The foreign operators of the Malampaya natural gas platform led by Royal Dutch Shell PLC, Europe’s top oil firm, are seeking international arbitration over the Commission on Audit’s (COA) recalculation of what they should be paying the Philippine government.

In a letter to President Benigno Aquino III, Royal Dutch Shell chief financial officer Simon Henry said recent COA decisions billing the Malampaya consortium $2.9 billion in income taxes on top of the government’s 60-percent share of net proceeds had become a “cause for concern” because they go against the terms of the service contract covering the multibillion dollar natural gas development project.

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The COA, in decisions dated April 6 and May 11 this year, ordered the Department of Energy to collect the back taxes from the Malampaya consortium, which operates in the waters off Palawan. The DOE appealed the COA’s decisions but this was denied.

COA order ‘erroneous’

Henry said the COA’s order was “erroneous” since the income taxes payable over the period 2002 to 2014 were to be deemed paid by the Department of Energy out of the 60-percent government share of net proceeds.

“This is expressly provided for under Service Contract No. 38,” Henry said.

“I wanted to let you know that in order to preserve our rights under the Service Contract No. 38, Shell Philippines Exploration B.V. (SPEX), together with the other foreign investor in the consortium, intend to initiate international arbitration shortly,” Henry said in the letter.

“The last thing desired by Shell after more than 100 years of productive partnership is to find that our approaches conflict, but the scale and nature of this challenge is such that I believe we have no choice.”

Various sources from both sides confirmed that the Shell-led investors had “served notice” that they were initiating international arbitration.

Back-channel talks are ongoing, however, to try to resolve the issue “in a collaborative way” between the consortium and the Philippine government, the sources said.

In an exclusive interview, Royal Dutch Shell’s upstream international director Andy Brown said, “I do believe that we are going to get a fair hearing.” He declined to get into details but added, “Our ambition is to resolve that amicably.”

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Sanctity of contracts

Brown, who leads Shell’s oil exploration, production and natural gas business, also stressed that “sanctity of contracts,” as well as good regulatory and investment climates, are needed to sustain investor interest in the Philippines.

The Malampaya consortium includes Shell Philippines Exploration B.V. (SPEX; 45 percent), Chevron Malampaya LLC (45 percent) and PNOC Exploration Corp. (10 percent).

Other recent arbitration cases faced by the Philippine government were initiated by water service providers Manila Water Co. Inc. and Maynilad Water Services Inc. in response to the Metropolitan Waterworks and Sewerage System’s (MWSS) reinterpretation of their concession contract disallowing them from recovering corporate income tax.

Maynilad won in local arbitration and has moved to the international court in Singapore to claim losses as the MWSS drags its feet in implementing a water rate hike incorporating provisions for income tax payments. Manila Water lost and was disallowed to tuck in corporate income tax provisions from its water rates.

Meanwhile, the Philippines has yet to fully investigate allegations that some P900 million of the government’s share of Malampaya funds ended up lining the pockets of lawmakers and executives in cahoots with fake nongovernment organizations in 2009 alone.

This is separate from the scandals involving the alleged diversion of up to P10 billion of the legislative pork barrel (Priority Development Assistance Funds), also using fake NGOs.

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