedto include the formulation and implementation of policies, plans and pro-grams for the development of indigenous energy resources. The MOE's otherresponsibilities include the monitoring and supervision of internationaltrade, domestic refining, marketing and distribution of petroleum products;regulation and control of private sector involvement in the energy sector,including the granting of service contracts for the exploration and develop-ment of coal, oil and geothermal fuels; the coordination of the electricpower industry; and the supervision and coordination of research into newand nonconventional energy sources. Charts 1-5 show the Ministry's structureand distribution of functions.

4.03 In keeping with the Government's overall priorities in the energysector, the Ministry has been more closely involved with the developmentand use of hydrocarbon fuels (particularly oil) than with the electric powersector where the Government's largest public corporation, the NPC, was al-ready well-established. Line responsibility in the Ministry is vested intwo major bureaus:

(a) The Bureau of Energy Development (BED) which isresponsible for the development of all indigenousenergy resources, except hydro and nonconventional,and for the regulation of private local and foreignfirms involved in such activities; and

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(b) The Bureau of Energy Utilization (BEU) which isresponsible for regulating the import, refining,marketing and distribution of crude oil andpetroleum products, the preparation and imple-mentation of energy conservation programs andutilization standards, and the collection andinterpretation of energy sector data and the for-mulation of energy demand and supply forecasts.

4.04 The Ministry also exercises control over three other agencies:(a) the Philippine Atomic Energy Commission (PAEC), responsible for theplanning and regulation of the country's nuclear energy program; (b) aquasi-judicial Board of Energy (BOE) which primarily regulates petroleumproduct prices and retail tariffs for electric power supplied by privateutilities;/l and (c) the Center for Nonconventional Energy Development (CNED)whose main focus to date has been on applied research in the application ofnew technologies. Closely linked to the Ministry for policy guidance butnot formally responsible to it are the two large government corporations onwhose performance much of the energy program depends, the NPC and the PNOC(and its several subsidiaries, of which the EDC is most important for coaland geothermal development).

4.05 MOE's staff are competent and, particularly at the senior levels,display an impressive understanding of the issues and problems facing thesector. The major reason why such a young ministry has been able to recruitsuch a competent staff is that a high proportion are in fact PNOC staffseconded to the Ministry. PNOC has supplied 41% of the Ministry's totalstaff of 281 as of March 1980; the proportion among senior staff is muchhigher. Many of the senior professionals were originally employees of theEsso Corporation and were taken over when that Company was sold to the Govern-ment and became the original core of PNOC's staff, and physical assets. Thesalaries of public corporation staff are substantially higher than ministrycivil service salaries, and the MOE would have found it impossible to recruitits able staff had it not been able to use the secondment arrangement withPNOC staff. This solution to a difficult problem is not without its ownproblems, however. One is the political unacceptability, in the long run,of having a ministry whose salary levels are substantially higher than therest of the Government. Another difficulty is the privileged position whichPNOC enjoys within the oil industry as a result of the absence of an "arm's-length" relationship between the Ministry and PNOC./2 Whether or not privateoil companies will perceive this relationship as unfair, only time will tell.Today, this does not seem to be a problem, perhaps because many of the Ministry/PNOC senior staff have come from private industry and appear to be administer-ing good rules evenhandedly.

/1 Originally outside the MOE and responsible to the Office of the President;attached to the Ministry in 1979. The BOE is not responsible for regulatingthe fares charged by public carriers, whose costs are powerfully affectedby oil product prices. Transport prices are regulated by a semi-independentBoard of Transportation.

/2 No seconded staff serve both entities by holding two jobs, however; second-ment means an individual works 100% for the Ministry.

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4.06 If the structural elements of energy policies and institutionsare in relatively good shape, the same cannot be said for the detailedprogramming of activities in many of the energy subsectors. Much moreattention must now be paid to this level of activity, especially in thecoal, alcogas, and hugely important electric power subsectors. To developthe technical side of the Ministry's activities will require a specialeffort to build up its technical resources and staff; the same commentapplies to NPC, particularly in its planning work.

The Hydrocarbon Sector

The Philippine National Oil Company (PNOC)

4.07 PNOC is the Government's main executing agency in the hydrocarbonsubsector. It was created in 1973 as a fully owned government corporationand has since been active in almost every aspect of the petroleum industryand in the development of coal and geothermal resources. Diversity of ac-tivity and strong government support have made PNOC a large and complex or-ganization. Its total revenues in 1978 exceeded $1 billion and at the endof that year it employed about 9,000 people. PNOC's revenues are generatedlargely through the refining and marketing of petroleum products. Its sub-sidiary, the Bataan Refining Corporation (purchased from Esso) is the largestdomestic refinery with a rated capacity of 130,000 barrels per day (bpd)(total refining capacity in the country is 270,000 bpd). PNOC's distributionand marketing subsidiary, Petrophil Corporation, is the country's largest cor-poration in terms of sales (P 4.2 billion in 1978).

4.08 PNOC's involvement in the upstream end of the business is also sig-nificant and growing. Through its subsidiary group of energy developmentcompanies it is engaged in survey and exploration work for oil, mostly on-shore where private companies have so far shown relatively little interest;in the exploration and development of coal resources at Malangas and on Cebu;and in exploration and development work for geothermal resources at half adozen sites. PNOC is in fact becoming an energy company; with some feelingthat historical demand for petroleum products may have peaked, PNOC sees anincreasing proportion of its revenues coming from its non-oil activities.These activities account for the bulk of PNOC's investment, P 384 million($52 million) in 1978 and about P 600 million in 1979 ($81 million).

4.09 PNOC's staff are competent and dedicated but, particularly in theupstream end of its activities, they are both in short supply and in needof further experience and training. Some of this training could be providedthrough joint ventures with international oil companies; the limited use ofexpatriate consultants should also be considered for certain technical tasks.

The Power Sector

National Power Corporation (NPC)

4.10 NPC is a stock corporation fully owned by the Government and runby a Board of seven members who are all appointed by the President. Priorto 1972, NPC's role was limited to the construction and operation of hydro-

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electricity plants; consequently its capacity for corporate, financial, orsystem planning was rather limited. Since then, however, the Corporation'sresponsibilities have been extended to include all future large-scale gen-eration of electric power. NPC has also taken over the generating stationspreviously owned and operated by MECO. NPC's expansion program during thenext ten years is larger than the total construction it undertook duringthe first 40 years of its existence.

4.11 The Government has become increasingly aware of the need tostrengthen NPC's institutional capability to enable it to effectively dis-charge the vastly expanded role envisaged for it; a number of significantimprovements have already been made. In 1978, the Corporation's seniormanagement structure was reorganized and streamlined and a new presidentbrought in. Steps have also been taken to upgrade NPC's staff capabilitythrough improved salary scales and the recruitment of qualified technicalpersonnel. These are steps in the right direction but there are still im-portant areas of weakness, particularly in program planning and procurement,which will continue to require close government attention and support if NPCis to become the first-class entity the country needs in view of the sizeand importance of its task.

National Electrification Administration (NEA)

4.12 NEA is responsible for implementing the Government's ambitiousrural electrification program; through its control of the electricity co-operatives, it has rapidly become the major distribution agency in the powersector outside Metro Manila. Unlike NPC and PNOC, NEA reports not to MOEbut to the Office of the President. Partly as a result of this, NEA's pro-grams and activities are inadequately coordinated with those of the otherenergy sector agencies, particular NPC. An example of this is the fact thatNEA is planning to undertake a program of electricity generation from non-conventional sources that will add roughly 15% to the capacity planned(entirely independently) by NPC. One or the other of these agencies willneed to build this capacity, but not both. The most urgent need for co-ordination is to explore possible energy interchange arrangements where thegenerating facilities of both agencies are connected to the same grids.Furthermore, NEA should reconsider whether it might not limit its mini-hydroand dendro-thermal generation schemes to those areas where these sources wouldprovide energy at the lowest cost. Where NPC power is available, it will oftenconstitute a cheaper source of supply than nonconventional power; productionfrom NEA's planned forestry plantations in areas where dendro-thermal plantsare not justified could be used to augment dwindling firewood supplies forhousehold use, or for charcoal production.

Other Organizations

The Philippine National Alcohol Commission (PNAC)

4.13 PNAC was established in early 1980 to provide overall policy guid-ance and support to the Government's ambitious alcogas program (paras. 6.22 ff.and Annex 1) which seeks to replace imported gasoline in the transport sector

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by a blend of gasoline and domestically produced alcohol from sugar andother root crops. This commission is chaired by the Minister of Energyand includes as its members the Chairman of the Philippine Sugar Commission,the Ministers of Agriculture, Industry, Finance and National Resources anda (as yet unnamed) representative of the private sector. It is supportedby a small Secretariat of technical staff. Although this Commission pro-vides a potentially strong nucleus for the development and control of thealcogas program, its relatively young age and the uncertainties surroundingthe future of the alcogas program itself imply that many of its operationaldetails have yet to be developed.

Noncommercial Energy

4.14 The existing institutional framework for the analysis of noncom-mercial energy consumption and supply, and for the development of programsto augment the supply and improve the efficiency of use, is inadequate andrequires further government attention (see para. 6.15 below and Annex 7).The CNED is doing some useful work on the supply side in testing new applica-tions for noncommercial and nonconventional fuels but much of this work istoo research-oriented to have a marked impact on solving the energy problemsof rural and poor urban households in the near future. More emphasis needsto be given to analyzing the more immediate needs for cooking and lightingfuel, taking into account both the competing demand from industrial usersand the potential for interfuel substitution. This could be achieved eitherthrough broadening the focus of CNED's program and staff or by establishinga separate small unit for this purpose in the BEU in the MOE which would co-ordinate closely with NEA as well as with the Bureau of Forestry Development,the Ministry of Agriculture and other concerned agencies. The second alter-native would probably succeed better in getting analytical attention focusedon the household energy problems that have so far been somewhat neglected.As noted earlier, CNED is scheduled to be absorbed in a new research unit ofPNOC; one obvious advantage of this change will be to allow the recruitmentof staff on PNOC salary scales.

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5. ENERGY DEMAND IN THE 1980s

Overview

5.01 The Bank has estimated that during the 'eighties commercial energydemand in the Philippines will grow at an average rate of 6.5% per year.This is nearly a third faster than the energy growth-rate of the 'seventies;it is explained partly by the expectation of a continued strong economicperformance and partly by the limited opportunities for additional struc-tural adjustments that would further reduce the energy intensity of nationaloutput and consumption. The sharp reduction in the economy's energy inten-sity which occurred in the 1970s is more likely to be reversed than ex-tended in the 80s. Between 1975 and 1979 a 6% annual rate of growth forGDP was accompanied by less than 5% annual growth in commercial energy con-sumption giving an energy elasticity figure of 0.83. Over the next decadethis relationship is unlikely to hold and the planned rate of growth of GDPof 6.0% is expected to be associated with an annual rate of growth for com-mercial energy consumption of between 6.5 and 7.5%, raising the elasticityfigure to 1.0-1.15. This is still well below the values preceding the first"'oil shock"; but it reflects a return to a situation in which the consumptionof commercial energy will grow faster than GDP. This unwelcome but probablyunavoidable development will be softened if a larger share of energy supplycan come from domestic resources./l

5.02 Expected growth in the demand for energy will require a near dou-bling in commercial energy supply, from 95 mmboe in 1979 to about 185 mmboeby the end of the decade. A continuation of the existing pattern of energyconsumption and supply would result in an annual oil import bill by the endof the decade of about $4.3 billion in 1980 dollars; this would constitutearound 30-35% of projected imports, to which another 5-7% of expected coalimports must be added. The picture will be substantially worse if the driveto reduce dependence on oil (especially imported oil) does not succeed. Inthis chapter, we examine the projected pattern of energy consumption and theextent to which other, cheaper sources of energy will substitute for oil inthe major consuming sectors: industry, transport, power generation and house-hold demand. In the next chapter we deal with the implications of this pro-jected consumption pattern for the supply of oil and of the other primaryfuels -- coal, hydroelectricity, geothermal steam, nuclear power and non-conventional energy sources.

Sectoral Composition of Demand

5.03 The 6.5% projected overall rate of growth of commercial energy con-sumption will, of course, derive from the different and changing patterns of

/1 The judgments and numbers in this paragraph, and throughout the chapter,have been thrown into some doubt by events since it was written. In both1980 and 1981, total energy consumption fell, despite continuing growth inthe economy. If energy elasticity can be held to 1.0 for the decade, totalenergy demand in 1989 would be 150 mmboe instead of the 185 mmboe projectedby the mission -- a reduction of nearly 20%. The two figures provide alikely range for end-of-decade demand for commercial energy.

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energy consumption at the sectoral level. The projected evolution of thissectoral pattern is presented in Table 5.1 below. While these projectionsare useful indicators of broad orders of magnitude, they are no more thanthat. The rate at which commercial energy consumption grows in the dif-ferent sectors will depend not only on their growth of output (or real in-come for households) but also on the pricing policy for energy productsand on the degree to which the Government's planned conservation campaignis successful. On both these points, there remain uncertainties about futuredevelopments which raise the margin of error for these figures and emphasizetheir indicative nature.

Table 5.1: SECTORAL COMPOSITION OF COMMERCIAL ENERGY DEMAND CONSUMPTION(Percentage Share and Total mmboe)

Annual AverageGrowth Rate

Sector 1979 1989 1979-89 (%)

Industry 49 55 7.5Transport 30 24 3.3Commercial/Residential 20 20 6.5Others 1 1 6.5

100 100

Total mmboe 89.9 167.2 6.5

Source: Mission estimates.

As these sectors rely in varying degrees on the different energy sources,differences in their projected growth of energy consumption will be trans-lated into differing growth rates for the overall consumption of thosefuels. A further source of variation will be introduced through the processof interfuel substitution within each sector as cheaper energy sources dis-place increasingly expensive petroleum products. These changes and theirimpact on the consumption pattern for the major fuels are analyzed below.

The Consumption of Petroleum Products

5.04 Petroleum product consumption is projected to grow at an averageannual rate of 2.5% and its share in commercial energy consumption as awhole is consequently expected to fall from 91% now to 66% by 1989. Thisreduction will be brought about in three ways: firstly, through the sub-stitution of coal for oil as a source for industrial energy, particularlyin the cement industry; secondly, through a reduction in the share of oil-

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fired thermal plants in the rapidly expanding electric power sector; andthirdly, through a lower rate of growth of energy consumption in the trans-port sector, which relies exclusively on petroleum products and where thepotential for interfuel substitution is limited, at least for the firsthalf of the decade.

Table 5.2: SECTORAL CONSUMPTION OF PETROLEUM ENERGY PRODUCTS

Consumption mmboe in Annual Average Growth RateSector 1979 1984 1989 1979-84 1984-89 1979-89

Industry /1 28.3 41.8 45.6 8.1 1.8 4.9Transport 27.1 31.8 38.5 2.9 3.7 3.3PowerGeneration /2 18.2 11.8 5.0 -8.3 -18.7 -13.4

Household/Commercial 5.4 7.5 11.4 6.8 8.7 7.7

Total 79.0 92.9 100.5 3.2 1.7 2.5

/1 Includes an estimated 6-7 million bbls. for electricity generation;this use of oil by industry is expected to drop sharply during thedecade.

/2 NPC only.

Source: Mission estimates.

5.05 In the Industrial Sector the consumption of petroleum products(mainly fuel oil for raising steam) is projected to increase at about 4%per annum, which is well below the rate of growth of industrial output.Nevertheless, the industrial sector will continue to rely on petroleumproducts for meeting at least half of its energy requirements throughoutthe next decade; in absolute terms the consumption of petroleum productswill be about 50% larger in 1989 than it was in 1979. Restraining thegrowth of petroleum use in industry to 4% will depend critically on twofactors: the success of the coal substitution program and the growing useof energy conservation measures. In arriving at these estimates, it hasbeen assumed that the Government's fuel conservation program for the cementindustry would proceed on schedule and that the program for other industries,while falling short of its 1984 target by about a third due to greater-than-expected delays in initial implementation, would also achieve its objectivesfor 1989. The success of this program alone would result in the potentialdisplacement of about 2.4 million barrels of petroleum products (largely fueloil) by 1989; about 1.5 million barrels would be replaced by coal, the rest

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by wood and bagasse. Further savings in petroleum product consumption ofabout 400,000 barrels by 1989 have also been assumed for these estimates.These will accrue from the programmed improvements and modifications toexisting industrial techniques and machinery.

5.06 A summary of the Government's planned conservation program forindustry and estimates of the potential that might accrue from it are pre-sented in Annex 6 of this report. Nevertheless, it is important to empha-size here that the expected rate of return for this program is high -- over40%; the savings in petroleum consumption are also large in absolute terms --over P 600 million a year in 1980 prices. In view of this, it is all themore important to resolve the relatively minor organizational and financialissues that might impede the rapid progress of this program. The introduc-tion of fiscal incentives in 1981 to private firms investing in energy con-servation should stimulate interest. The expansion of BEU's energy manage-ment training courses and advisory services need review to see if they canbe strengthened. With generally rapid payback of energy-saving investment,the availability of finance may be more important than concessionary terms.Announcing a "special program" may also stimulate action that would nototherwise be taken.

5.07 In the Transport Sector projections of fuel consumption are diffi-cult to make on the basis of historical trends, both because the availabledata are sparse and sometimes contradictory and because the transport sectorhas been and is still going through a period of rapid structural adjustmentto higher fuel costs. Since 1973, there have been large fluctuations in thegrowth of transport fuel consumption ranging from a decline of 8% in one yearto an increase of 6% in another. While the data series is far too short forconclusive evidence, it does suggest that much of this erratic fluctuation isconfined to the early years after 1973. Since 1976, for example, the totaldemand for transport fuels has been growing more or less steadily at between2 and 4% a year. The demand for individual products has of course been morevolatile, largely reflecting vehicle fleet adjustments caused by the Govern-ment's interproduct pricing policy. As mentioned earlier, the consumption ofgasoline has declined in absolute terms, mainly because vehicle owners haveshifted from gasoline to diesel power to take advantage of the product pricedifferential. /l

5.08 In its projections of future demand for transport fuels, the MOEhas assumed a continuation of the declining trend in gasoline consumption;this assumption results in a reduced overall transport fuel consumption growthrate of 2.8% for the period 1979-89./2 However, these projections are likely

/1 Between 1978 and 1979, the number of diesel powered trucks, buses andjeepneys increased dramatically from 115,000 to 185,000 and their sharein the total fleet of trucks, buses and jeepneys rose from 31% to 45%.A large part of this increase reflects the substitution of diesel forgasoline engines in the same vehicle.

/2 Gasoline consumption is expected to decline at an annual rate of 1.4%during the 1980s (2.1% p.a. to 1984 and 0.6% p.a. thereafter). Totaltransport fuel consumption is projected to grow at 1.9% p.a. to 1984 and3.7% p.a. thereafter, resulting in an average annual rate of 2.8% for theentire period.

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to prove optimistic because much of the decrease in gasoline consumptionover the past five years resulted from a once-and-for-all adjustment tointerfuel price differentials. If the Government now adjusts pricingpolicy for gasoline and diesel to achieve refinery balance, as recommendedin this report, further shifts from gasoline to diesel power are unlikelyto materialize. A more reasonable assumption would be that if any furthersuch shifts were to occur their effect would be counterbalanced by the growthof gasoline demand by existing users and new private car owners and that, onbalance, the consumption of gasoline would remain at its present level forthe next five years. Beyond that date, the rate of growth of gasoline con-sumption will depend critically on the outcome of the Government's alcoholdevelopment program and on world-wide efforts to develop low-consumptiongasoline vehicles./l If, as recommended in this report, the alcogas pro-gram is implemented at a much slower pace than planned, its impact on gaso-line consumption is likely to be limited to the equivalent of less than 1million barrels a year by 1989; again this impact could easily be offset bygrowth in the overall demand for gasoline. Therefore, in the following esti-mates, gasoline consumption is projected to remain at current levels through-out the 1980s./2 These estimates further assume the continuation of govern-ment policies and programs to improve the efficiency of vehicle utilizationthrough appropriate fiscal and pricing policies and an expanded program oftraffic management to reduce congestion in Metro Manila and shorten vehicleturnaround times.

5.09 The use of oil in the Electric Power Sector depends critically onthe policy that the Government adopts with regard to the early shifting ofexisting oil-fired plants from base-load to peaking service and their replace-ment for base-load duty by non-oil-fired units. In the Ten-Year Energy Program,the Government has based its projections for oil consumption in the power sec-tor on early withdrawal from service (i.e., outright retirement) of some 1,460 MWof oil thermal capacity during the 1980s. However, a program scaled down tothe level needed to meet load growth would result in full retirement of onlyabout 420 MW and would retain in service the remaining 1,040 MW, which wouldbe operated less intensively as they moved to higher positions on the loadcurve. On this latter (probably unlikely) scenario, electricity generationfrom the existing oil-fired plants is expected to decline from 12,600 GWh in1979 to around 9,800 GWh in 1989; the consumption of oil in the electric powersector is projected to decline proportionately from 3.15 MTOE to 2.25 MTOEover the same period. This reduced oil consumption will mean a gross savingof around US$240 million a year by 1989; these savings on the oil account willbe offset by whatever foreign exchange expenditures may be necessary to re-place the reduced oil-fired energy. If the substitute coal, nuclear, orgeothermal fuels had to be paid for entirely in foreign exchange, the abovegross savings in oil imports would be cut approximately in half.

/1 For a discussion and review of this program, see below Chapter 6 andalso Annex 5.

/2 For the other transport fuels, projected growth rates are those providedby the MOE. This results in the projected overall rate of growth fortransport fuels of 2.9% p.a. up to 1984 and 3.7% p.a. thereafter whichis cited in Table 5.2 above.

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5.10 Differences in the sectoral consumption growth will have an im-portant bearing on the structure of petroleum product demand in the 1980s.Large-scale substitution by coal will be translated primarily into a re-duced demand for fuel oil; and above-average growth in the domestic andcommercial sector will result in an increase in the share of kerosene andLPG in total product demand.

Table 5.3: PROJECTED DEMAND FOR PETROLEUM PRODUCTS

-- Consumption ---(million barrels) Annual Average

Product 1979 1984 1989 Rate 1979-89(M)

Gasoline 14.4 14.5 14.5 0Diesel 17.0 21.4 28.3 5.2Fuel oil 38.6 44.0 42.6 1.0Kerosene 3.5 4.7 5.3 4.2LPG 2.7 3.9 5.2 6.8Avturbo 2.8 3.9 4.6 5.3

Total 79.0 92.4 100.5 2.5

Source: Mission estimates.

The Demand for Coal

5.11 During the 1980s the demand for coal is projected to increase morerapidly than for any other conventional energy source. This is due partlyto the present very low level of coal consumption but more to the vigorouscoal promotion program that has been launched by the Government and to theeconomic attractiveness of coal to many users for whom energy is an importantcost. The cement industry -- the country's largest oil-using industry -- hasbeen instructed to switch from oil to coal and a program has been drawn up toaccomplish this by the middle of the decade. Plans are also under way toincrease the consumption of coal in other industries and in the power sector.Although initial progress in this field has been slow, a revised and slightlyscaled-down version of the coal promotion program now appears ready to moveahead. However, for industrial users other than cement, it is still likelythat the Government's 1984 target of 1.5 million tons will need to be reviseddownwards by about a third, although this target can probably be met by theend of the decade. For the electric power sector a rapid inicrease in coalconsumption emerges directly from the least-cost power expansion program dis-cussed in the following chapter.

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Table 5.4: COAL CONSUMPTION PROJECTIONS

---- Consumption ----- Annual Average(thousand tons) Growth Rate (%)

Sector 1979 1984 1989 1979-89

Cement Industry 145 1,400 2,500 32.8Other Industry 87 1,100 1,500 33.1Electric PowerGeneration 7 310 2,300 81.9

Total 239 2,810 6,300 40.0

Source: Mission estimates.

5.12 One of the impediments to the early development of a coal marketin the Philippines is the uncertain perception by private buyers and sellersof the role that the Government intends NCA to play in the marketing of coal.At present it is not clear whether NCA will be involved as a coordinatingagency for all such contracts. To resolve this uncertainty the Governmentshould make clear that NCA stands ready to supply coal users with their re-quirements on request but that users are also free to negotiate their ownsupply contracts -- either domestic or foreign -- entirely independentlyif they so choose.

The Demand for Electricity

5.13 Electric power consumption is projected to grow at about 7% perannum during the 1980s, a rate somewhat below historical levels and whichreflects the moderating impact of a more effective program of demand man-agement and conservation and the early removal of excessive subsidies inthe pricing of electric power for residential users in Metro Manila. How-ever, this national average will derive from quite unequal regional trends,with consumption growth in the "young" and small Visayas and Mindanao mar-kets exceeding the growth rate for the large, mature Luzon market. Thesetrends reflect national objectives, which call for directing industrialgrowth outside the metropolitan Manila area. It is not possible to presentreliable projections of electricity consumption on a regional basis; thebest available figures are those for expected growth of NPC generation,1980-89, shown in Table 5.5 below. These figures overstate the probablegrowth in total consumption because some of the NPC growth (especially inMindanao and the Visayas) will include substantial substitution of new,cheaper NPC supplies for existing "captive" generation. Since the figuresare based on projected NPC generation, use of these growth rates to esti-mate consumption-growth implies no change in system losses.

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Table 5.5: PROJECTED GROWTH OF NPC GENERATION, BY REGIONS, 1980-89

Generation (GWh) Annual Average GrowthRegion 1980 1989 (%)

Luzon 12,714 23,739 7.2Visayas 1,047 3,880 15.7Mindanao 1,873 4,510 10.3

Total 15,634 32,129 8.3

Source: Annex 4, Appendix 4.

5.14 At a sectoral level, industrial electricity consumption will con-tinue to account for a large and increasing share of the total. Thereforeit is all the more important to resolve the existing uncertainties relatingto the projected power requirements of the 11 major industrial projects whichare part of the Government's industrial expansion and diversification program.The economic feasibility of many of these projects is currently under reviewand planning for their large but as yet unspecified energy requirements is adifficult matter. In the following projections, the energy requirements offour of these projects have been excluded because of their early stage ofpreparation and the resulting uncertainty about their realization during thedecade. An additional source of uncertainty for sectoral projections of elec-tricity consumption stems from the lack of good data on "captive" power plants,i.e., those owned largely, but not invariably, by industrial firms. Today,about 20% of the country's generating capacity is owned and operated by non-public entities (about a dozen small private utilities plus a large number ofcaptive generators). In view of the expected decline in captive generationover the next decade as NPC power replaces the largely oil-based and muchmore expensive captive power, (especially in the Visayas and on Mindanao),the following projections, which are based on expected growth of NPC salesto industries, tend to overstate the rate of growth of consumption in theindustrial sector since they make no allowance for the retirement of captiveplant.

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Table 5.6: SECTORAL DISTRIBUTION OF ELECTRICITY CONSUMPTION(NPC Customers Only)

-------------- Percentage Share --------------Sector 1979 1984 1989

Industry 49 55 57Commercial 25 22 21Residential 21 18 17Others 5 5 5

Total 100 100 100

5.15 The Government has set itself ambitious targets for its nationalelectrification program to be carried out by the NEA. Under this programmore than five million new householders are hoped to be connected to theelectricity network during the 1980s. This would be supplemented by anadditional 630,000 household connections done by private utilities in urbanareas and would raise the percentage of households with access to electricityfrom a national average of 43% to nearly 100% by 1989.

- 43 -

6. ENERGY SUPPLY IN THE 1980s

Overview

6.01 The program of demand management and interfuel substitution dis-cussed in the previous chapter will make an important contribution towardsreduced dependence on imported oil by resulting in a substantial realloca-tion of the pattern of energy supply by primary energy source. Oil and oilproducts will account for a much reduced share of this supply in 1989 ascompared with their contribution now. Nevertheless, in absolute terms therequirement for petroleum will probably continue to rise; 50-60% of thisincrease might come from domestic oil (see Table 6.2); even larger in-creases in the supply of other primary energy sources will be called for.In 1989 the country must expect to be spending considerably more foreignexchange for oil imports than it is now paying, even if its Ten-Year Programis highly successful. The share of imported energy will go down but theabsolute amount will go up.

Table 6.1: COMMERCIAL ENERGY SUPPLY BY SOURCE

Percentage Share in Average Annual IncreaseSource 1979 1989 1979-89 (%)

Oil 91.0 66 3Coal 1.0 14 40Geothermal 1.5 6 20Hydro 6.6 9 9Nuclear - 4 -Other - 1 -

Total 100.0 /I 100 6.5

/1 Rounded.

6.02 Meeting these increased requirements for primary energy supplywill be a major challenge for the 1980s. The Ten-Year Energy Program hasassumed that all the country's additional oil and coal requirements will bemet from increased domestic production and that the substantial realloca-tion in the source of energy supply will be translated into an equally sub-stantial reduction in the country's reliance on imported energy. However,a major conclusion of this report is that while the increased domestic pro-

- 44 -

duction of these resources will indeed result in a considerable reductionin the proportional reliance on imports, for neither coal nor oil will thisincreased production be sufficient to meet the projected growth in demand.By 1989, domestic oil production is unlikely to exceed 70,000 barrels perday and domestic coal production is expected to be in the range of 2.5 mil-lion tons (compared with a projected consumption level of over 6.0 milliontons)./l These somewhat disappointing findings are offset to some degree byan equally important positive recommendation with regard to the large andcostly electric power program, where potential capital cost savings of nearly$3 billion have been identified, mainly by NPC, through the formulation of amore efficient least-cost investment program.

The Supply of Petroleum

6.03 A detailed review of the prospects and program for increased domes-tic oil production is presented as Annex 3 to this report. The main con-clusion of that review is that domestic oil production is unlikely to exceed65-70,000 barrels per day (about 25 million bbls per year) during this decade.This level of production represents a threefold increase over current produc-tion levels but it is only 55 to 60% of the MOE's earlier projection of 120,000bpd by the end of the decade (the MOE has since sharply reduced its expecta-tions of domestic output).

6.04 This estimate represents the "most probable" level of productionbased on a careful review of the country's geology and of the policy andinstitutional environment that has such an important influence on the rateof drilling. The main explanation for the somewhat disappointing projectionis geologic, i.e., the nature of the country's oil-bearing rock is such thatthe probability of discovering petroleum resources on the scale assumed inthe Government's Ten-Year Energy Program is less favorable than the Programassumes. However, as with all such projections, these estimates are subjectto a wide margin of error. There remains a small chance -- between 0.1 and1.0% -- that a very large find (e.g. up to 1 billion barrels) might be made.But this possibility is too remote to form a basis for supply planning inthe energy sector. Even if such a discovery were to be made, it would beunlikely to have any impact on petroleum supply in the 1980s, given the longlead time between discovery and when it could be brought on stream. At theother end of the probability range, there is a small chance that no furtherdiscoveries will be made and that domestic oil production will trail off after1984 when the proven but as yet undeveloped reserves of the Cadlao and Matinlocfields have been exhausted. However, this possibility is also too remote toform the basis of national planning.

/1 In the compressed five-year program for energy self-sufficiency, pub-lished in July 1980, the figures for oil and coal consumption, and forthe domestic production of these primary fuels, were both revised down-wards. In the new plan, oil-dependence was estimated to fall from 84.5%in 1981 to 57.19% in 1985 (the Ten-Year Plan's figures were 91% and 66%).In fact, oil dependence is falling somewhat faster than projected (84.4%in 1980, 81.1% in 1981); the big gains will come from substitution incement and power generation.

- 45 -

6.05 The "most likely" estimate for domestic oil production in the1980s is a steady increase from present levels to about 25 million barrelsper year by 1987 onwards. This finding is crucial to estimating the levelof oil imports by the end of the decade./l

Table 6.2: PETROLEUM SUPPLY PROJECTION(milliona barrels)

Sources 1979 1984 1989

Domestic crude oil /1 7.7 15 25Imported crude and products 74.9 82 80Total supply 82.6 97 105Domestic prod. as apercentage of total 9.3 15 24

6.06 The rise in oil imports will result in a continuing strain on thebalance of payments. Assuming a 3% per annum real increase in internationaloil prices, the country's oil import bill will increase (in 1980 dollars)from about $2 billion in 1979 to $2.8 billion in 1984 and $3.2 billion in1989.

6.07 Attaining even the projected level of domestic oil production ispredicated upon the early rectification of certain (relatively minor) anom-alies in the existing terms and conditions of the service contracts with ex-ploration companies so that the latter will in fact undertake the requiredlevel of drilling activity. These suggested changes are discussed in detailin Annex 3 of this report; the more important of them include the following:

(a) the introduction of greater flexibility in thepresently uniform minimum drilling requirementsof service contracts to ensure that areas withless attractive prospects are not neglected;

(b) reducing the size of the exploration blocks inthe more promising offshore areas;

(c) restricting the use of exclusive geophysicalcontracts offshore;

(d) expediting the negotiation and signing of servicecontracts to minimize uncertainty; and

(e) speeding up the agreed conversion and repatriationof local-currency profits received by foreign oilcompanies.

/1 By mid-81 the Government was projecting 1986 oil output of only .8 to6.6 mmb, far below the Survey mission's estimate. The difference ofroughly 20 mmb is matched by a similar reduction in domestic oil con-sumption, which the Bank thinks will be smaller and will come later.With such large uncertainties, estimates of oil imports in 1989 arehighly speculative.

- 46 -

6.08 These changes are individually minor but their collective impacton the drilling rate could be substantial. For the medium term, the Gov-ernment should also encourage the pace of exploration by playing a moreactive role in collecting and disseminating technical and geophysical data.This can be done through a combination of publishing nonconfidential datagenerated by private contractors and mounting an expanded data-gatheringprogram of its own, for which it might consider the use of external tech-nical assistance.

The Supply of Coal

6.09 The Government initially set a very high target for the expansionof domestic coal production, hoping that output could be increased over 20fold during the decade, from about a quarter of a million tons in 1979 to6.0 million tons by 1989. A careful review of the existing knowledge ofmineral deposits, of the present state of technology in the industry, andof the requirements for expanding output suggests that by 1989 coal outputis unlikely to exceed 2.0-2.5 million tons./l A major implication of thisis that a growing and substantial volume of coal imports will be requiredto supplement domestic production and help satisfy rapid expansion in thedemand for coal hoped for in the industrial and power sectors. Indeed, thelargest investments needed to expand coal use will not be for coal produc-tion but for infrastructure facilities to handle the transport, unloading,blending, and distribution of both imported and domestic coal.

Table 6.3: COAL SUPPLY PROJECTIONS('000 tons)

1979 1984 1989

DomesticOpen pit - 1,000 1,500Underground 263 500 1,000

Sub-total 263 1,500 2,500

Imports - 2,250 4,250

Total supply 263 3,750 6,750

Source: Staff estimates.

6.10 As the above table shows, much the quickest way of increasing coaloutput would be to concentrate on opencast or strip mines. There are atpresent two such known exploitable deposits of any consequence -- one onSemirara Island and the other in the Cagayan Valley in Northern Luzon. Both

/1 See Annex 2 for a detailed review of the coal expansion program.

- 47 -

of these deposits are being developed by private companies; their combinedoutput, although subject to some uncertainty in the early years, should bearound 1.5 million tons by the end of the decade. By contrast, undergroundmining will do well if it doubles production levels every five years andproduces about 1.0 million tons by the end of the decade.

6.11 The differential rates of increase for opencast and undergroundmining reflect the more intractable problems associated with the latter'sexpansion. The two major opencast projects, although substantial in size,do not appear to present problems that lie beyond the ability of a compe-tent management to solve, using suitable assistance. The problems of theunderground industry are far more difficult to deal with. Neither theGovernment nor company managements now have a good understanding of whatis needed to expand the industry's output, and no plan yet exists for doingso. The top priority for launching the industry on an expansion course isthe preparation of such a plan, using four to six months of experienced tech-nical assistance. This would concentrate primarily on the formulation ofdetailed expansion programs for half a dozen or so of the larger existingunderground mines, most of which are on Cebu.

6.12 It is unlikely that new mines can make any significant contribu-tion to the expansion of underground production during the decade. Onlytwo new mines are presently under development, both by PNOC subsidiaries./lOne of these has already turned out to be a major disappointment; a reflec-tion of inadequate planning and plain bad luck. Primary reliance will there-fore have to be placed on output expansion at about 10 of the industry'slarger mines that can be brought up to around 300 tpd or 90,000 tpy. Onlyminor increases can be expected from the 25 or so other operations, whichare extremely small and primitive.

6.13 Although a substantial increase in manpower will be needed, overhalf the potential increase in output can come from the doubling or triplingof productivity that seems feasible. Most mines should probably be encouragedto shift over from the present room-and-pillar method of working to a modifiedlongwall system. Hand winning (with pneumatic picks) would continue, withlittle or no introduction of large-scale mechanization. Improvement of under-ground haulage and of hoisting systems appear the keys to getting more coalto the surface. With faster extraction and more dust, there will be majorneeds for improved ventilation and for more reliable supplies of roof supports(wood pit props) than now exists. Several mines will need to be electrified,or to have their supplies improved. Once higher volumes of output reach thesurface, many mines will find it impossible to move them to market unlessimprovements are made in the low-standard roads that now connect most minesto customers or forwarding points (all land transport of coal is handled bytruck). To operate the industry at a level with perhaps 50% more employees,at three or four times the level of previous output, and with considerablyhigher levels of capitalization will require a substantial expansion of tech-nical, supervisory and skilled manpower. It is important to note here that

/1 Two more promising possibilities (Malangas II and Bislig, both onMindanao) are entering the feasibility study stage.

- 48 -

at present, the country has no technical institution for training miningtechnicians or supervisors, although there are engineering colleges.Given the industry's present low absorptive capacity, a quadrupling ofunderground output by 1989 would be no small achievement.

Nonconventional, Renewable Energy

6.14 There are two parallel but different programs for the further de-velopment and use of nonconventional energy resources. Both are well ledand hold out considerable long-term promise. The NEA, which reports not tothe MOE but the Office of the President, has planned a nationwide programof electricity generation based on mini-hydro and dendro-thermal sources.This program, which has adequate bilateral funding for the next few years,may add 400-800 MW of capacity to the country's installed capacity by 1989.A second and quite different program (R&D work on nonconventional energy)is being pursued by the CNED, presently an entity of the MOE but scheduledfor transfer into PNOC. CNED is only moderately interested in power genera-tion (and only in using technologies, such as wind and sun, which still re-quire much R&D work): it is primarily interested in nonpower solar applica-tions (e.g. hot water heating, the drying of agricultural crops), in biomassand biogas possibilities, in adapting vehicle engines to multiple fuels, andin improved cooking stoves. Biomass conversion and solar-heat applicationspresently look the most promising. Windmills have proven vulnerable totyphoons. Biogas energy is still experimental, with a large proportion ofan initial experiment with 500 units said to have closed down. Biogas hasproven itself in large-scale commercial piggeries; but there is still con-siderable question about the viability of small-scale systems./l The French,British and Chinese Governments are supporting the NEA program; the UnitedStates Agency for International Development (USAID) and the Federal Republicof Germany are supporting the CNED program. Additional support for one orboth of these programs is likely from the Federal Republic of Germany, whichis supporting the development of renewable energy in several countries; fullerdescriptions of both the CNED and NEA programs appear in Annex 7, "Noncon-ventional Renewable Energy".

6.15 The main recommendations made on these two programs are (a) thatNEA should relax its drive for generating self-sufficiency in all its memberco-ops and concentrate on areas that cannot be joined to NPC grids at accept-able costs, and (b) that CNED needs to prioritize its tasks (the introductionof an "Assessment Workshop" sounds a useful step) and should begin to paymuch more attention to the market side of nonconventional energy development,i.e., to the social acceptability and economic viability of its technicaldevelopments.

The Electric Power Expansion Program

6.16 A detailed review of the electric power expansion program is pre-sented as Annex 4 to this report. There have been several revisions in

/1 Despite these doubts, the Ministry of Agriculture announced in 1980 anew program designed to build 5,425 village digesters by 1985.

- 49 -

the power investment program originally proposed in the Ten-Year Energy Plan.The changes have reflected (i) Presidential urging to accelerate the shiftfrom imported to domestic primary energy sources as rapidly as possible and(ii) rapid changes in the identification of potential new domestic resources(geothermal and coal) which have led to revisions in the proposed program.The Bank felt that the originally-proposed program was unnecessarily large,both because it assumed too high an estimate of future loan growth and becauseit included the building of some new generating capacity intended not to meetload growth but to permit early retirement of existing oil-fired plants. Bankcalculations suggested that, on the basis of January 1, 1980 oil prices paidby NPC, there was no clear advantage to increasing the investment program topermit accelerated retirement of oil-fired plant. It pointed out that con-siderable oil savings would occur anyway, under a more modest investmentprogram geared to the agreed load growth of just over 7%, as existing base-load oil plants were moved to higher positions on the load curve, where theywould be operated less intensively as peaking plants. After reaching almostcomplete agreement with the Bank, NPC (stimulated in part by sharply higherprices for oil) re-examined its program and in August, 1981 proposed anAccelerated Program that would greatly increase investment (mainly to exploitthe large but distant geothermal resources on Leyte) in the first half of thedecade; these additional investments would permit much larger oil savingsduring the second half of the decade: the difference in NPC's projected oilconsumption, 1986-90, would amount to around US$1.4 billion in 1981 prices.

6.17 The Bank had many reservations about the economic justification, andabout the financial and technical viability of the Accelerated Program (inSeptember, 1981 this was reduced slightly and renamed the Adjusted Program).A Task Force was established within the Bank to restudy the main alternativeswhich NPC had under consideration. The Bank's review, conducted with the aidof the WASP II computer program, showed that there was little to choose amongthe main alternatives under study when judged from the viewpoint of lowestpresent-value cost. But the Bank pointed out to the Government that theinvestment program which NPC appeared to favor, and which involved very heavynear-term investment in geothermal capacity very distant from the only market,was open to serious question on grounds of financial cost, administrativefeasibility, and technical risks. At time of publication these questions hadnot yet been resolved, and constructive discussions between the Bank and theGovernment were continuing.

6.18 The preceding account reflects the fact that both NPC and the Bankhave had difficulty in finding a clear answer to the question of how rapidlyexisting oil-fired base-load plants should be phased out by investing in newgenerating capacity based on domestic resources. The answer involves a trade-off between substantially higher near-term capital costs (including foreignborrowing and its future foreign exchange obligations) and future oil savings.Bank and NPC calculations have thrown much light on the problem but the finaldecision will depend heavily on matters of judgment and national financialpolicy.

6.19 The NPC is (wisely) accelerating the introduction of coal-firedbase-load plants as rapidly as possible. The main problem is no longer thatof deciding what to do but that of detailed planning and implementation. NPCis also accelerating its exploration and development of geothermal sites,since this source, already competitive, will become even more attractive as

- 50 -

oil and coal continue to rise in price, as expected. Geothermal steam isnot a "free good", however, as the Government well knows; making use ofthis resource requires investments in wells and surface piping and equip-ment, the cost of which is roughly equivalent to developing a major coalmine. If these costs, including a normal rate of return, have to be paidfor in foreign exchange (as under at least one NPC contract) then there islittle balance-of-payments advantage to generating electricity by geothermalmeans instead of using imported oil or imported coal. This fact underlinesthe importance of expanding domestic geothermal skills as rapidly as possiblein order to minimize dependence on foreign firms. In addition to NPC's vig-orous moves into geothermal and coal generation, it should keep under con-tinuing review the possibility of installing one or more additional nuclearpower plants. Not only are the country's coal and geothermal resourceslimited, but nuclear plants may also turn out to have attractive cost ad-vantages as large-scale base-load plants.

6.20 The Survey also strongly recommends more cooperation between NPCand NEA, perhaps by means of a permanent working group, to achieve economiesof scale in investment and in operations. Agreement should also be reachedon which areas of the country it would be most economic to install the pro-posed dendro-thermal and mini-hydro plants.

6.21 In addition to identification of the least-cost expansion program,a second major problem is the program's financing. NPC has not been gener-ating internally sufficient cash to (i) cover its debt service requirementsand (ii) make a reasonable contribution to its investment program. This isnot an acceptable state of affairs in a revenue-producing sector that requiresmore capital than any other sector of government expenditures. The onlysolution to this serious cash-flow problem is an increase in the averagelevel of electricity tariffs, both wholesale and retail. NPC must join withother interested agencies in the industry (e.g. NEA, MECO) to work out tech-nical solutions to this problem that are likely to be politically acceptable.

The Alcogas Program

6.22 The alcogas program was launched in late 1979 as the Government'smajor effort in the field of nonconventional energy development. The pro-gram's stated objectives for the 1980s are to progressively replace up to20% of the country's projected consumption of gasoline with anhydrous alcohol(by 1985) and to then use ethanol as an industrial feedstock and in purealcohol engines as ethanol production rises to nearly one billion litresby the end of the decade. The costs of this program are high -- both interms of its initial capital investment (estimated at nearly $900 million)and in terms of land requirements, which would rise to over a quarter of amillion hectares at peak operation.

6.23 The program's targets and its economic feasibility are reviewedin detail in Annex 1 of this report. The main conclusions of this revieware that the program's physical targets are unlikely to be met, at least overthe next five years, in view of attractive alternative markets available forsugar to private cane growers, on whose support the success of the alcogas

51 -

program depends to a great extent. A more realistic scenario for anhydrousalcohol production over this period would be for production to grow fromabout 2 million litres in 1980 to 9 million litres in 1982 to 120 millionlitres in 1984 and 1985; the latter figure would be less than 25% of the1985 target./l At the same time, it is not at all clear that meeting these(lowered) targets would be a good use of national resources. The other mainconclusion of the review is that whereas there is a good possibility thatalcohol production from sugar cane will become economically viable in thePhilippines in the latter half of this decade, present evidence stronglysuggests that this is not likely to be the case for the next five years.The medium term behavior of the volatile world sugar market is a key factorin these conclusions: 1980 sugar prices make alcohol production uneconomicwhen alcohol is priced somewhat higher than 1980 gasoline prices. The eco-nomics of alcohol from cassava or sweet potatoes is expected to be even lessattractive than returns from sugar cane because of low yields and high costs.An attempt has been made to calculate an economic rate of return for the pro-gram based on the most plausible assumptions regarding the projected worldprice of sugar and the associated economic cost of sugar cane, the projectedprice of crude oil, the cost of plant and equipment, and other key variablesaffecting the program. The sensitivity of the economic rate of return toalternative assumptions regarding these uncertain parameters has also beenexamined. Under none of these alternatives does the economic rate of returnfor the program exceed 12%, and it only approaches that figure if the invest-ment in distillery facilities is delayed to begin in 1984, with alcohol pro-duction commencing in 1986. For the program as it is formulated now, theeconomic rate of return is about 3.5%, far below the opportunity cost ofcapital to the Philippine economy. An attempt has also been made to evaluatethe economics of biomass alcohol production in the Philippines in terms ofthe estimated domestic currency costs of the program's foreign exchange sav-ings. This analysis suggests that the domestic resource cost of producinganhydrous alcohol is 15-20% greater than the cost (at the existing exchangerate) of importing crude oil and refining an equivalent amount of gasoline.Alternatively stated, the loss to the economy from alcohol production in onedistillery of 120,000 litre/day capacity could be as much as one milliondollars annually. The implication of this calculation -- if substantiatedby further study, or if not reversed by cost-reducing technological changes --is that the country could acquire liquid fuel more cheaply by means other thanproducing alcohol (e.g. by expanding exports or substituting for nonoil im-ports) and using the extra foreign exchange to import more oil.

6.24 Under these circumstances, the immediate priorities of governmentshould be to ensure that the program is properly formulated, that technicalcadre and relevant institutions are gradually put in place, and that appro-priate technologies for the efficient production and utilization of rawmaterials are available to foster steady expansion of alcohol production

/1 The July, 1980, Five-Year Program revised the 1985 target downward bynearly 30% (the 1981 Program again reduced the 1985 target by a further50%). The target to displace 20% of gasoline with alcohol, by 1985, re-mained unchanged; these figures reflect an expectation that gasoline con-sumption (including alcogas) will also decline by nearly 30%, 1981-85.

- 52 -

as economic conditions permit. These considerations also suggest that heavyinvestment in distillation plant and equipment is not advisable in 1980-82.This reflects in part the unfavorable underlying economics of alcohol pro-duction in a period of high world sugar prices; it is also warranted by therapidly developing industrial technology in alcohol production, which mayresult in the early obsolescence of costly investments made today.

6.25 A reformulated national alcohol program should also reflect morefully three basic considerations which characterize its operation in thePhilippines. These are (i) the relatively high cost of raw materials;(ii) the scarcity of new land suited for sugar cane; and (iii) the islandgeography of the country and the associated cost of transporting alcoholas gasoline between production and consumption centers. A strong R&D ele-ment is needed in the program to take these factors into account. In termsof agricultural research, a basic objective should be to enlarge the supplyof low-cost raw materials within existing land constraints. With some notableexceptions, few underutilized areas remain with soils and climate suitablefor efficient sugar cane production; to a lesser extent the same constraintapplies to the increased production of sweet potatoes or cassava, the othersources of alcohol for energy. However, average cane and sugar yields in thePhilippines are relatively low by international standards and could be in-creased through stronger research and extension efforts. Additional work isalso needed to identify and test possible alternative raw materials for alcoholproduction (e.g. nipah palm, sweet sorghum, cellulosic materials) not only tofuel gasoline and (future) all-alcohol engines but to serve as a diesel fuelas well. The Philippine Government Coconut Palm Association has pioneered asmall project to develop a diesel oil substitute from coconut oil. A jeepneyhas been run over 100,000 km with various blends of coconut oil and diesel(to a maximum 80% coconut oil). Technically, coconut oil looks feasible,although starting problems increase at higher coconut oil ratios and lowerambient temperatures. Coconut oil does not yet look economically attractive,however. At present, mixing coconut oil with diesel is more attractive as away of supporting coconut prices when they are low than as an economical wayof saving diesel consumption./l

6.26 On the industrial side, PNAC is now wisely giving greater emphasisto smaller scale distilleries (in the range of 20-40,000 litres/day), annexedto existing sugar mills wherever possible to minimize capital costs and en-hance operating flexibility by permitting the production of either alcoholor sugar, depending on relative prices and national objectives. Finally,the island geography of the Philippines and the presence of numerous rela-tively isolated communities warrant efforts to decentralize the manufactureof liquid fuel supplies. Therefore, the R&D effort should examine the meritsof small distilleries to produce hydrous alcohol for use in pure alcoholengines, which could be used in several common applications in rural areas.In this context it may be possible to build upon existing small-scale dis-tillation technology in the Philippines to produce a localized source ofliquid fuels where the cost of raw materials and of transporting other liquidfuels make this option attractive. PNAC has in fact started a micro-distilleryproject with exactly these objectives (Japan's Honda Motor Company is coopera-ting by undertaking to develop, on its own initiative, an all-alcohol enginefor small-scale applications).

/1 The 1981 Program recognizes this fact and, in the face of steep falls incoconut prices, has greatly expanded the target for "coco-diesel." The1986 target for coco-diesel is now 1.35 mboe vs. 1.14 for alcogas.

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6.27 Some improvements will also be necessary to the institutionalaspects of the program. Despite its short history, PNAC appears to havethe potential to develop into an effective policy-making and advisory bodyfor the program as a whole. Nevertheless, the success of the alcogas pro-gram will depend critically on the degree of support provided by the privatesugar industry which is expected to supply the bulk of investment and mana-gerial resources for both the industrial and agricultural aspects of theprogram. At present, industry participation and interest is limited, partlybecause of attractive alternative markets for sugar, but also because oflimited awareness of the program and its objectives. To ensure futuresupport, there is a need to bring cane growers and millers more fully intothe design of the program. Indeed, if carefully integrated in terms of bothcane production and processing, with emphasis on flexible facilities to per-mit production of either sugar or alcohol, the alcogas program could con-tribute to the market stability which the Philippines sugar industry haslacked in the past. The same comment applies to the newer, less-publicizedcoco-diesel program. If the retail price of diesel is increased, as seemsdesirable, then private consumers could cover at least part of the subsidywhich coco-diesel will require.

ORGANIZATIONAL CHARTMINISTRY OF ENERGY

NEDANSDB .INISTER

DEPUTY

NWC1 -11vSEISECETARY SECRET ,Y

NATIONAL POJER P11ILIPP1NE NATIONALCORPORATION OIL CpANy

|AD1M421ST1RATIVE SE VICE | IFINANCIAL & MAAGEENT| PLANNING SERVICESERVICE

BUREAU OF ENERGY BUREAU OF ENERGY PHlILIPPIN2 ATOMIC BOARD OF ENERGYDEVELOPMENT UTILIZATION ENERGY CO012ISSIO-'1_

LEGENDSupervision and control

...................... Additional membership inGovernment Board

Attached for policy and

program Coordination

FUNCTIONAL CHART

BUREAU OF ENERGY DEVELOPMENT

DIRECTOR

Exercises overall supervision andcontrol over the policies, standards,rules & regulationsof the Bureau.

ASSISTANT DIRECTOR

Assists in the overall supervisionof the operations of the Bureau.

GEOTHERW~L DIVISION COMPLIANCECoordinates & regulates Provides coordinated &all activities concern- systematic control pro-ing the investigation, cedures to ensure com-exploration and develop- pliance of service con-muent of geothermal tracts.resources. l

NON-CODNENTIONAL RES. LEGAL & NEGOTIATIONSFormulates & implements] Provides assistance on

proqramIon development all legal matters; assuresprogram on development tesot lwo hof non-conventional re- the smooth flow of thesources. Provides tech- Bureau's negotiationsources. Provldes tecn-~~~aciviiesnical assistance on same. activities.

OIL AND GAS DIVISION COAL AND URANIUMCoordinates, implements Plans, organizes & con-& supervises overall trols the exploration,petroleum exploration development, mining &and production activi- beneficiation activi-ties in the country. ties on coal & uranium.

ENE.RGY RESEARCCH LABORATORYProvides supportive technicalservices to all energy explora-tion ventures thru complete &modern facilities & technology

FUNCTIONAL CHARTBUREAU OF ENERGY UTILIZATION

OFFICE OF THE DIRECTOR

Develops and administers programs for guidance,encouragement, and regulation of business activ-ities in the enerqy industry.

ASSISTANT DIRECTOR

Assists in the overallsupervision of the oper-ation6 of the Bureau.

_ ~ ~ ~ ~ ~I_ ___ -CONSERVATION & UTILIZATION DATA & ANALYSIS DIVISION

DIVISION Collects and processes infor-

Develops & irplements energy mation & statistics on energy,conservation program, and both domestic and international.utilization standards. Interprets reports on energy

situation and prepares fore-cast of energy demand and

_______ _ ______ supply. I

REGULATION DIVISION TECHNICAL DIVISION

Requlates imports, exports, Studies importation of crudeshipping, marketing distri- oil & determinesmost econo-bution refining and proces- mical sources. Draws upsing and storage activities plans to cope with contingen-of energy industry. cies of supply interruptions.

REGIONAL OFFICE

Implements laws, policies,plans & programs, rules &regulations in region.

1

PHILIPPINE NATIONAL OIL COMPANY

BOARD OF DIRECTORS

OFFICE OF THECHAIRMAN/PRESIDENT

G M C G M S C

STAFF TO THE CHAIRMAN4PRESIDENT

EXEC. IR UR-/-g.- VIEPRSCHIEF OPERATING OFFICER

LOGISTICS DIVISION FINANCE DIVISION MANAGEMENT SERVICES DIVISION LEGAL/MANPOWER DIVISION

| PETROLEUM - | E N ER G Y l l TRANSPORT

PETROPHIL CORP. | |PETROCHEMICAL PNOC EXPL. I AL PNOC MARINE PETROPHIL TANKERSrp CORP. ~~~~~~COL OR.CORP. CORP. _ _

P[ETRON TBA CORP. FILOIL REF.CORP NC NY PNOC SHRPG PNOC TANK-ERSCO

BATAA REF.ORP. LOIL IN ' LENERGYDRILPP. PETRON TANKERS1 BATAAN REFCORP1 FEST. INC. F .| ING DIV. |RASE CORP.

I!

CHART 5

FUNCTIONAL CHART

fOARD OF ENERGY

CHAIRMAN, BOARD MEMBERS

Regulates & fixes prices/rate schedule of petroleumproducts & electric power, issues licenses to re-fineries & regulates their capacities.

EXECUTIVE DIRECTOR

Directs & supervises the implementation ofthe policies & programs of the Board.

PROSECUTION STAFF INFORMATION STAFF

Acts as prosecutor on cases - Implements a systematic publicbeing tried by the Board. information program.

- Provides technical informationon oil piped gas, & electricpower.

ENERGY PRICES & LEGAL BRANCH REGULATION BRANCHRATES BRANCH

Rationalizes & fixes - Acts as legal Assists Board inprices, profit levels arm. formulation, imple-in the petroleum in- -Provides legal mentation of poli-

dustry, power utili- services, stud- cies for proper

ties & piped gas cos. ies & advice to supervision of oiltthe Board. refineries, piped

gas cos. & elec-tric power.

ENERGY PRICING DIVISION LAW DIVISION

Reviews cases of overpricing Provides interpretativein petroleum, piped gas & opinions & legal assis-electric power. tance to Board on cases

referred to it forI_________________ _ study or action.

FIELD OFFICES

ENERGY ECONOMIC HEARING DIVISION - Implements poli-RESEARCH DIVISION cies of Board

affecting Op-Makes economic studies on Hears & receives erations of oilproduction, supply, demand, _ evidence on cases refineries &consumption, inventory, involving prices elec. utilities.capacity of petroleum, & rates viola-piped gas & electric tions in the sale,power. retail of petro-

leum, piped gasl_________ _ & electricity.

ACCOUNTING & ADMINISTRATIVEBUDGETING DIVISION DIVISION

Advises the Board on Takes charge of personnelaccounting the & general services.budgetary matters.