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DEPARTMENT CIRCULAR NO. DC2020-02 - 90 OG

RULES AND REGULATIONS FOR THE SELECTION, REVIEW AND APPROVAL
OF FARM-OUT OF PNOC EXPLORATION CORPORATION (PNOC EC)
PETROLEUM SERVICE CONTRACTS (PSCs) IN FAVOR OF THIRD PARTIES
AND FARMN-IN OF PNOC EC INTO EXISTING PSCs

WHEREAS, Section 2, Article Xil of the Constitution declares that all minerals,
petroleum and other mineral oils, and other natura! resources are owned by the State,
and that the exploration, development, and utilization of these resources shall be under
the full control and supervision of the State:

WHEREAS, Section 4, Presidential Decree No. (PD) 87, as amended, otherwise
known as the “Oil Exploration and Development Act of 1972”, allows the Government
to promote and undertake the exploration, development, and production of the
country’s indigenous petroleum resources by engaging technically competent and
financially capable contractors through service contracts;

WHEREAS, Section 11 of PD 87 allows holders of service contracts to assign or
transfer their rights thereto upon the prior approval of the Department of Energy (DOE);

WHEREAS, the DOE issued Department Circular No. DC2007-04-0003 entitled:
“Prescribing the Guidelines and Procedures for the Transfer of Rights and Obligations
in Petroleum Service Contracts under Presidential Decree No. 87, as amended”
providing for the documents and information necessary for the review and approval of
requests for transfers and assignments in PSCs;

WHEREAS, Executive Order (EO) No. 80 entitled “Rationalizing the Rules for the
Engagement of Third-Party Participants under Petroleum Service Contracts,
Repealing for the Purpose Executive Order No. 556” was issued permitting PNOC EC
to enter into farm-in/farm-out agreements, among others;

WHEREAS, EO 80 directed the DOE to issue rules and regulations specifying the
selection process to be observed by PNOC EC, in consultation with the Governance
Commission for GOCCs (GCG) and taking into consideration provisions of existing
government selection procedures that enhance transparency and objectivity in the
selection process;

WHEREAS, the DOE, in compliance with its mandate and in accordance with best
practices widely adopted in the petroleum industry, shall ensure that the farm-in/farm-
out arrangements by PNOC EC shall be in favor of technically competent and
financially capable third-parties and shall support and promote in spreading the risks
inherent in oil and gas exploration, development and production;

NOW, THEREFORE, in consideration of the foregoing premises, the following rules
and regulations and guidelines shall be observed in the selection, review and approval
of farm-in/farm-out arrangement of PNOC EC:

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Section 1. Scope and Application. This Circular shall govern the following activities
of PNOC EC:

a. Participation of third-parties (“Farminees”) in PSCs awarded by the
Government, through the DOE, to PNOC EC; and

b. Participation of PNOC EC in PSCs awarded by the Government, through the
DOE, to third-parties (“Farmors’).

Section 2. Business Judgment. In entering into commercial contracts and
arrangements contemplated herein, PNOC EC shall observe sound business
judgement and exercise extraordinary diligence, with paramount consideration to the
national interest.

Section 3. Farm-in/Farm-out. Farm-in/farm-out refers to a practice, recognized and
accepted in the oi! and gas industry, of allowing third-party participation to spread the
risks inherent in oi! and gas exploration, development and production. The entity
acquiring the participating interest considers the transaction as a “farm-in”, while the
entity transferring such interest considers the transaction as a “farm-out’.

Section 4. Farm-out Selection Committee. The PNOC EC Board shall constitute a
Farm-out Selection Committee (“FSC”) for purposes of selecting a Third-Party
Participant for the farm-in process, which shall be composed of four (4) members with
legal, technical and financial expertise, and headed by the Senior Management
representing the Implementing Unit. Once organized, the FSC shall continue to act as
such unless reconstituted or its authority is revoked by the PNOC EC Board.

Section 5. Responsibilities of the FSC. The FSC shall be responsible for all aspects
of the selection process, including, but not limited to the following:

a. Preparation of the selection/tender documents which shall comply with the

general Terms of Reference (TOR);

Publication of the invitation to submit a proposal;

Qualification of prospective Third-Party Participants;

Conduct of pre-selection conferences;

Issuance of supplemental notices:

Interpretation of the rules regarding the selection process and the conduct

of the selection process;

Evaluation of the financial and technical proposals;

. Resolution of disputes between Third-Party Participants; and

i. Recommendation for the acceptance of the proposal and/or for the award
of the PNOC EC participating interest.

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Section 6. Qualifications of Third-Party Participants. A Third-Party Participant may
be any local/foreign individual company or group of companies forming a joint
venture/consortium, organized or authorized for the purpose of engaging in petroleum
exploration, development and production.

lf the Third-Party Participant is a joint venture or consortium, it shall also submit a copy
of the joint venture/consortium agreement to the FSC.

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Section 7. Farm-out Process and Third-Party Selection Procedure of PNOC EC
PSCs. The FSC shall comply with the following procedures in the farm out process
and third-party selection for PNOC EC PSCs:

a.

The FSC, upon due approval of the PNOC EC Board, shall cause the
publication and posting of PNOC EC’s invitation to submit proposals for its
PSC being farmed-out;

Third-Party Participants shall, within fifteen (15) calendar days from
publication, formally signify, through a letter of intent (LOI), their intention to
submit proposals and participate in PNOC EC's farm-out process;

For Third-Party Participants who have submitted LO!s to PNOC EC, the FSC
shall provide the TOR, as approved by the DOE, and its preferred form of
the Farm-in Agreement. The FSC shall also conduct presentations and
discussions with Third-Party Participants with submitted LOls, as may be
appropriate;

The Third-Party Participants with LOls may conduct due diligence on the
PSC being farmed-out by PNOC EC upon execution of a Confidentiality
Agreement. Any cost or risk associated with the conduct of the due diligence
shall be for the sole account of such Third-Party Participant;

The Third-Party Participants shall submit their farm-out proposal within sixty
(60) calendar days from publication. The proposal shall consist of three (3)
complete sets of legal, technical and financial requirements, and technical
and financial proposals in accordance with the TOR;

The FSC shail open the submitted proposals immediately after the lapse of
the deadiine for its submission. Submissions with incomplete documentary
requirements shall be automatically disqualified. The FSC shall not accept
any additional documents after the deadline for the submission of proposals.

. The FSC shall duly inform all Third-Party Participants whether their

submissions are rated “Pass” or “Fail’ and if their respective applications
shall be subjected to further legal, technical and financial evaluation.

. After the opening of the submitted proposals, the FSC shall immediately

evaluate them based on the following criteria:

Legal Documents - Pass/Fail
Technical Proposal - 70%
Financial Proposal - 30%

After the review and evaluation, the FSC shall select the highest rated Third-
Party Participant who meets the technical and financial requirements.

in case there is only one Third-Party Participant, the FSC shall ensure that
the sole applicant meets the legal requirements and the minimum financial
and technical requirements under the TOR.

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The FSC shall complete the review and evaluation of the proposals within a
period of seven (7) calendar days from the opening date and deadline of
submissions.

i. The FSC shall endorse the highest rated Third-Party Participant to the
PNOC EC Board of Directors for their approval. The PNOC EC Board of
Directors shall act on the endorsement within fifteen (15) calendar days from
receipt thereof.

Once approved, the FSC shall inform the highest rated Third-Party
Participant through a Notice of Award. PNOC EC and the highest rated
Third-Party Participant (or the Farminee) shall then discuss, finalize and
agree on the execution of the Farm-In Agreement (“FIA”), Joint Operating
Agreement (“JOA”), and the Deed of Assignment (DA) within a period of
fifteen (15) calendar days.

j. For PNOC EC, the agreed FIA, JOA and DA shail be reviewed by the Office
of the Government Corporate Counsel (OGCC), pursuant to Section 12
hereof, who must favorably endorse these documents prior to being signed
by both Parties.

k. Within a period of ten (10) calendar days from receipt of the favorable
endorsement by the OGCC, the Parties shall then sign the FIA, JOA and
DA. Within the same period, PNOC EC shall request the DOE’s approval of
the DA, as provided for under Section 10 hereof.

|. In case of a sole applicant, the FSC shall follow the same process in items
(i) to (k) as herein provided.

Section 8. Farm-in Process of PNOC EC to existing PSCs. PNOC EC may farm-in
into existing PSCs under the following procedures:

a. PNOC EC shall conduct a preliminary technical evaluation of available
PSCs.

b. If the preliminary technical evaluation is positive, PNOC EC shall submit an
LOI to the Farmor informing PNOC EC’s interest to evaluate the block and
to request for farm-in terms and pertinent documents.

c. PNOC EC shall then conduct a preliminary economic and legal evaluation
of the offered PSC and, if results are positive, shall proceed to a more
comprehensive evaluation or due diligence. PNOC EC, at this stage, may
enter into a Confidentiality Agreement or a Non-Disclosure Agreement, as
the case may be, with the Farmor.

d. If the results of the due diligence examination or assessment is positive and
encouraging, PNOC EC shail secure prior approval from the Board to farm-
in into the offered PSC and the terms thereof. Once approved, PNOC EC
shall negotiate the Board-approved farm-in terms with the Farmor.

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e. Once the negotiating parties have reached an agreement on the farm-in
terms and conditions, and secure the approval of their respective Board of
Directors, PNOC EC and the Farmor shall finalize the FIA, JOA and DA.

f. For PNOC EC, the FIA, JOA and DA shall be reviewed by the OGCC,
pursuant to Section 12 hereof and must favorably endorse these documents
prior to being signed by both Parties.

g. After receipt of the favorable endorsement by the OGCC, the Parties shall
then sign the FIA, JOA and DA.

h. The Farmor shall then request for the DOE’s approval of the DA as provided
under Section 10 hereof.

Section 9. Farm-in by PNOC EC into existing PSCs with petroleum discoveries.
Following the procedure under Section 8 above, PNOC EC may farm-in into existing
PSCs with petroleum discoveries which have been declared commercial and have field
development plans approved by the DOE, provided that the Service Contractor agrees
and consents to the proposed farm-in terms, which consent shall not be unreasonably
withheld.

Section 10. Evaluation and Approval by the DOE of the Transfer/Assignment.
Every farm-in/farm-out agreement under this Circular shall take effect upon approval
thereof by the DOE after it has been determined that all aspects of the agreement,
including the qualifications of the relevant Third-Party Participant and the selection
process undertaken, comply with Presidential Decree (PD) 87, EO 80, this rules and
regulations, and other applicable laws and issuances.

The procedure for the transfer or assignment of rights and obligations under these
Service Contracts shall be in accordance with those provided under DOE Department
Circular No. DC2007-04-0003 dated 23 March 2007.

Section 11. DOE and GCG Monitoring. In order to closely monitor the selection
process of PNOC EC, the DOE and GCG may attend the proceedings of the FSC and
may request relevant documents necessary for their evaluation.

Section 12. Review by the Office of the Government Corporate Counsel (OGCC).
Prior to securing the approval of the DOE in accordance with Section 10 hereof and
before its signing and execution, the OGCC shall review and issue its favorable
endorsements to the draft FIA, JOA and DA between PNOC EC and the Farminee or
Farmor, as the case may be, within a period of twenty (20) working days from receipt
thereof. Copies of these documents shall then be forwarded to GCG for records
purposes.

Section 13. Confidentiality. All data or information exchanged by and between the
parties, pursuant to the process in Sections 7, 8, and 9, including the FSC’s evaluation
thereof, shall, at all times, be treated as confidential. For this purpose, only the FSC,
the PNOC EC Board, the OGCC, the GCG and the personnel authorized in writing by
the DOE Secretary to monitor the selection process shall have access to the
information provided by the PNOC EC and Third-Party Participants.

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At any time after the conclusion of the farm-in/farm-out process, a Third-Party
Participant may demand the return of the confidential information it disclosed pursuant
to the farm-in/farm-out contemplated under this issuance upon giving written notice to
DOE, PNOC EC and/or other relevant government agencies. Within thirty (30)
calendar days of receipt of such notice, the relevant recipient of such confidential
information shall return all of the original confidential information and shall destroy or
cause to be destroyed all copies in its possession and in the possession of persons to
whom it was disclosed.

Section 14. Reportorial Requirement. The DOE shall submit regular reports to the
Office of the President on the impiementation of EO No. 80, copy furnished the GCG.

Section 15. Duty to Extend Assistance. The departments, bureaus, offices, agencies
or instrumentalities of the Government, including GOCCs and government financial
institutions, are hereby directed to extend assistance and support as may be necessary
for the successful implementation of EO 80.

Section 16. Separability Clause. |f for any reason, any section or provision of this
Circular is declared unconstitutional or invalid, such parts not affected shall remain in
full force and effect.

Section 17. Repealing Clause. All circulars, orders and issuances contrary fo or
inconsistent with this Circular are hereby repealed, amended or modified accordingly.

Section 18. Transitory Provision. All DAs and FIAs signed and executed by PNOC
EC for the farm-in or farm-out of participating interests in PSCs which are pending
approval by the DOE shall comply with the provisions of this Circular.

Section 19. Effectivity. This Circular shall take into effect fifteen (15) days following
its publication in at least two (2) newspapers of general circulation and shall remain in
effect until otherwise revoked.

A copy of this Circular shall be filed and registered immediately with the University of
the Philippines Law Center-Office of the National Administrative Register (UPLC-
ONAR).

Issued this day of 2020 at Energy Center, Rizal Drive,
Bonifacio Global City, Taguig City, Metro Manila.

F Noe CUSI

ecretary

a FEB 13 2020

DEPARTMENT OF ENERGY
IN REPLYING PLS. CITE:

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