Presidential Decree No.

87

AMENDING PRESIT)ENTIAIA 1)ECKEE NO. 8 ISSUED O N OCTOBEK 2, 1972, AND

PROMULGATlNG AN AMENDED ACT TO PROMOTE THE DISCOVERY AND

PRODUCTION OF INDIGENOUS PETROLEUM AND APPROPRlATE FlJNDS

THEREFOR

WHEREAS, I'rcsidcntiai Decree N o , 8 dated Octobcr 2. 1972 was issued to

promote the discovery and development of the country's indigenous petroleum resources and

adopting therefore as part of the law of the land the provisions of Senate Bill No. 531 (An

Act to Protnote the Discovery, Production of Indigenous Petrolcutt) and Appropriate Funds

Therefor);

WHEREAS, it was found necessary for the national interest to amend Senate Bill

No. 531 among others things to provide more meaningful incet~tivcsto prospective service

contractors.

NOW, THEKEFORE, 1, FERDINAND F,. MARCOS, President of the Philippines,

by virtue of the powers vested in me by the Constitution as Commander-in-Chief of all the

Armed Forces of the Philippines, and pursuant to Proclamation No. 1081, dated September

21, 1972, and General Order No. 1, dated September 22, 1972, as amended, do hereby amend

Presidential Decree No. 8 as follows:

AN ACT TO PROMOTE THE DISCOVERY AND PRODUCTION OF

INDIGENOUS PETROLEUM, .4ND APPHOPHIATlNG FUNDS

THEREFOR.
 Section 1. Shorl title. This Act shall be known and may be cited as

"The Oil Exploration and Development Act of 1972."

Section 2. D~'clurarionqfpnlicy It is hereby declared to bc the pol icy

of the State to hasten the discovery and production of indigenous petrolcum

through the utilization of government and/or private resources. local and

foreign, under the arrangements embodied in this Act which are calculated to

yield the maximum benetit to the Filipino people and the revenucs to the

Philippine Governmet~t for use in turtherance of national economic

development, and to assure just returns to participating private cntcrpriscs.

particularly those that will provide the necessary sel+vices, financing and

technology and Fully assume all exploration risks.

Section 3. Dcfinition of term,s. As used in this Act, the following shall

have the following respective meanings:

(a) "Petroleum" shall include any mineral nil hydrocarbon gas,

bitumen, asphalt. ~tlineralgas and all other similar or naturally associated

substances with the exception of coal, peat, bituminous shale and/or other

stratified mineral fuel deposits.

Ibl '-Crude oil" ur "crudc" means oil in its natuml state bcfore the

same has been refined or otherwise treated. It does not include oil produced

through destructive distillation of coal, bituminous shaks or other stratified

deposits, either in its national state or after the extraction of water, and sand or

other foreign substances thercfiom.

 (c) " N a t ~ r a ]gas" means gas obtained from boreholes and wclls

and cot~sistirrgprintat.ilq. of hydrocarbons.

(d) "Petroleum operations" means searching fur and obtaining

petrolcurrl within thc Philippines through drilling and pressure or suction or

thc like, and all other operations i~lcidental thereto. It includes the

wansportat ion, storage, handling and sale (whether for cxpcrt or for domestic

consumption) of petroleum so obtained but does not include any: (I)

transportalion of petroleum outside the Philippines; (2) processins or refining

at a rctjncrq.; or (3) any transactions in the products so refined.

(e) "Fetroleum in camrnercial quantity" Inearls petroleurii i 11 such

quantities which will permit its being ecnnamically developed as determined

by the contractor after taking into consideration the location of the resencs,

the depths and number of w-ells required to be driIIed and the transport and

terminaI fiuilities needed to exploit the reserves which have been discavcrrd.

(t) "Posted price" refers to the FOB price established by the

Contractor in consultation with the Petroleum B d for each grade. gravity

and qualify of crude oil offered for. sale to buyers gerletally for cxport at thc

particular point of export, which price shall be based upon geographical

location, and the fair market export values for crude oil of comparable grade,

gravity and qua1it}).

(g) "Market Price" sl-rall mean tllc price which would be rcalized

for pe~roleumproduced under a contract as hereinafter defined if sold in a

transaction between independent persons dealing at arm's length in a free

market.

(h) "Barrel" means 42 U.S. gallons or 9702 cubic inches at

temperature of 60" Fahrenheit.

Any reference in this Act to the value of any crude oil at the postcd

price or tnarket price shall be construed as a reference to thc amount obtaincd

by multiplying the number of barrels of that crude oil by the posted price or

market price per barrel applicable to that crude oil.

(i) "Crude oil exported" shall include not only crude oil exported

as such but also indigenous crude oil refined in the Philippines for export.

(j) ' L G ~ ~ e r n m e nmeans

t" the Government of the Republic of the

Philippines.

(k) "Contractor" means the contractor in a service contract ~vhether

acting alone or in consortium with others.

(1) "Contract" refers to a service contract.

(m) "Filipino participation incentive" means the allowance which

may be giver1 the Contractor with Filipino participation as provided in Sectior~

28 herenf.

(n) "Philippine corporation" means a corporation organized under

Pl~ilippinelaws at least sixty per cent of the capital of which is owned and

held by citizens of the Philippines.

 (0) "Affiliate" means (a) a company in which a contractor holds

directly or itdirectly at least fifly per cent of its outstanding shares entitled to

vote; (b) a company which holds directly or indircclly at least fifty per cent of

the contractor's outstanding shares entitled to vote; or (c) a company in which

at least fifty per cent of its share outstanding and entitled to vote are nwncd by

a company which owns directly or indirectly st least fifty per cent of the

shares outslanding and entitled to vote of the contractor.

(p) "Gross income" mcans the gross proceeds from the sale of

crude, natural gas or casinghead petroleum spirit produced under the contract

and sold dt~ringthe taxable year at posted or market price. as the case may be,

and such other income which arc incidental to and arising fihornany one or

more of the petroleum operations ofthe contractor.

(q) "Taxable net income" means the gross income less the

deductions allowed it1 this Act.

(r) "Taxable year" mcans the calendar or fiscal year of the

contractor.

(s) "Casinghead petroleum spirit" means any liquid hydrocarbon

obtained from natural gas by separation or b!, any chemical or physical

process.

(t) "Pctmlcum Board" refers to the Petroleum Board created in

Section seventeen of this Act.

Government, including all taxes paid by ur on behalf of the contractor, be less

than sixty pet cent o f t h e difference between the gross income and the sum ol'

operating expenses and Fi Iipino participation incentive;

(c) Provide Tor the manner and form of the income tax payment.

the reimbursement of operating expenses, the payment of service fee, and

payment of Filipino participation incentive allowance, if any, in the service

contract:

(d) Make specific proposals to Congress far the grant u f subsidy tu

contractors and petrolcum companies at least sixty per cent of the capital of

which is owned by Philippine citizens, to be derived from the revenue or share

that will accruc to !he Government in pursuance of this Act;

(u) Urldertakc intensive studies and researches on nil field

practices, procedures, and policies;

(f) Promulgate such rules and regulations as may be necessary and

assess charges k r services rendered, tu ir~lpleiilentthe intent and provisions of

this Act;

(g) Appoint, discipline and remove, and determine the

corn pcnsation of, its technical stair and other personnel: Provided, That

positior~swhich are highly technical or primarily confidential shall not bc

subject to the Civil Service Laws and Rules, and of the Wage and Position

Classificatiot~Office;
 (h) Within four months after the close of every fiscal year, submit

to the President and Legislature an annual report on i t s activities. with

appropriate recommendation; and

(i) Generally, exercise all powers necessary or incidental to attain

the objectives of this Act.

TAX PROVISIONS

f ~tax 'I'he contractor shall be liable each

Section 19. I m p ~ s i t i uo~

taxable year for Philippine income tax on income derived from its petroleum

operations under its contract of service, computed as provided in Section 20,

through 25.

Section 20. Determination ($gross income. The gross income shall

consist of:

(a) In respect of crude oil exported, the gross proceeds from the

sale of crude oil at the posted price:

(b) In respect of crude oil sold for consumption in the Philippines,

the gross income shall consist oC the gross proceeds from the sale thereof at

market price per barrel;

(c) In respect of natural gas andlor casinghead petroleum exported

or sold for consumption in the Philippines the gross income shall consist of the

total quantity sold at the prevailing market price thereof; and

 (d) Such other income which are incidental to andlor arising from

any petroleum operation.

Section 2 1. Deduc~ionsfrom gross incorjle In computing the laxablc

net income, there shall be allowed as deductions:

1 Filipino participation incentive; and

(2) Operating cxpenses reimbursed pursuant to Section 8 ( I ) which

includes amortizatioi~and depreciation as provided in Section 22.

Section 22. Ansortiz~ttio~l

and Depvecintion. Intangible exploration

costs may be deductible in full; all tangible exploration costs quch as capital

expenditures and other recoverable capital assets are tu be depreciated for a

period of ten years.

Section 23. Dcducrions )lot ul/owed. In ascertaining the taxable nct

income, no deduction from gross income sl~allbe allowed in respect of any

interest or oihrr consideration paid or sutfered in respect of the financing of its

petroleum operations.

Section 24. Rettirn and payment of tax. Evcry party to a service

contract shall render to the c t r o j e u m Hoard a return for each taxablc year in

duplicate in such form and manner as provided by law setting forth its gross

income and the deductions hzrsiri allowed. The return shall be filed by thc

l'elroleum H& uith ttic Commiscioncr of Internal Revenuc or his deputies

or other persons authorized him to reccive such rcturn within the period

specified in the National Internal Revewe Code and the Rules and
Regulations promulgated thereunder. Every party to a service contract shall

be subject to tax separately on its share of taxable income arising from such

Conlract.

Section 25. ..Ipplicahilitv (fl'rite provisions of rhe Nutional Revenue

Code. All provisions of the National Internal Revenue Code and rules and

regulations promulgated in relation thcrcwith which are not inconsistent with

thc provisions of this Act shall be applicable to the Contractor.

SPECIAL PROVISIONS

Section 26. Option r$ exploration concessionaires. A holder of a

valid and subsisting petroleum exploration concession under the Petroleum

Act of 1949 may, at his option enter into a contract of service under the rules

of the Pctmleum Act of 1949, subject to constitutional restrictions, with any

local or foreign oil company under such terms and conditions as rnay be

agreed upon by the concessionaire and the service contractor. As an

alternative the concessionaire may convert his cor~cessicln into a s<rvice

contract as provided in this Act through negotiations, with all the rights and

privileges herein authorized: P~*ovided,That the contract which may be

concluded after said ncgutiation shall contain at lcast the minimum terms and

conditions provided in this Act and shall take into account terms and

conditions more favorable to the Government contained in contracts involving

exploration pursuant to this Act: Provided, further, That the exploration

period sllall commence to run from the effective date of the original

cclncession, except when the concession has been effective for a period of

seven years or morc, in which case the contractor shall be required to

commence exploratory drilling operations within a period of not rxcceding

sighken months fro111 rhe date of effect~vityof the service contract. If the

cnnrrnctor is not in default in thc drilliilg operii~iunsas hereunder required, an

extension of the exploration period may be granted as provided in Section

nine, paragraph ( e )of this Act.

Section 27. Altcrnati~.eoption cf explornrion concessionnire The

concessionaire referred to in the preceding section ma!. form a consortium

with another company or companies and joint14 enter into a service contract

with the Government under this Act, with thc right to assign ru the consonium.

subject ro the approval of the Pctroleuin Doard. the area covered by his

concession which shalI thereupon be govcmed by rhe provisions of lhis Act:

P~,ovidrJ, That the vtiuntary relinquishment of the concession and its

assignment, as well as 311 technical data on the area resulting from studies

conducted by thc conccssionairc; subsisling improvement introduced by him

thereon, shall be evaluated and given a fair value which may constitute his

contribution, wholly or in part, to the consortium: Provided, however, 'l'hat

the exploration period under the new contract shall comnlence to run from the

date of the effectivity of the contract if it covers areas in addition to the

assigned areas; otherwise the prov~sionsof the preceding section shall apply:

Provided, further. That duly pubiished applications, for exploration

concessions or bids therefor already awarded by the Secrclav or A~ricultul-e

and W r a I Resources under the provisions of the Petroleum A c t of 1949 shall

be recognized and the corresponding deeds of concessions issued accordingly:

That exploration concessions on which the holder thereof

fJrovided,jin~~lly.

failed to perform the three consecutive years the expIor51fi~111

work requirecl
under the provisions of the Petroleum Act of 1949, as amended by Rcpt~hlic

Act Numbered Five Thousand Eighty-Six shall be considered automatically

canccl lcd.

c under a
e . ~ u n t r a [or
Section 28. Fii+ino Pa~licipatiorrI ~ ~ c e n f i vThr:

service contract in which Philippine cilizens or corporations have a minilnurn

participating interest of fifteen per cent in the contract area may bz subject 10

reasonable conditions imposed by the Petroleurn BowJ be granted by a

government subsidy, commensurate wilh the scope of Filipino participation,

rlol exceeding seven and one-hatf per

i.e., a Filipino pnrticipatioll iiice~iliv~,

cent, which shall be computed by deducting the said allowance from the

posted or market price, whichever, is the higher, of crude oil exports produced

in rhe contract area, and from the market price of crude oil prnducecl in the

contract area, sold or disposed of for consumption in the Philippines.

Section 29. Publicily. Negotiation with the Government fnr the

conclusion of a contmct undcr this Act and every contract co~~cluded

hereunder shall be given publicity consistent with the bcst interest of the

Government.

Section 30. Provisions of Pc~mlezimAcr upplicublc. The provisions

of thc Petroleu~nAct of 1949, as amended, shall not be applicable in the

service contract provided in this Act, except the followir~gAr~icles:

(a) Article 16, referring to public easetnents on lands covered by

concessions:
 (b) Article 17, providing that petroleum operations are subject to

existing mining rights, permits, leases and concessions in respect of substances

other than petroleum and to existing petroleum rights;

(c) Article 18, referring to the right of the Government to establish

reservations or grant mining rights on petroleum concessions;

(d) Article 20, granting exploration and cxploilation

concessionaires the right to enter private lands covered by their concessions;

(e) Article 2 1, referring to easement and the exercise of the right of

eminent domain over private lands for the purpose of carrying out any work

essential to petroleum operations;

(f) Article 22, providing for casemcnts ovcr public land for the

purpose of carrying out any work essential to petroleum operations; and

(g) Article 23, which grants concessionaires the right to utilize for

any of the work to which the concession relates, timber, water, and clay from

any public lands within their concessions.

Section 31. Preference to Local Labor. 'I'he Contractor shall givc

priority in employment to qualified personnel in the municipality or

municipalities or province where the exploration or production operations are

locatcd.

Section 32. Foreign Assislunce. Nothing in this Act or of any other

law shall preclude the Government of the Republic of the Philippines, through

the Petroleum Hoard or any other proper office or agency, from negotiating or
 entering into any agreement with any foreign country or government for

assistance in terms nf eqi~ipmenr.tec hnicnl know-how and financing for the

exploration and production of indigenous crude oil and its by-products.

Section 33. Futzd~. To carry out the purpose of this Act, there is

hereby appropriated. out o f any funds in the National Treasury not otherwise

appropriated, the s u m of five hundred thousand pesos for the fiscal year

nineteen hundred seventy-thrcc. I Itreafter, lkir necessary appropriations shall

be included in sitbsequent General Appropriations Act.

Section 34. Repealing Clause. All laws, executive orders and

regulation5 inconsistent with the provisions of this Act are hereby repealed,

provided that no existing rights shall be prejudiced thereby.

Section 35. cjfictivity &re. This Acl shall take effect upon its

approval.

Done in the City of Manila, this thirty first day of December, in the

year of Our Lord. ninctccn hundred artd seventy-two.

GO B.~cktc the Tup: Cju b ~ tok a-ort~llr r l ( a g p . I . n i ~ g hor l3e Gnlertoincd: I)cstro\, C'a~tcl:,
and Monopolies: loves1 or Find a .lob: Chech Sofwarc or a Computer: Check out the Latest
Nen s; Look for a School: Greet a Friend; I l i into~ €3 lack G o l c m R e Electri Cied,: Express
k'oonelf: N v c the f'ast: Get Involvcd in he l.aw, Govt.rninenl. & [ ' o l i t ~ :Kead Svmc
C'lassics: Meet New l'eoplc: Consult the la\+< of he Philippine energy sectill*: Philctsrlphize:
or Se31~cb.

[ ast 1.2)isccl: .JJI! 15. 1(H)7.3:05 1'h.l