Oil Discovery and Technical Change in Southeast Asia: Politics of Oil in the Philippines 9789814376402

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The Institute of Southeast Asian Studies

Established as an autonomous corporation by an Act of the Parliament of the Republic of Singapore in May, 1968, the Institute of Southeast Asian Studies is a regional research centre for scholars and other specialists concerned with modern Southeast Asia. The Institute's research interest is focussed on the many-faceted problems of modernization and social change in Southeast Asia. The Institute is governed by a 24-member Board of Trustees on which are represented the University of Singapore and Nanyang University, appointees from the Government, as well as representatives from a broad range of professional and civic organizations and groups. A ten-man Executive Committee oversees day-to-day operations; it is ex officio chaired by the Director, the Institute's chief academic and administrative officer.

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OIL DISCOVERY AND TECHNICAL CHANGE IN SOUTHEAST ASIA Politics of Oil in the Philippines

by

M. Raj aretnam

FIELD REPORT SERIES NO . 6 Institute of Southeast Asian Studies Price: $5 . 00

PREFACE There are probably few e conomic deve lopmen ts in Southeast Asia as interest1ng and so potent1a l of c hange as the d1scovery of oil in the region and the 1ndustry wh ich 1s growing up to support 1t . For much of the region this 1s an ent1rely new phenomena; at the s a me t1me Singapo r e stands at its ce ntre and contributes to 1ts techn1cal, admin1strat1ve and financial de v elopment . It wou l d seem theref o re appro p r 1ate and urgent that studies begin w1th the v1ew of ascertaining what would be the 1mpact of oil 1f d1sc overed in large quan t ities? What impact would 1t have on uniting the region if the oil is found to l1e off the co ast of several countries? What 1mpact would 1t have on shipping, and more importantly on world polit1cs especially 1f Southeast Asia begins to d1splace the Mlddle-East as a prime source of oil for Japan and Australia? With the discovery of oil will also come enormous economic and techn1cal changes as it begins to generate a cheap and fundamental ·source of power. What are the impli c ations of such developments and changes for Southeast Asian soci ety? It was the feeling of the Instltute of Southe ast As1an Stud1es that there should be 1mmed1ate study of such questions and issues as the forego1ng . Indeed, w1th a genero us grant from the Asia Foundation a beg1nn1ng was made to this end early last year when the Institute 1naugurated five pilot studies on aspects of var1ous phen o mena associated with 011 d1s covery and techn ical c hange . The work t hat follows grew out o f o ne of these p 1lot proJects. It is a case study o f the p ol 1t1cs o f oil 1n the Ph1l1pp1nes , espe c ially the r o le o f f o re1gn lnvestment in the search f or o il in that c ountry dur i ng the pre-Martial Law days , As far as can be as c ertained, 1t 1s the first up-t o - d a te acco un t a v ailable of the top1c and Mr . Rajaretnam rightfully deserve s all the cred1t for this most worthwh ile effort . Wh ile w1sh1ng h1m all the best , 1t is cl ear ly understood that respons1b1l1ty f or facts a nd op 1nions expressed in this s tudy rests exclus1vely w1th the auth or, and his 1nterpretations d o not necessarily reflect the views or po l icy of the I nst1t ute itse lf or 1 t s supporters . 10 September 1973

Kernial Singh Sandhu Director

Acknowledgements The author wishes to thank Dr. Serafin Qulas on, Director of the National Library of the Philippines, for the use of office facilities; Mr. Fernando Busuego, Director of the Philippine Bureau of Mlnes; Mr. Luis Villafuerte, Senior Vice President of Bancom Corporation and Mr. W.H. Dittmar of Esso Exploration Inc., Houston, for their candid views on the Philippines situation; Mr. Eduardo Martin Jr., Director, and Mr. Mariano M. Melendres, Jr., Chief Geologist, both with Philippine-Overseas Drilling Oil Development Corporation (Philodrill) for their interest and assistance; Mr. Chee Koon Lin of Shell Eastern Petroleum (Singapore) and Mr. C.K. Lee of Esso Standard (Singapore); and Professor Kernial Singh Sandhu, Director of ISEAS and Professor Josef Silverstein, former Director of ISEAS. The oil concession and application map of the Phll1ppines on page 17 was adapted from Mr. Melendres' study, 'Review of Oil Exploration in the Philippines,' by gracious permission of the author. The author also wishes to thank all those who have, in one way or other, ass1sted in the preparation of this report. However, the author remains responsible for all erro rs of fact and judgement conta1ned in this report.

INTRODUCTION The main purpose of this study is to analyse the role of foreign investm ent in the search for oil in the In this respect , it analyse s the outlook , Philipp ines. views, concept ions and preconc eptions of the Philipp ine Governm ent, the Philipp ine Congres s, private enterpr ise an0 the public toward ?rivate foreign investm ent in the field of oil explora tion. The Philipp ines was chosen as a case-stu dy because of its somewha t unique position of being about the only country in the region which does not have any of the big interna tional oil compani es looking for oil within its territor y, especia lly at a time when these same compani es are making intensiv e explora tions for oil elsewhe re in the region. Oil explora tion, as is well-kno wn, is a very highly specula tive venture involvin g conside rable sums of money It is estimat ed that it costs about and great risks. US$2 million to drill a well and another US$25 million to establis h whether or not an oil concess ion contain s This commerc ial deposit s that will be worth exploit ing. local of ity does impose prohibi tive limits on the capabil investo rs to explore for and exploit oil as they lack the necessa ry capital and technic al know-how . Foreign capital and foreign technic al experti se have, therefo re, an importa nt role to play in the developm ent of Philipp ine The question then really pertain s to natural resourc es. the role that foreign investo rs could undertak e in the Unlike some other exploit ation of oil concess ions. do not allow a ents governm where region the of parts ines has, Philipp the forces, al free play of politic importa nce l nationa of issues until recently , allowed engende red has turn, in This, to be publicly discuss ed. has issue much debate between rival groups and the oil had more than its share of spirited discuss ion and public The issue can be categor ized thus: attentio n. (i) the most importa nt concern s the increase and attempte d increas~in the prices of gasolin e and oil product s. The controThis has caused heated public reaction . versy is between the oil compani es (consis ting of Shell, Esso, Caltex, Filoil, Mobil, and Gulf) and the public (compri sing of consume r associa tions, the transpo rt The governm ent industr y, student s and politica ns.) tor although arbitra of role has been reduced to the lt one to difficu t this role has become a somewha credibi lity of loss play because of the governm ent's

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The Philippin e governmen t, in the eyes of the public. unfortuna tely, is viewed by many to be in 'collabor ation' with the oil companies against the interests of its citizens. (ii) the second aspect of the issue concerns t he nature of the oolicy with regards to oil ex?lorati on. What tyoe of policy would best safeguard the interests of the nation? The 'conflict ' is between the governme nt's approach to the question of oil explorati on and the opposit o r s ' (represen ted more by congressm en than the The multinati onal Fili?ino man-in-th e-street) position. for a fav o urable anxious than oil companies which are more of t h e outside outcome of the 'conflict ' have remained Local Filipino entrepren eurs intereste d in fra y . exploitin g oil are somewhat reticent about their stand They have expressed concern over the on the matter. istic' policy on oil explorati on 'national need for a but are, at the same time, desirous of the participa tion of foreign capital and expertise . The The study covers the period up to July 1972. establishm ent of a state of martial law in the Philippin es on 22 September 1972, has brought about tremendou s changes The new political in the political process of the country. at least, has, es Philippin the framework establish ed in it that namely, resulted in one fundamen tal change, that was rhetoric brought an end to the seemingly violent so characte ristic of the style of Philippin e politics. Instead, every governmen t policy is now legitimiz ed through the ~ssuance of 'executiv e o rders' by the President . To show how drastical ly the changed c o nditions in the Philioo1n es has affected the issues of oil and foreign investmen t, a postscrip t is appended to the end of this study . Research Methods and Difficult ies En co unte red Following initial library work a 3-week field trip As the was made to Manila to gather more inf o rmation. subject is contempor aneous, the libraries were generally not very helpful in terms of more recent data. Before the trip was made, a questionn aire describin g the nature of the project and the answers sought was prepared and sent to all companies , both retailers and explorers , Congress

-

3 -

members, government officials and oppositors. The main difficulty was the inadequacy and general inaccessibility of data pertaining to the subject in question. For various reasons the Philippine Bureau of Mines was not able t o provide all of its data. The oil companies, including the exploration companies, could not make relevant data available for competitive reasons, and also for reasons of sub-judice as the proceedings of the Oil Industry Commission were then taking place (March-April, 1972).

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THE OIL CP.IS I S IN THE PIII L TPP £1-J .C: .S In the months precedin g the imposit ion of martial law, oil had become a controv ersial and serious problem in tne The success ion of price increase s of gasoline Philipp ines. dnd related oil product s which, in turn, led to the increas e s of prices of essenti al primary commod ities and daily necessi ties magnifi ed the importan ce of oil in relati on t o the Philipp ine economy . In all develop ed and develop ing nations oil has beco me not only an importa nt energy resource for developm ent but it has also assumed great strateg ic importa nce.l Countri es which import all their oil requirem ents are consequ entl y subject to the pressur es which frequen tly occur as a result of the nationa listic demands of the oil producin g nations The of Western Asia on the interna tional oil compani es. g importin been has and Ph i lippine s produce s no crude oil and States all of her crude oil requirem ents from the Arab Indones ia: 2 Table I :

Philippin es Irrports of Crude Oil (1954-197 1) (in thousand barrels)

Year

Quantity

Year

Quantity

1954 1955 1956 1957 1958 1959 1960 1961 1962

1,818 5,417 5, 460 7,147 8,175 7,889 10,080 15,933 22,610

1963 1964 1965 1966 1967 1968 1969 1970 1971

25,620 37,571 44,775 Not Available 471496* 57, 192* 61 1CB7* 65 1200** 66,6 90**

* estimate s

**

does not incltrle M=ralco inports

1

For the importan a: of oil in q~stions of security see U.S. Cabinet Task Fora: en Oil Inport Control, The Oi l Impor t Question., A Repor>t on the Re Zat:ions hip of Oil Imports to the Na t i onal Se auri ty 1 Govemne nt Printing Offia:, Washingt m D.C.1Feb ruary 1970.

2

The Eaonorrri a Monitor> (Manila) , 11 Septerrbe r 19 72 1 p. 9. M=ralco is the Manila Electric Carpany which inports oil from its ONn soura:s.

- 5 This has been, and still continues to be, a heavy drain on the country's foreign exchange reserves which, itself, The Philippines' had become a critical economic problem. importations of crude oil had, in the minds of many concerned Filipino intellectuals, many social and political Since it is extremely difficult to separate ramifications. the political and economic issues in a nation's life politic it can be assumed that the economic and political 'crises' thatweze engulfing the Philippines were closely interrelated.3 Much of the rhetoric in the works and writings of many o p p osi t ors4 to the oil industry have been dominated by accusations on the close links between the international Since 1899 the oil industry and imperialistic forces. Philippine economy has been dominated by American businesses and their Filipino 'illustrado collaborators' and it is this so-called insidious imperialistic influence that has It is claimed met with much resistance in recent years.

3

4

The word 'crises' is used in this instance to describe the state of Phi lipr;>ines natimal life as it was then perceived by outsiders, and not an actual o:nditim of state daninated by serious social, eo:nanic and political upheaval. Neither was it a state that was in the throes of revolutimary change. Although many Filipino intellectuals Sa.N their c:o..mtry in this way, me's perceptim of the Phili~ines (especially if me is looking at that cotmtiy fran outside) is frequently influenred by the sarer.Nhat exaggerated news ooverage, (That 'licentious' local both Filipino and foreign, of that countiy. press no lmger exists today uut the present 'contro lled' Philippine news rredia hardly makes for a rrore d:>jecti ve press . ) The oil crisis was d:>viol.Ely a very inpartant issue but the conflicts and cantroversies therein were prd:>ably ~e reflective of the Philippine political process thCI"l the actual and _-eal state of affairs in that cotmtry. The Philippines, before that '....uur. c.cy c...arre 1..11der martial law cmditims, had oftentilres been described as bemg am:ng the freest in Asia and it wa s prd:>ably not wrmg to have seen it in that light. This, hCJ.t..~ever, is n o t t o s ay that the Philippines was not facing serious social, e oonomic and political proolems; in fact, the Phili?pines, in 1972, was having rrore than its fair share of prd:>lerrs. For instance, during the few months preceding 22 Septerrber 1972, the crisis had intensified and worsened soiTeW'hat especially after the great dislocatims caused by the typhoc:ns in July. Urban guerillas intensified their activities during the sane period when they attacked (See S traits the McDil Oil depot in Pandacan, Manila, in Septerrber. Ti mes [Singapore], 13 Septercber 1972, p. 2). '!his gro.ving crisis prd:>ably prec1pitated, if it did not already give sufficient reasm for, the inpositim of martial la"W in the Philippines.

'lhese individuals and associations are generally referred to as opposi t ors in the Philiwines because of their cppositim to the oil industry and 'foreign eo:nanic impe rialism'; this term shall hereafter be used to denote these groups.

- 6 that the international oil compan ies, as ?art of a worldwide phenomenon of growing economi c car t els , are adjuncts of a new k ind of imperialism that seeks to greatly influence t~e destinies of deve loping nations through their strangleh old control over t h ese nations 1 economies. The problems of the oil industry probably had their genesis in the events of January 1970 . The Presidential elections of November 1969, had a disastrous impact on the Philippine economy. Excessive spending during the election campaigns, estimated somewhere between 200 million pesos to 300 million pesos had resulted in a plentiful supply of money that could not go into imports and lending and which therefore provided fuel for tge stock markets which had been bullish since late 1968. Heavy speculation on the possibility of exchange controls and peso devaluation, which had been widespread since early in the year, sustained heavy and growing investments in stocks by various institution: and individuals. With prices of commodities and services rising and wages not growing commensurately,6 a city-wide strike was called for by the Manila-Suburban Drivers 1 Association (MASDA) on 2 March 1972, which proved to be the catalyst for a movement symptomatic of an innate desire for change and frustration at unfulfilled promises. The MASDA demanded for, firstly, a five centavo (P0.05) increase in the then current rate from one point to another; and secondly, a stop to the Manila Police Department traffic bureau from illegally extracting 10.50 pesos from jeepney drivers arrested for traffic violations, which, they claimed, went only into the pockets of the policemen . On the following day the drivers of jeepneys, buses and taxis stopped operating in the city in protest against the onerous and unfair practices of the Manila Police Department. Thous ands of commuters were stranded when transport services came to a standstill. In a city where a great percentage of the lab our force is dependent on transport services, much damage was done. Violence erupted in various parts of the city ending in the injury of two persons and the destruction of thirty taxis and ten buses.

5

Manila Times, 1 January 1970, p. 11-A.

6

See Figures I and II which shOtJ the spiralling trend of prices of crnsurrer goods and the declines in real wages. 'Ihese inflatimary tendencies occurred at a tine when the value of the peso was shrinking and when merrployrrent was grOtJing thus adding to the ccntinuing social mrest in the naticn.

- 7 Figure I (1965=100)

CCNSUMER PRICI INDEX

200

/

--

150

-------~-- ----- --~

Manila

100 0

J

D

S 0 N 1971

A

J

F

M J J 1972

M A

A

0

S

N

D

PhiLi ppine Fi nan cial Stati stics Quarte r l y Bulletin ,

Source :

Vol. III, No: 3, September 1972 .

Figure II WAGE RA'IES Th'IEX (1965=100) FOR NCN-AGRICULTURAL I..ABOURER3 IN MANilA AND SUBURBS, 1969-1972. 16 0

140

120

---__ "'- __ _____ --

"'

100

REAL WAC:E f or

----- -- '-..:::-

---------

/ /

rnJEY WAC:L for s k illed l aboure rs

-

-----.. -..- .._---- -- .._

ski l led lcbourers

' ' .... - - - -- ___ __ _

80 0

3rd

4th

1st

2nd

3rd

4th

ls t

2nd

3rd

4th

1st

2nd

~ · ~ · ~ · ~·~·~ · ~ · ~ · ~ · ~ · ~ · ~ · 1972 1971 1970 1969

Source :

Phi li ppi ne Financial Statistics Quarterly Bu lletin , Vol. III, No.: 3, September 1972 .

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The Public Services Commission, a body which supervises petitions for price increases, ordered the 'freezing' of the petition for increase in bus rates by the Bus Operators' Association of the Philippines (BOAP). The Commission refused the petition on the grounds that the projected price increase would affect about two million bus commuters all over the country, about one million of whom were in the Greater ~anila area. The BOAP petition, which was signed b y fifty-one bus com~anies, 7 claimed that the prices of soare ~arts, tyres, fuel, accessories and other vital materials purchased by hus tran s portation firms 'lad increa -:; c:i b e cause of the peso devaluation. The BOAP had petitioned the Public Services Commission for an increase in the minimum bus fares from 10 centavos to 15 centavos and from 2 centavos to 3 centavos for the per kilometer rates. In what ~ad apparently begun as a demand on the part of the MASDA to do away with certain abusive practices of the Manila Police Departrnen t and an increase in fare rates, the oi 1 issue accelerated and gained national prominence on 6 March 1970, when the oil companies announced their intentions to increase the prices of their products by 35 per cent to 40 pe r cent to de~reciate the effects of the devaluation of the peso. The Man i la Times described that this would have t h e widest impact o~ the economy since the peso was floated on th e moneymarket. Oil industry sources claimed that at the the n current peso-dollar rate of 3.90 pesos to US$1.00, t h e i ndustry would lose about 240 million pesos in 1970. Th e price increases for the various oil products were as follows: Diesel oil was increased by 35 per cent from 0.23 peso to 0.32 peso per litre; Lubricating oil was increased from 1.00 peso to 1.32 pesos per litre; Regular gasoline was increased by 0.05 peso per litre; and Grease was increased from 0.80 peso per pound (0. 4536 kilogram) to 0.96 peso per pound. One event followed another. The Public Services Commission, on 13 April 1970, approved provisional fare increases for jeepneys and buses as a temporary measure of immediate relief

7 These fifty-me bus cxxrpanies represented about 95 p3r cent of the bus transportaticn industry enplOjing an estimated work forre of 50,0CO. Manila Times, 4 Mardll970, p. 1. 8 Manila Times, 7

~dl

1970, p. 1.

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for o~erators for six months. The Commission had to act as failure to do so would have precipitated large-scale strikes by jeepney and bus drivers on 16 March 1970.9 But a few days after these provisional increases were authorized, revocation of the Commission's order was demanded by student and civic leaders. About 5,000 students demonstrated and battled with police in protest against the increased fares. The following day, the oil corn~anies were given a five-day ultimatum by some jeepney firms to reduce the prices of their products. 10 The announced intention of the oil companies to increase the prices of their products added more fuel to fire. In terms of the proportions involved a look at past figures would suggest the enormity of the burden that consumers would have to bear. Oil represents about 90 per cent of the total energy needs of the Philippines. In 1969 the industry im~orted about 61 million barrels of crude oil worth US$113 million (about 440 million pesos). In 1970 the figure rose to 65 million barrels. The transportation i ndustry would be the most badly affected by these increased r ates. In 1969, the Man i la Time s calculated that the transportation industry had consumed 1.2 billion litres of regular gas. At 5 centavos more per litre consumers will h ave to pay 60 million pesos more if consumption were to remain unchanged at 1.2 billion litres.ll

On 25 March 1970, the Philippine Congress acted upon th e crisis and passed into law, the Price Control Bill which authorized the Price Control Council (PCC) to fix t h e ceiling prices of essential commodities. The bill c overed within its orbit the following commodities medicines, drugs and surgical supplies; food and foodstuffs; clothes, clothing, sewing and weaving materials and supplies; fuels and lubricants; construction materials; educational supplies and equipment; fertilizers, insecticides, pesticides

9

'fue new rates cilar