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Republic of the Philippines
DEPARTMENT OF ENERGY

(Kagawaran ng Enerhiya)

*

DEPARTMENT CIRCULAR NO. _2C202S- 03 - 00/4 a

GRANT OF SPECIAL ALLOWANCES FOR PETROLEUM SERVICE
CONTRACTORS

WHEREAS, Section 2, Article XII of the 1987 Constitution provides that “xxx The
exploration, development, and utilization of natural resources shall be under the full
control and supervision of the State” and “(t)he President may enter into agreements
with foreign-owned corporations involving either technical or financial assistance for
large-scale exploration, development, and utilization of minerals, petroleum, and other
mineral oils according to the general terms and conditions provided by law, based on
real contributions to the economic growth and general welfare of the country. In such
agreements, the State shall promote the development and use of local scientific and
technical resources;”

WHEREAS, Republic Act (RA) No. 7638, as amended, otherwise known as “The
Department of Energy (DOE) Act of 1992", mandates the DOE to prepare, integrate,
coordinate, supervise, and control all plans, programs, projects, and activities of the
Government relative to energy exploration, development, utilization, distribution, and
conservation;

WHEREAS, Section 5(f) of RA No 7638, as amended by Section 37(k) of RA No. 9136,
otherwise known as the “Electric Power Industry Reform Act of 2001 (EPIRA),” further
mandates the DOE to “assess the requirements of, determine priorities for, provide
direction to, and disseminate information resulting from energy research and
development programs for the optimal development of various forms of energy
production and utilization technologies;”

WHEREAS, Section 5(k) of RA No 7638, as amended by Section 37(p) of RA No.
9136 likewise mandates the DOE to “(flormulate such rules and regulations as may
be necessary to implement the objectives of this Act;”

WHEREAS, Section 2, Presidential Decree (PD) No. 87, as amended, otherwise
known as “The Oil Exploration and Development Act of 1972,” declared it to be the
policy of the State “to hasten the discovery and production of indigenous petroleum
through the utilization of government and/or private resources, local and foreign, under
the arrangements embodied in this Act xxx” and provides in Section 4 thereof that “the
Government may directly explore for and produce indigenous petroleum. It may also
indirectly undertake the same under service contracts as hereinafter provided.”

WHEREAS, Section 18 (b) of PD 87 provides, as among the functions of the
Petroleum Board (now the DOE), to “(e)nter into contracts herein authorized with such
terms and conditions as may be appropriate under the circumstances including the
grant of special allowance: Provided, however, That no depletion allowance shall be
granted: xxx”

Energy Center, Rizal Drive cor. 34th Street, Bonifacio Global City, Taguig City, Philippines 1632
Tel. No. (Trunkline) (632) 8479-2900

Website: http://www.doe.gov.ph; Email: infocenter@doe.gov.ph
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WHEREAS, PD No. 1459 authorized the Secretary of Energy to enter into and
conclude service contracts, or re-negotiate and modify existing contracts, subject to
the following limitations, thus: “(a) (t)he share of the Government, including all taxes,
shall not be less than sixty percent of the difference between the gross income and
the sum of operating expenses and such allowances as the Secretary of Energy may
deem proper to grant; (b) (t)he service contractor must be technically competent and
financially capable to undertake the petroleum operations required in the contract,
and (c) (t)he Secretary of Finance shall be consulted on all matters involving revenue.”

WHEREAS, the DOE is continuously adopting new mechanisms and strategies to
effectively carry out its plans and programs as mandated under PD 87, as amended,
including its implementing rules and regulations;

WHEREAS, the current state of the oil and gas exploration in the country shows low-
level investments due to the attendant high risk in petroleum operations;

WHEREAS, there is a need to offer improved fiscal terms to service contractors to
complement the other Government initiatives in attracting more exploration and
production companies to spur exploration activities leading to the discovery of more
oil and gas fields in the country;

WHEREAS, providing special allowances that allow for maximum benefits to the
country and at the same time provide reasonable returns to private companies that
render financial and technical services and assume all the risk of petroleum
exploration will make the Philippine service contract regime more attractive to
investments and will improve the state of the oil and gas exploration in the country;

WHEREAS, the grant of special allowance will induce the inflow of foreign investment
capital that would have a significant potential contribution to the country’s balance of
payment;

WHEREAS, there is a need to attract more investments to accelerate the exploration,
development, and utilization of indigenous petroleum resources in order to attain the
goals embodied in the Philippine Development Plan (PDP) and Philippine Energy Plan
(PEP) - to contribute to the country’s energy security, create jobs, and generate
wealth;

NOW, THEREFORE, in consideration of the foregoing premises, the following policies
and guidelines are hereby adopted and promulgated:

Section 1. Policy on the Grant of Special Allowances. Petroleum service
contractors shall be entitled to the special allowances granted under this Circular,
which shall be applied by deducting the applicable special allowance/s from the gross
proceeds. Provided further, that in no case shall the share of the Government be less
than sixty percent (60%) of the difference between the gross income and the sum of
operating expense, the Filipino participation incentive under Section 28 of PD 87, if
applicable, and the special allowance/s granted herein and in existing petroleum
service contracts, Provided finally, the reimbursement of all operating expenses shall
not exceed seventy percent (70%) of the gross proceeds from production in any year.
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Section 2. Special Allowance on Cost Recovery. To spur exploration activities and
encourage producing service contractors to invest in exploration activities in other
service contracts, a special allowance for the cost recovery of exploration expenses
from service contracts outside the producing service contract is hereby granted,
subject to the following:

2.1 The petroleum service contract under production phase has not fully
utilized the seventy percent (70%) allowable reimbursement of all
operating expenses from production in any year. The balance of which
shall be deemed to be the special allowance granted under this section;

2.2 The special allowance on cost recovery shall be computed
proportionately to the service contractor's participating interest in the
petroleum service contract under production phase; and,

2.3 If the service contract wherein the exploration activities are undertaken
converts to production, the operating expenses recovered under this
special allowance are no longer recoverable.

Section 3. Special Allowance on Marginal Petroleum Operations. To enable
petroleum service contractors to maintain or continue marginal petroleum operations,
a special allowance shall be granted when the annual operating expenses exceed the
cost recovery allowance of seventy percent (70%), based on the following schedule:

Percent of Operating Expenses | Percentage of Gross Proceeds

vs. Gross Proceeds as Special Allowance
Below 70% 0%
More than 70% - but less than 3%
75%

75% - but less than 80% 5%
80% - and above 7%

For purpose of this Section, annual operating expenses refer only to expenses directly
incurred to produce petroleum excluding development and exploration costs, and
capital expenditures.

Section 4. Special Allowance on New Plays. To encourage the discovery of new
petroleum sources in untested geologic plays in productive basins, a special allowance
of Five percent (5%) of the Gross Proceeds is hereby granted. This special allowance
shall be granted only to the first commercial development of such new geologic play
in the basin.

Section 5. Special Allowance in Frontier Areas. To encourage the development of
new petroleum fields discovered in a frontier area, a special allowance of Five percent
(5%) of the Gross Proceeds is hereby granted. This special allowance shall be granted
only to the first commercial development in the frontier area.
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For purposes of this Circular, frontier areas shall refer to basins with no significant
production activity as determined by the DOE.

Section 6. Special Allowance for Gas Development in Remote Areas. To

encourage the development of new gas fields discovered in a remote area with more
than 200km from the identified delivery market, a special allowance shall be granted

as follows:
Distance to Market Percentage of Gross Proceeds
Delivery Point as Special Allowance

This special allowance shall be granted only to first or foundational development in the
remote area.

Section 7. Special Allowance on Gas Production. To encourage the production of
indigenous gas in new plays, frontier, or remote areas, a special allowance of Thirty
percent (30%) of the Gross Proceeds less any FPIA, cost recovery, and other special
allowances, is hereby granted. This special allowance shall be granted only to the first
or foundational project in the new play, frontier or remote area.

Section 8. Separability Clause. If, for any reason, any provision of this Circular is
declared unconstitutional or invalid, such part or parts not affected shall remain in full
force and effect.

Section 9. Repealing Clause. All circulars, orders, letters of instructions or issuances
contrary to, or inconsistent with this Circular are hereby repealed, modified or
amended accordingly.

Section 10. Effectivity. This Circular shall take into effect immediately upon its
publication in at least two (2) newspapers of general circulation. Copies of this Circular
shall be filed with the University of the Philippines Law Center — Office of National
Administrative Register.

Issued this SEP 23 202 2025 at the Energy Center, Rizal Drive, Bonifacio
Global City, Taguig City.