(STAR) President Arroyo’s decision to revoke a contract awarded to a foreign company for oil production in the Philippines has sent a shudder through the heart of the foreign investment community.

The President’s executive order 556 effectively terminated Malaysian-based Mitra Energy Ltd.’s rights to take part in the development of oil deposits in the Camago-Malampaya field off Palawan.

"Mitra won the tender fair and square and at the stroke of a pen it was taken away. There was no warning and no explanation," one industry source who declined to be named told Agence France Presse.

Oil exploration publication Upstream said the move was "understood to be due to pressure from influential Filipino business interests, which do not want the potentially lucrative projects to be awarded to a foreign company."

Mitra secured a preliminary agreement with a unit of Philippine National Oil Co., PNOC Exploration Corp., which owns the Malampaya oil rights, on June 1 this year and the order was released on Aug. 11 but backdated to June 17.

"It sounds like the abrogation of an agreement," said Peter Wallace, a consultant for foreign multinational corporations with over 30 years of experience in the Philippines.

He said investors were increasingly concerned about the "sanctity of contracts in this country," and there were unsubstantiated claims of one major foreign producer pulling out of a government deal since the Mitra order.

The order included a directive that bars PNOC and other government agencies from sub-contracting out work covering exploration, known as farm-in, or development, known as farm-out, in the Camago-Malampaya reservoir.

It said all arrangements entered into by the PNOC "which violate this Executive Order shall be immediately discontinued or canceled."

The executive order also caught PNOC and the Department of Energy by surprise as neither knew anything about it, analysts told AFP. Both declined to comment on the issue.

And the unease was reflected by the French Chamber of Commerce, which wrote to Trade Secretary Peter Favila, saying it would question the exclusion of PNOC and the Department of Energy from such a decision.

"We, the French Chamber of Commerce, are of the opinion that if indeed that was so, this occurrence would not help the establishment of confidence in the Philippine market which we have been trying to fight for."

Mitra spokesman Chris Whitmee told AFP: "We spent a great deal of time and upward of a million dollars preparing for this bid. Having it taken away from us without any explanation has taken us completely by surprise."

He said total project cost was estimated at about $700 million with recoverable reserves forecast at between 35 million and 40 million barrels to be financed by a unit of British Petroleum and Standard Chartered Bank.

Whitmee said his company had already lined up contracts with international vendors, with production due to begin towards the end of 2007.

"What we find particularly puzzling is the objection to farm-in, farm-out contracts. These are the energy sector’s benchmark which all oil and gas companies use worldwide.

"Foreign governments and oil companies also use them to attract and obtain partners to join in either an exploration (farm-in) or development (farm-out) of a gas or oil field."

Such agreements, he said, had stood the test of time worldwide for over 50 years and majors like Shell did a farm-out of 45 percent of the Malampaya gas field to Chevron, as Shell did not want to take the whole risk alone.

He said to drill one oil well in Malampaya would cost more than 35 million dollars and Malampaya was not an easy area to drill as it sits at the bottom of 3,000 feet (1,000 meters) of water.

The size and costs were considered too small for the majors like Shell.

"The big players don’t look at anything under 200 million barrels," Whitmee said, adding that with oil well above 60 dollars a barrel, the Malampaya site was economically viable and within Mitra’s capabilities.

Whitmee said Mitra had not given up on the project and was waiting for an explanation, while others in the industry are waiting to see how the government justifies its decision to rescind a contract after it had been awarded.

"This is a tight-knit business," one industry source said. "When something like this happens, you have to think twice about investing here." — AFP

Chief News Editor: Sol Jose Vanzi

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