Globally, more and more countries continue to increase their focus on developing renewable energy sources, both due to the increasing pressure from various stakeholders, as well as the acknowledgement of the clear and present danger posed by climate change. Because of this, environmental, social, and governance (ESG) reporting has become a top priority for most boards.
As the country gains momentum in shifting to renewable energy, we expect that financial reporting will have to reflect the commitments and actions of most organizations, notably those in the oil and gas sector, in tackling climate change. As a signatory to the Paris Agreement, the Philippines, being a country that is particularly vulnerable to climate-related risks, has pledged to reduce its own greenhouse gas emissions by 75% from its 2015 levels by the year 2030.
Given the increasing global climate concerns and strong interest in achieving the United Nations Sustainable Development Goal 7 of ensuring access to affordable, reliable, sustainable and modern energy for all, the Department of Energy (DoE) is pursuing a Clean Energy Scenario setting a target of 35% renewable energy share in the power generation mix by 2030 and more than 50% by 2040. As of 2020, renewable energy accounted for 21.2% of the Philippine power generation mix.
OIL AND GAS REMAIN VITAL TO ENERGY SECURITY
The DoE reported that in 2020, indigenous sources comprised almost 53% of the energy supply mix, out of which 6.6% was accounted for by the oil and gas sector, mainly from three petroleum service contracts (SCs): SC38 Malampaya, SC14C1 Galoc, and SC49 Alegria. Malampaya and Galoc are projected to be depleted by 2024 and 2025, respectively.
However, in October 2020, the President lifted the moratorium on oil and gas exploration in disputed areas in the West Philippine Sea. One of the areas that will significantly benefit from renewed exploration is SC72 Recto Bank, which is operated by a subsidiary of PXP Energy Corp. SC72’s Sampaguita Gas Field is reported to contain prospective resources of 3.1 trillion cubic feet of gas. This project, once developed and made operational, can fill the void that will be left by Malampaya and Galoc.
The reality is that until more renewable energy sources are developed, oil and gas will remain a significant component of the Philippine energy mix. This is why, given the global emphasis on climate-related reporting, oil and gas industry players should be seen as being proactive and taking the lead in addressing ESG concerns.
FINANCIAL REPORTING FOR CLIMATE CHANGE
Sustainability reporting is an important factor in improving a company’s sustainability commitment and its relationship with investors and customers.
With this, the Securities and Exchange Commission, through its Memorandum Circular No. 4-2019, has provided guidance regarding disclosure requirements relating to sustainability reporting as an attachment to Publicly-Listed Companies’ annual reports (SEC Form 17-A).
As climate-related matters continue to evolve and entities make further commitments and take additional actions to tackle climate change, it is important that they ensure their financial statements reflect the most updated assessment of climate-related risks. In November 2021, the International Financial Reporting Standards (IFRS) Foundation announced the establishment of the International Sustainability Standards Boards (ISSB), which is tasked to develop global standards linked to sustainability disclosures including climate and other environmental matters. As of 31 March 2022, the ISSB has issued two Exposure Drafts on IFRS Sustainability Disclosure Standards for public comment.
While the Philippine Financial Reporting Standards (PFRSs) do not as yet explicitly reference climate change, climate risk and other climate-related matters, there may still be anticipated impacts on oil and gas companies over several areas of accounting as follows.
General disclosure requirements. Entities are required, at a minimum, to follow the specific disclosure requirements in each PFRS standard. In determining the extent of disclosure, entities are required to carefully evaluate whether users of financial statements can assess the effects of climate change on their financial statements. If climate-related matters could reasonably expect to influence the decisions of the users of the financial statements, this information must be disclosed.
Going concern. In many cases, climate risk may not add significant going concern uncertainty in the short term. However, Philippine Accounting Standards (PAS) 1 requires disclosures of material uncertainties. Climate-related matters could create material uncertainties related to events or conditions that cast significant doubt upon an entity’s ability to continue as a going concern. In such a case, although going concern may be assumed, additional disclosures explaining the uncertainties associated with the assumption would be required.
Exploration and evaluation assets. Entities should consider the impact of climate risk and potential future developments, including the sustainability of its current business model and commercial viability, in assessing the recoverability of its exploration and evaluation assets (i.e., deferred exploration costs) and provide appropriate disclosures.
Property, plant and equipment (PP&E). Climate-related matters have the potential to significantly impact the useful life, residual value and decommissioning, and restoration of PP&E (e.g., wells, platforms and related assets, refineries, retail service stations, etc.). Climate change and the associated legislation to promote sustainability increase the risk that PP&E items become “stranded assets” whose carrying value can no longer be recovered within the entity’s existing business model. Given the uncertainties around the impact of climate change, disclosures should be enhanced to allow the users of financial statements to understand and evaluate the judgements applied by management in recognizing and measuring items of PP&E.
Impairment of assets. The extent to which certain assets, processes or activities will be impacted by climate-related business requirements and how climate-related risks and opportunities will affect an entity’s forward-looking information, such as cash flow projections, may require significant judgement. Entities should consider what information users rely on in assessing the entity’s (lack of) exposure to climate-related risks.
Provisions. As entities take actions and initiatives to address the consequences of climate change, these actions may result in the recognition of new liabilities or, where the criteria for recognition are not met, new contingent liabilities have to be disclosed. Entities should ensure that sufficient disclosures are provided to allow users of financial statements to understand those uncertainties, how climate transition has been considered in the measurement of a provision or disclosure of a contingent liability, and the assumptions and judgements made by management in recognizing and measuring provisions.
In a world that is increasingly sitting up and taking note of ESG concerns, the pressure on the oil and gas sector to help address climate risks will likewise continue to mount. While the above list of climate-related considerations is by no means all-inclusive and may vary between entities, they offer a starting point for the industry to take a proactive and progressive stance and demonstrate how it is doing its part to make the global climate change ambition a reality.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Arthur M. Maddalora is a senior manager from the Assurance Service Line of SGV & Co.