NEDO —1C —00ER35 0 4

Feasibility Study onEnergy Saving and Environmental Improvement

via Utilization of Residual Oil at Petron Bataan Refinery

March, 2001

New Energy and Industrial Technologies Development Organization (NEDO):o Mitsui Engineering & Shipbuilding Co., Ltd.

020005044

I"Feasibility Study on Energy Saving and Environmental Improvement

via Utilization of Residual Oil at Petron Bataan RefineryJ

Mitsui Engineering & Shipbuilding Co., Ltd.

March, 2001

Study purpose;

Toward the target of digging out projects leading to joint implementation and CDM in the future

for the purpose of reducing the emission of greenhouse gases, we conducted a feasibility study

regarding possibility of reduction of greenhouse gases at Petron Company’s Bataan Refinery in the

Republic of the Philippines.

The contents of this survey include an evaluation for the reduction amount of emission of carbon

dioxide as greenhouse gasps by assuming the installation of the high efficient low-speed 2-stroke

cycle diesel engine combined cycle in Bataan Refinery, with the effective utilization of residual

oil, the demand for which is expected to stagnate in the future.

N EDO- I C — 00ER35

FeasibiIity Study onEnergy Saving and Environmental Improvement

via Utilization of Residual Oil at Petron Bataan Refinery

March, 2001

New Energy and Industrial Technologies Development Organization (NEDO)

Entrusted to Mitsui Engineering & Shipbuilding Co., Ltd.

Introduction

The present report summarizes the results of the "Year 2000 Basic Survey for Joint Implementation Promotion: Feasibility Study on Energy Saving and Environmental Improvement via Utilization of Refinery Residual Oil at Petron Bataan" entrusted to our company as operation for the year 2000 by New Energy and Industrial Technologies Development Organization (NEDO).

The protocol adopted at COP 3 (The 3rd Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change) held in Kyoto in 1997 stipulates "joint implementation" among advanced countries, "trade in international permits" with developing countries, "clean development mechanism (CDM)", etc., to prevent global warming due to greenhouse gases. The Japanese government also expressed its wish and determination to achieve the targets by positively utilizing those systems.

In the present survey, we conducted a feasibility study regarding possibility of reduction of greenhouse gases through high-efficiency utilization of residual oil at Petron Company's Bataan Refinery in the Republic of the Philippines, for the purpose of paving the way for eventual joint implementation and CDM, toward the target of digging out projects leading to joint implementation and CDM in the future in the reduction of emission of greenhouse gases.

The contents of this survey include a study of optimal energy supply facilities in the case considering effective utilization of residual oil, the demand for which is expected to stagnate in the future, and eventual reinforcement of the refinery facilities, for the reduction of emission of carbon dioxide from the energy (electric and steam) supply facilities installed in Bataan Refinery. While the current facilities are boilers and steam turbine power generation systems using heavy oil C as fuel, we conducted technical study and evaluation of facilities having the possibility of reducing carbon dioxide which is a greenhouse gas through installation of high-efficiency optimal equipment using residual oil as fuel, and also made an assessment of economical efficiency of such facilities.

It is our wish to make further study on the basis of the results of this feasibility study and materialize highly economical products, so as to achieve effective utilization of residual oil fuel and reduction of emission of carbon dioxide that is a greenhouse gas.

Lastly, we would like to express our heartfelt thanks to all parties concerned for their kind cooperation to this survey, and we shall be very happy if the results of survey given in this report will be useful as reference materials for the respective parties concerned.

March 2001

Mitsui Engineering & Shipbuilding Co., Ltd.

Feasibility Study on Energy Saving and Environmental Improvementvia Utilization of Residual Oil

Table of ContentsIntroduction......................................................................................................................1Outline ........................................................................................................................1

Chapter 1 Basic Matters for the Project...................................................................... 1-11. General situation in the country.......................................................................... 1-3

1.1 Political, economic, and social conditions....................................................1-31.2 Energy situation in the Republic of the Philippines.................................... 1-261.3 Needs of CDM project................................................................................ 1-45

2. Necessity of introduction of energy-saving technology in objectline of business.................................................................................................. 1-51

3. Significance, needs and effects of the project and diffusion ofachievements to similar industries, etc...............................................................1-68

Chapter 2 Materialization of the project plan.............................................................2-11. Project plan.......................................................................................................... 2-3

1.1 Situation of the area forming the subject of the project................................. 2-31.2 Contents of the project........................................... 2-61.3 Object greenhouse gas, etc.............................................................................2-7

2. Outline of implementation site............................................................................ 2-82.1 Level of interest of implementation site........................................................ 2-82.2 Situation of relative equipment and facilities on the implementation site ...2-102.3 Project execution capability of implementation site................................... 2-242.4 Contents of the project on implementation site and specifications after

modification of related equipment.............................................................. 2-312.5 Scope of supply of fund, facilities & equipment, services, etc. by both parties

for the implementation of the project..........................................................2-462.6 Preconditions for implementation of the project, and problems................. 2-482.7 Schedule for implementation of the project................................................2-50

3. Concretization of fund plan................................................................................2-574. Task and Prospect for realization of CDM........................................................ 2-61

4.1 Tasks for realization of CDM...................................................................... 2-614.2 Prospect of realization of CDM................................................................... 2-65

Chapter 3 Effects of the project..................................................................................3-11. Energy-saving effect............................................................................................ 3-3

1.1 Technical ground for production of energy saving effect...............................3-31.2 Base line serving as foundation for the calculation of energy-saving effect..3-31.3 Concrete amount, period of production and accumulated amount of

energy saving effects..................................................................................... 3-81.4 Concrete method for checking energy saving effects...................................3-11

2. Greenhouse gas reducing effects....................................................................... 3-122.1 Technical basis of production of greenhouse gas reducing effects..............3-122.2 Base line serving as basis for the calculation of greenhouse gas

reducing effects...........................................................................................3-122.3 Concrete amount, period of production and accumulated amount

of greenhouse gas reducing effects.............................................................. 3-132.4 Concrete method for checking greenhouse gas reducing effects.................3-14

3. Influences on productivity........................................................................ 3-15

Chapter 4 Profitability.................................................................................................4-11. Economic investment pay-back effects................................................................4-1

1.1 Amount of investment.......................................................................... 4-11.2 Reduction of cost by investment................................................................... 4-41.3 Expenses produced in connection to implementation of the project..............4-51.4 Economic effects for recovery of investment.................................................4-6

2. Cost-project effects............................................................................................4-102.1 Cost-energy saving effect............................................................................4-102.2 Cost-greenhouse gas emission reducing effect.............................................4-112.3 Cost-S02 emission reducing effect....................... 4-11

3. Others................................................................................................................4-12

Chapter 5 Verification of diffusive effects..................................................................5-11. Possibility of diffusion in the object country of the object

technologies introduced through the project....................................................... 5-22. Effects considered to be diffused........................................................................ 5-2

2.1 Energy saving effect............................................................................5-22.2 Greenhouse gas reducing effect..................................................... 5-4

Chapter 6 Influences on others................................................................................. 6-11. Influences on other environmental, economic and social aspects, produced

in exchange for energy saving effects and greenhouse gas reducing effects obtained through implementation of the project.......................................6-1

1.1 S Ox reducing effects..................................................................................... 6-11.2 NOx reducing effects..................................................................................... 6-4

Conclusion.................................................................................................................... 7-1

Related materials1. List of figures and tables2. List of persons in charge of the feasibility study3. Related data

3-1 Records on site visits, and various meetings held in Japan 3-2 Photographs shot around the refinery3-3 Presentation materials on site visit (1) - General explanation on the purpose of

the site visit and power generation facilities 3-4 Presentation materials on site visit (2) - Energy conservation in refinery 3-5 Presentation materials on site visit (3) - Flue gas desulfurization system 3-6 Acceptance criteria for residual oils 3-7 List of references

Outline

Among various problems of global environments which is a matter of worldwide concern, protective measures against global warming is a subject for which the targets of reduction for respective countries are set at sessions of the Conference of the Parties to the United Nations Framework Convention on Climate Change, and various activities are being promoted to achieve the targets also in Japan. On the other hand, the future demand for residual oil at refineries is expected to decrease and, for that reason, we conducted a survey aiming at effective utilization of such residual oil as well as reduction of emission of carbon dioxide which is a greenhouse gas discharged from oil refineries, at Bataan Refinery run by Petron Company in the Republic of the Philippines.

In the power generation system of this Bataan Refinery is adopted a system supplying steam to the oil refining facilities and driving a steam condensate turbine at the same time to generate power, by installing an ordinary industrial boiler of medium pressure level. Considering the situation in advanced refineries where high-pressure boiler is used to make high-efficiency power generation with increased heat drop or dual-purpose electricity and steam generation system by gas turbine of high heat-electricity converting efficiency is introduced, it is judged necessary (for Bataan Refinery) to achieve improvement of thermal efficiency and rationalization for energy saving at an early time, not only from the viewpoint of reinforcement of competitive power of the refinery but also from the viewpoint of global warming prevention required today. What is important is not simply questions of thermal efficiency and reliability which are common subjects of concern to general power generation systems, but to estimate future demand for petroleum products, select the type of fuel for internal use based on the composition of oil refinery facilities corresponding to that estimation, and select and decide the power generation system and power generation capacity suitable for it.

In consideration of such factors, we performed study and evaluation of power generation system which is believed most suitable for improvement and rationalization of Bataan Refinery, by the following procedure:

1. Analysis of current energy balance, contents of power generation facilities and operating situation in the refinery.

2. Equipment modernization plan based on estimation of future demand for petroleum products. Estimation of consumption of electricity and steam (heat), and study of countermeasures against a trend for excess of residual oil, to be expected as a result of implementation of the modernization plan.

3. Comparison and study of various kinds of power generation systems about said consumption

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of electricity and steam, and in the case of use of residual oil as fuel.4. In the study, we picked up high-pressure high-temperature steam boiler & turbine power

generation system, dual-purpose electricity and steam generation system by gas turbine (gas turbine combined cycle) and dual-purpose electricity and steam generation system by low- speed diesel engine (diesel engine combined cycle) and made a comparative study from the viewpoints of thermal efficiency, reliability, maintainability, influences on environments, effectiveness as protective measures against excess of residual oil in the future, etc.

5. Proposal of optimal power generation system based on the results of comparative study, and calculation of the amount of reduction of carbon dioxide emission in the case of adoption of the proposed system.

By following the above-described procedure, we reached the conclusion that, under the situation of the refinery in which the consumption of electricity is expected to greatly increase in the future with no substantial increase of the demand for steam, the system most suitable as internal power generation system is dual-purpose electricity and steam generation system by low-speed diesel engine capable of burning residual oil, which tends to be excessive, directly as fuel.

From what has been stated above, in comparison with a case of use of the current facilities, under the conditions of meeting the demand for electricity and steam to be required in the equipment modernization plan, the case of adoption of dual-purpose electricity and steam generation system by low-speed diesel engine was investigated. The results of this investigation are summarized in the following table. In general, the service life of low-speed diesel engine is said to be around 25 years. However, here the investigation for energy saving effect and green house gas reducing effect was carried out by setting the period of 20 years used as the general service life of power generation system.

Bataan Refinery of Petron Company, where the primary condition of selection is considered as power generation system available for a long period of stable and continuous operation, is satisfied with the current boiler and turbine power generation system. However, to evaluate the power generation system from the viewpoint of thermal efficiency for promoting reduction of carbon dioxide emission, superiority is found on the part of dual-purpose electricity and steam generation system by low-speed diesel engine provided with exhaust gas heat recovering boiler, which can utilize residual oil as mentioned above.

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~ ................. ............ ....... Withouta system of trade in emission

Witha system of trade in emission

Unit price for trade in C02 — 10 $/t-C02 (1,200¥/t-C02)Unit price for trade in S02 — 125$/t-S02 (15,000¥/t-SQ2)

Initial investment 4,732 million yen

Energy saving effect 50,861 toe/year(annual reduction of fuel consumption during a period of 20 years)

Accumulated energy-saving effect

1,017,224 toe(amount during a period of 20 years)

Energy saving effect for cost 10.7 toe/year-million yen (average amount during a period of 20 years)

Greenhouse gas reducing effect

132,880 t-C02/year(average amount during a period of 20 years)

Accumulated greenhouse gas reducing effect

2,657,599 t-C02(amount during a period of 20 years)

Greenhouse gas reducing effect for cost

28.1 t-C02/ year-million yen (average amount during a period of 20 years)

Annual saved amount of operating cost

1,274 million yen(average during a period of 20 years)

Annual revenue by transfer of C02 & S02

— 270 million yen(average during a period of 20 years)

Annual operating expenses 688 million yen(average during a period of 20 years)

Annual rate of profit after tax for initial investment amount 5.2% 9.7%

Period of investment recovery 10.2 years 7.3 years

Note This investment is not attractive as a purely commercial project in case without considering a system of trade in emission.

Thanks to the trade in emission in addition to the reduction of fuel cost and saving of purchased electricity, the profitability of the project will improve to a considerable.If the expansion of the demand for light oils exceeds that for fuel oils and the difference of prices becomes larger in the future, it is estimated that the economic efficiency of this project will greatly improve and the chance for its realization will become higher.

In the case where the profit of the project is sought only in the saving of the fuel and that of the amount of purchased electricity, it is rather difficult to implement the project because of low economical efficiency, even with application of financing conditions comparable to those of special yen credit for environmental protection which is the most favoured treatment currently available. However, if trade in international permits of carbon dioxide emission or auction of sulfur dioxide emission allowance practiced in the United States and Canada are applied in additional to

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advantageous financing conditions by CDM which is the main purpose of the surveyed project concerned, the profitability will improve and the project will have a better chance of realization.

In this project, Bataan Refinery of Petron Company in the Republic of the Philippines is set as project partner. However, the necessity of energy saving, effective utilization of fuel oil and measures for environmental protection is a subject common to all oil refineries in ASEAN and other Asian countries maintaining close relations with Japan and, for that reason, we may expect a great pervasive effect of the project depending on the conditions of CDM aiming at reduction of carbon dioxide emission. Therefore, it is our wish to establish close relations with Bataan Refinery of Petron Company, as a candidate for pilot project in case dual-purpose electricity and steam generation system by low-speed diesel engine using residue of vacuum distillation in the refinery comes to have a good chance of realization by CDM in the future.

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Chapter 1 Basic Matters for the Project[Summary]

The Republic of the Philippines, which gained independence in 1946 after going through approximately 400 years of colonial rule, is a young state following a new course toward democratization, liberalization and modernization by revising its Constitution in 1987 after putting an end to about 20 years of military rule. The Philippines, which is essentially a country blessed with rich primary industrial resources, is also fated to be easily exposed to natural disasters such as earthquakes, volcanic activities, typhoons, El Nino, etc. To improve its industrial, social and economic structures which are fragile against natural disasters, this country has been promoting various measures for improving its industrial structure, i.e. industrialization since the middle part of 1990s up to today, and has produced some positive results. Although the Republic of the Philippines succeeded in developing several natural gas fields in recent years, this country is essentially not blessed with fossil fuel resources. It is therefore an extremely important task for the Philippines to secure energy sources for the future and effectively utilize them, to further promote industrialization and stably develop the state and people's livelihood.

As problems which will be probably encountered in the near future by Bataan Oil Refinery of Petron Corporation, forming the subject of this basic survey for promoting joint implementation, etc., we may cite the followings:

Increase of demand for light petroleum products due to development of motorization. Stagnation or decrease of demand for heavy petroleum products produced in larger quantities as a result of an increase in the demand for light petroleum products.Environmental protection measures.

As means for tackling those problems, the basic survey for promoting joint implementation, etc., is intended to introduce dual-purpose electricity and steam generation system (co-generation system) by low-speed diesel engine using vacuum residue as fuel directly, so as to contribute to prevention of global warming by promoting energy saving and reducing the amount of emission of C02 by power generation with high heat-electricity conversion ratio, meet an increase of demand for gas oil by reducing cutter stock of vacuum residue, and further remove S02 in the exhaust gas of diesel engines as part of protective measures against air pollution.

Dual-purpose electricity and steam generation system by low-speed diesel engine with high heat- electricity conversion efficiency using vacuum residue, which is expected to become superfluous in the future, as fuel can be introduced only in oil refineries, because of the handling of highly viscous vacuum residue, and it is an item of energy saving measure applicable not only to Bataan Refinery but also commonly to any refinery in the world.

The Republic of the Philippines established Clean Air Act 1999 and prepared enforcement regulations for this law in November 2000, to promote prevention of air pollution. However, no example of installation is found yet in the Philippines today of exhaust gas desulfurizer or exhaust gas NOx removal system, which are commonly used in the industrial circle of Japan. In view of such situation, we believe it is quite significant to transfer those technologies to the Republic of the Philippines as a project for joint implementation, etc. with Japan which is an advanced country in the matter of environmental protection, in addition to measures for reducing the amount of emission of C02 for protection against global warming which is the main purpose of this survey.

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Most of the 7109 islands that make up the Philippines are small, with around 4000 of these having no name. Around 2000 islands are inhabited, and only 500 are over one square kilometer in area. Some of these island names are familiar to the Japanese either as ancient ports of call for the old Shogunate-licensed trading ships, as scenes of battles during the Second World War, or more recently as tourist spots. The most important of these 7109 islands are listed below.

Island nameLuzonMindana)SamarNegrosPalawanPanayMindoroReyteCebuBoholMasbate

Area104,70094,60013,40013,30011,80011,50010,2009.0005.1004.1004.000

(km2)

The overall land area of the Republic of the Philippines is about 300,000 square kilometers, or about 80 percent of the area of Japan. Together, the islands of Luzon and Mindanao account for around two-thirds of this total, and both the relative positions of these two islands on a north-south axis and their size give an indication of their importance in terms of the country's social, economic, cultural and political makeup.

The Philippines archipelago lies between the Eurasian Plate, which is moving in an easterly direction, and the Philippine Plate, which is moving to the north. Its geological structure is complex, and, as the 10,000-meter deep Philippine Trench indicates, the islands are situated in an area where the earth's crust is extremely volatile. Because almost the entire country, from Mindanao in the south to Luzon in the north, lies over the juncture of these two very active tectonic plates, volcanic activity and earthquakes are distinguishing features of the geographical makeup of the Republic of the Philippines.

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Table 1-1-1 Average monthly temperatures at meteorological stations in the Republic of the Philippines as shown on world climate charts

(Units: °C)Island Luzon Leyte Panay Mine anaoCity Apari Manila Tacloban Doilo Surigao Zamboanga

January 23.2 25.3 25.9 25.8 25.4 26.6February 24.0 26.0 26.0 26.0 25.5 26.8

March 25.5 27.4 26.6 27.0 26.1 27.2April 27.6 28.9 27.5 28.2 26.9 27.6May 29.1 29.4 28.0 28.6 27.7 27.6June 29.1 28.4 27.9 27.6 27.8 27.1July 28.9 27.7 27.9 27.2 27.6 26.8

August 28.5 27.3 28.1 27.1 27.8 27.0September 28.0 27.5 28.1 27.2 27.7 27.0

October 27.0 27.2 27.8 27.2 27.2 27.0November 25.5 26.5 27.2 26.9 26.7 27.0December 24.0 25.7 26.5 26.2 26.1 26.8Average 26.7 27.2 27.3 27.0 26.9 27.0

Source: Rika Nenpyo (Historical Scientific Data Book),National Astronomical Observatory of Japan

With regard to average monthly relative humidity, none of the meteorological stations record figures below 65 percent for the dry season, while figures below 80 percent are extremely rare for the wet season.

Annual rainfall is close to 4000 mm in the wettest regions and around 1250 mm in the driest regions, with average regions recording annual rainfall of about 2000 mm. It is due to this abundant rainfall and strong sunshine that agriculture and forestry, the principal industries of the Republic of the Philippines, have flourished. Climatic conditions are ideal for rice cultivation, which is the mainstay of the county's agriculture, allowing three crops a year.

As is well known in Japan, the stretch of water between the Republic of the Philippines and the Mariana Islands spawns numerous typhoons, or tropical cyclones, with an average of around 30 appearing each year. According to the CIA World Factbook, the Republic of the Philippines is highly susceptible to natural disasters, being struck by some 15 typhoons and five or six cyclones or storms each year. This is several times the number that strike Japan, where around three typhoons ram into the main islands and a further seven come close enough to Okinawa and the surrounding islands to cause damage each year. Because these typhoons develop in the area between the Philippines and the Mariana archipelago, they vary rarely cause damage in the Visayas region, which is south of the Mariana Islands, while damage in the Mindanao region near the equator is negligible. In

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other words, damage due to typhoons is usually restricted to the island of Luzon.In addition to tropical cyclones, the El Nino phenomenon, which traditionally affects the entire Pacific Ocean region once every few years, has been occurring more frequently in recent years. El Nino causes a decrease in rainfall and droughts in lower latitudinal areas of Southeast Asia, and for several years up until 1998 droughts were so severe that it was difficult to retain enough drinking water in the capital of Manila, while in 1999, the La Nina phenomenon, which has the opposite effect to El Nino, brought downpours and flooding to the capital. The never-ending floods and droughts caused by these unusual weather patterns and the changes in atmospheric temperatures, rainfall, sunshine, and seawater temperatures had a devastating effect on agriculture, forestry, fishing, and the other primary industries that are so vital to the Philippines.

With the tropical cyclones, El Nino, La Nina, and the other climatic phenomena, not to mention the region's volcanoes and earthquakes, there is seemingly no end to the number of people who are directly affected by natural disasters in the Republic of the Philippines.These disasters inevitably have social, economic, and political consequences for the entire country. Productivity is too low to sustain stable economic development while at the same time supporting an increasing population, and so it is expected that there will continue to be a firm commitment to following the current policy of striving to shift from a socio-economic model based on primary industries, which are easily affected by natural phenomena, to one based on secondary industries.

(2) Origins of the nationThe first people to set foot on the islands that now make up the Republic of the Philippines were the Negrito (early Malayans) and Malayan people, who crossed the frozen oceans from the south during the last ice age some 25,000 to 30,000 years ago. This migration across the frozen waters that surrounded the Philippine archipelago is thought to have continued until the end of the last ice age. Following the end of the ice age more than 10,000 years ago, waves of migrants continued to cross the thawed oceans by boat for several thousand yearsuntil around the time of the birth of Christ (Philippines Statistical Year Book). During thisperiod, society was based on kinship and tribal units made up a ruling class including chiefs, free people, and a subordinate class of commoners, and there was generally no recognition of property rights. It was not until the introduction of Islam that an awareness of property rights emerged within the traditional Philippine hunting and gathering culture.Islam was introduced into the Philippines by traders and missionaries from the islands of Indonesia, and by around 1500 had established itself on the island of Sulu, which is close to Borneo. From here it is thought to have spread to Mindanao, and by 1565, when Spanish rule of the Philippines began in earnest, it had reached Manila on the island of Luzon. In place of the traditional chief system, these Moslem immigrants tried to instill the concept of a national domain ruled by a sultan who reigns over several states. However, neither this

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Islamic concept of a national domain ruled by a sultan nor the concept of property ownership, which already existed among a small number of rice farmers on the island of Luzon, were to spread far within the Philippines. When, in the 16th century, the first Spanish immigrants arrived in what is now the Republic of the Philippines, most of the estimated 500,000 people who inhabited the archipelago are thought to have lived according to the traditional kinship and tribal social system, under which property rights were not recognized.The first Spaniard to set foot on Philippine soil was the explorer Ferdinand Magellan, who is famous as the first man to circumnavigate the globe. It is thought that he first came ashore on the island of Cebu on March 16,1521. Magellan immediately claimed the territory in the name of his sponsor, the King of Spain, so beginning over 400 years of Spanish colonial rule in the Philippines.The Spanish immigration to and settlement of the Philippines, or in other words its colonization of the territory, began in earnest in 1565. The archipelago had already been named the Philippine Islands after Philip II of Spain (1556-1598). Several years after Spanish colonization began, the capital was established in Manila, which still functions as the capital today, more than 400 years later.Spanish rule of the Philippines was to continue some 300 years until its defeat by the United States in the Spanish-American War, which broke out in 1898 as a result of a dispute over control of Cuba. Philippine culture and society were strongly influenced by Spain as a result of this colonization, during which Catholicism and private property were both firmly established. At the end of the Spanish-American War, the Philippines declared its independence and established a republic, but defeat in the Philippines-American War, which broke out the following year, resulted in the United States establishing control over the territory in 1902. As was the case with the old colonizing nation of Spain, the United States was to have a strong influence on the culture, society, and politics of the Philippines, spreading Protestantism, establishing political parties and an electoral system, and setting up a legislative system. American colonial rule lasted for 40 years until the occupation of the Philippines by Japanese troops during the Second World War, and in 1946, the year after the defeat of the Japanese and the end of the Second World War, the territory at last became an independent republic, ending some 400 years of colonial rule. Following independence, despite considerable political and social upheaval resulting from the Cold War and the rise of communism, economic development and the thawing of relations between the United States and the Soviet Union led to the end of military dictatorship, and the return to civilian control has allowed the government to concentrate on promoting modernization.Because the birth of the Republic of the Philippines had its origins in waves of immigration to these islands over thousands of years, the many and varied traditional cultures in each of the islands or regions, along with economic, religious, and other differences, have all left their mark on modem Philippine society.

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(3) Politics and administrationIn the 20 years after the end of United States colonial rule and the establishment of an independent republic, the Nationalist Party and the Liberal Party ruled the Republic of the Philippines in succession, with not a single President being re-elected to the highest administrative post in the land. Six different Presidents ruled Indonesia until 1965, when Ferdinand Marcos was first elected President.

1946 Liberal Party, President Roxas elected (succeeded on his death in office by Vice- President Quirino)

1949 Liberal Party, President Quirino elected1953 Nationalist Party, President Magsaysay elected (succeeded on his death in office by

Carlos P. Garcia)1957 Nationalist Party, President Garcia elected 1961 Liberal Party, President Macapagal elected 1965 Nationalist Party, President Marcos elected

With the constitution forbidding a President serving three terms in office, President Marcos, who made history in 1969 by becoming the first Philippine President since independence to be re-elected, declared martial law in 1972, suspending the constitution and continuing on as President without holding elections.The Cold War intensified in the 1960s, symbolized by the outbreak of the Vietnam War, and as the military took over in neighboring Indonesia in response to the threat of communism, the United States, the most influential of the Philippines' former colonial rulers, was unable to maintain democracy in the Republic in spite of its strong advocacy of this form of government both home and abroad.Later, as relations between the United States and the Soviet Union thawed, criticism of the Marcos regime began to grow louder, and the political turmoil and worsening social and economic indicators of the mid-1980s saw the Republic of the Philippines fall well behind the other ASEAN nations.In the snap election of 1986, the first since the declaration of martial law, President Marcos faced off against Corazon Aquino, the widow of former Senator Benigno Aquino, who was considered Marcos's main rival until his assassination at the hands of the military in 1983. After Marcos announced his victory in this election, accusations of fraud led to the rise of a nationwide resistance movement, and unable to combat this opposition, Marcos was forced to flee to the United States and was never to set foot on Philippine soil again.Corazon Aquino took over as President on a wave of popularity after Marcos fled to the United States, and in order to prevent a return to military rule, in 1987 the election system was overhauled and the constitution revised to read as it does today. The main changes were as follows:

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- Prohibition on Presidents serving more than one term (up to two terms were possible under the old constitution)

- Revision of length of Presidential term of office (from four to six years)- Public election of Vice-President (elected together with the President under the old

constitution)- Full public election of all members of the House of Representatives (abolition of system

of nomination and election by President)- Revision of number of members of the House of Representatives (from 120 to 250 seats)- Introduction of proportional representation for House of Representatives (50 out of the

250 House of Representative seats decided by proportional representation)

As the above indicates, as well as preventing a single President serving an extended term in office, the new constitution aimed to ensure future administrations better reflected the will of the people, by expanding the number of seats in the House of Representatives and introducing proportional representation so that the voices of supporters of smaller political parties could be heard. Under the new constitution, the three powers of administration, legislation, and judicature were organized as shown in Figure 1-1-4.

Legislature Executive Judiciary

Senate

PresidentParliament

Vice-President

Office of the

President

House of Representatives

Cabinet- Department of Agriculture- Department of Trade and Industry- Department of Interior and Local

Government- Department of Energy- Department of Transportation and

Communications- Department of Public Works and

Highways- Department of Finance- Department of the Budget and

Management- Department of Science and

Technology- Department of Health

- Department of Justice- Department of Education, Culture

and Sports- Department of Tourism- Department of Labor and

Employment- Department of Environment and

Natural Resources- Department of Agricultural Reform- Department of National Defense- Department of Foreign Affairs- Department of Socio-Economic

Planning- Department of Social Welfare and

Development

Court of Appeals

Supreme Court

Regional Courts

Municipal Courts

Courts of the First Instance

Figure 1-1-4 Administrative System of the Republic of the Philippines

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Of the various departments that conduct the day-to-day administration of the Republic of the Philippines, those with particularly close links with the Basic Survey for Joint Implementation Promotion are the Department of Energy and the Department of Environment and Natural Resources, although when it comes to matters involving the advancement of loans from the Japanese government, of course the Department of Finance is also involved.The first President to be elected under the new constitution, Corazon Aquino, had to deal not only with continuing public order problems stemming from persistent rumors of possible assassination plots and coup d'etat attempts, but also with economic losses and social upheaval due to a string of natural disasters from 1990 to 1991, in the latter part of her term in office, including a major earthquake on the island of Luzon, the eruption of Mount Pinatubo, and a typhoon strike in the Visayas region. In spite of these hardships, widespread public support saw President Aquino complete her full term of office in 1992.The first presidential election under the new electoral system was fought not between candidates from the old Nationalist and Liberal parties, but between a host of candidates from newly established minor parties. In the end, Fidel Ramos, who was endorsed by Aquino after supporting her regime as Defense Minister, won a narrow victory.During President Ramos's six-year term in office, public order improved and the economy began to show signs of strengthening, and it is generally considered that the Republic of the Philippines faired better than most other ASEAN member countries during the financial crisis that hit the entire Asian region in 1997 and 1998, when Ramos was coming to the end of his term as President. Ramos is also credited with strongly promoting modernization in the Republic of the Philippines, which was promoted using five catchwords starting with the letter D.

DecentralizationDevolutionDemocratizationDeregulation(Sustainable) Development

(Minutes of World Bank symposium)

The 1998 Presidential election, the second to be held under the new electoral system, again saw a flood of candidates after a realignment of the political parties, and resulted in a landslide victory for the Party of the Philippines Masses (PMP) candidate Joseph Estrada, who was Vice-President under the Ramos regime and a folk hero for his championing of the cause of redressing the huge disparity of wealth in the Republic of the Philippines, which is the country's greatest social problem.Buoyed by his massive popular support, as well as improvements in the economy from 1999 through to late-2000 after the slowdown caused by the financial crisis of 1997, the Estrada

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regime appeared to be relatively stable, but in September 2000 it became the focus of rumors of bribery and corruption scandals, and was suddenly thrown into confusion.Already targeted by the mass media, the Estrada regime also came under attack from the hugely popular Gloria Arroyo, who had become Vice-President despite coming from an opposition party. Citing the bribery and corruption scandal, Arroyo resigned as Minister of Social Welfare and Development, further plunging the Estrada regime into turmoil. In mid- November 2000, during the second visit for the purposes of the Basic Survey for Joint Implementation Promotion, mass demonstrations swept through Metro Manila demanding the resignation of President Estrada, and a reluctance to venture outside in the vicinity of Makati meant that members of the research team were unable to carry out their normal information gathering activities. In December, impeachment proceedings were started against President Estrada, and as the nation became divided over whether or not he should resign, on December 29, just after Christmas, bomb attacks were launched against elevated railways, Ninoy Aquino International Airport, and public facilities and spaces, mainly in the city of Quezon, resulting in 22 deaths and 124 injuries. With the impeachment trial continuing, confusion reigned as the Republic of the Philippines entered the 21st century. With a general election due in May 2001, Cabinet Ministers began to resign one after another, and the Estrada regime was unable to form a cabinet. Amidst rumors of a military coup, President Estrada resigned on January 20, and Gloria Arroyo became the new President. Confusion reigned as to the future of the former President's impeachment trial, and there were fears that further political instability would halt the influx of foreign capital and lead to a collapse of the peso, dealing a fatal blow to the economy, which had recovered relatively steadily following the currency and financial crisis of 1997. There are already reports in the mass media that the Republic of the Philippines is lagging behind the other ASEAN nations, and so it is hoped that the new regime stabilizes as soon as possible.

(4) Society and cultureThe population of the Republic of the Philippines is approximately 80 million. The relative populations and population densities of Japan, the Philippines, and the Republic of Indonesia, which is separated from the Philippines by a narrow stretch of water and has a similar natural environment, are as follows:

Country Population Area Population density

Philippines 8.0 mil 30,000 km2 267/km2Japan 12.5 mil 37,000 km2 338/km2Indonesia 20.4 mil 190,000 km2 107/km2

The population of the Republic of the Philippines is 65 percent of that of Japan and about 40 percent that of Indonesia, while its population density is 80 percent of that of Japan and 2.5

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this issue, although there are those within the Philippines who recognize that limiting this population growth is the most important issue facing the country.

Forty percent of the population of the Republic of the Philippines live in urban areas, with 13 percent of the total population, or 11 million people, concentrated in the 630-square- kilometer metropolitan area made up of the four cities (Manila, Quezon City, Caloocan, Pasay) that are known collectively as Metro Manila and the surrounding 13 municipalities. For this reason, traffic congestion, air pollution, refuse, and other problems associated with overcrowding have reached critical levels. Sixty percent of the remaining population live in farming or fishing villages, but with the development in recent years of secondary and tertiary industries, an increasing number of people are migrating from the countryside to the cities in search of highly paid work, and so a solution has yet to be found for the increasing overcrowding of the urban areas.

The population of the Philippines is made up of Malays, who are by far the majority, Chinese, people of mixed Spanish and Malayan descent, and members of smaller indigenous ethnic groups.

Christian Malays 91.5%Islamic Malays 4%Chinese 1.5%Others 3%

Native languages commonly used in the Republic of the Philippines number as many as 80, and include Tagalog as well as languages of the smaller ethnic groups. In the late-1970s, the government introduced language education centered on instruction in Tagalog into the compulsory education system, and sought to unify the languages as part of an effort to encourage greater national awareness, but it is thought that only 50 percent of the population currently use Tagalog. Both English and Tagalog are currently recognized as official languages in the Republic of the Philippines. English language education has been a part of compulsory education in the Philippines from when the United States ruled the archipelago until after independence, and the widespread use of English is one reason why so many Filipinos find it easy to find work overseas, which is a major source of foreign exchange for the Philippines.

As the figures showing a breakdown of the religious affiliation of the population indicate, the Republic of the Philippines is unusual among Asian countries in that Christians make up the majority. Catholics vastly outnumbering Protestants, reflecting the fact that the influence of Spain, the territory's first colonizer and ruler for some 350 years, is far greater than that of the United States.

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Catholics 83%Protestants 8%Moslems 4%Buddhists, others 3%

The fact that Christians make up the vast majority of the population of the Republic of the Philippines is reflected in the long-established custom of taking a long vacation around Christmas, from December 16 to the first Sunday in January. This Christmas vacation has more than just religious significance. It also allows most of the Filipino laborers working overseas to return home with their foreign currency, fostering the family ties that are regarded so highly in the country and at the same time making a considerable contribution to the country's economy.

Most of the country's Moslem population live in the south of the country where Islam was first introduced, including the Sulu archipelago and the Mindanao region. Citing cultural differences with other regions of the Philippines, since the 1970s some of these Moslems have been pushing for independence from the Republic of the Philippines as part of groups such as the Moro National Liberation Front (MNLF), and public order in the Mindanao region has become a serious social problem.The MNLF has signed a peace agreement with the government on the condition that moves are made in future to turn the island of Mindanao into an autonomous region, although this was not enough to appease the more radical elements of the MNLF, and public order in Mindanao remains a serious social and political problem. The Mindanao issue is widely regarded as an economic problem stemming from poverty and regional inequalities more than it is a social and political problem caused by religious differences, and there have been numerous calls for economic development in the region.

Organized education of the general population of the Republic of the Philippines first beganin 1901 during the period of colonial rule by the United States. XT 7 0 o no

common language in widespread use at the time, the language of the colonizing nation, in other words English, was used in the classroom, and as a result English is still widely used in the Republic of the Philippines.Since the late-1970s, a mixture of English and Filipino has been used in the classroom, with some observers claiming that the use of English is on the decline as a result. The education system in the Republic of the Philippines is based on six years of elementary education, four years of junior high school education, followed by high school education.Compulsory education starts at the age of six and consists of six years of elementary instruction. The literacy rate is 94.6 percent, which is among the highest of all the ASEAN nations. Although secondary education is not compulsory, because education at public

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secondary schools is paid for by the state, an extremely large number of students go on to attend public secondary schools, leading some observers to complain of a lack of adequate facilities.

Table 1-1-2 The Republic of the Philippines Education System

Education level Years Standard age Curriculum

Tertiary education

8 23 Post-graduate research7 22 University graduate - 26 21 University graduate -15 204 19 Higher education3 18 Post-secondary education completed2 17 Vocational education completed1 16

Secondary education

4 15 Standard secondary education completed3 14 Vocational training completed2 13 Secondary education completed1 12

Elementary education Compulsory education

6 115 104 93 82 71 6

Infant education- 5 Kindergarten/Preschool- 4- 3

Federation of Asian Chemical Society symposium material

According to information on the ASEAN Center homepage, (published in the UNESCO '99 Statistical Yearbook, etc.) around 100 percent of children in the Republic of the Philippines complete compulsory education, with 78 percent going on to secondary education, and 35 percent going on to tertiary education. Among ASEAN nations, the ratio of students who go on to higher education is on a par with Singapore, and is testimony to how committed the people of the Philippines are to education.Another feature of education in the Republic of the Philippines when compared with other ASEAN countries and even Asia as a whole is that females are more likely than males to go on to undertake tertiary education. The number of females who progress to universities and other tertiary institutions in the Philippines is extremely high, and around 83 percent of teachers are female, which means 54 percent of all national public servants are female. One problem with education in the Philippines is the number of children from poor backgrounds who drop out of compulsory education, with some observers estimating that no more than 70 percent of students complete compulsory education.

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Zone Authority (PEZA), which was set up under the auspices of the Department of Trade and Industry in accordance with the Special Economic Zone Act of 1995.As of October 2000, a total of four public and 25 private Special Economic Zones have been recognized by PEZA, with some 399 companies engaged in manufacturing and other activities in the former, and 305 in the latter.Looking at the distribution of these Special Economic Zones in the three regions of Luzon, Visayas, and Mindanao, it is clear that the vast majority are located in Luzon, with only five Special Economic Zones in Visayas and one in Mindanao. Clearly, regional characteristics and inequalities are still an issue in the Republic of the Philippines.

Table 1-1-3 Special Economic Zones in the Republic of the PhilippinesRegion Special Economic Zone No. of Companies

Public:LUZON Bataan Economic Zone 62

Baguio City Economic Zone 13Cavite Economic Zone 219

VISAYAS Mactan Economic Zone 105

Private:LUZON Tabangao Special Economic Zone 1

Subic Special Economic Zone 3Luisita Industrial park 4Toyota Sta. Rosa Industrial Complex 3Angeles Industrial Park 5Carmelray Industrial Park II 5Daiichi Industrial Park 4First Philippine Industrial Park 4Cocochem Industrial Park 4Laguna Automotive Park 3Plastic Processing Center 1Lima Technology Center 12Light Industry & Science Park I 36Light Industry & Science Park II 12Laguna International Industrial Park 22Carmelray Industrial Park 17Laguna Technopark, Inc. 49Gateway Business Park 17First Cavite Industrial Park 51Victoria Wave 19

VISAYAS Leyte Industrial Development Estate 2New Cebu Township 2West Cebu Industrial Park 4Mactan Economic Zone II 24

MINDANAO First Oriental Business & Industrial Park 1

(PEZA Home page)

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(6) Relations with JapanRelations between Japan and the Philippines, which are both island nations inhabited by seafaring people, stretch back as far as the time of Hideyoshi Toyotomi in the 16th century, when trade was carried out using shogunate-licensed trading vessels. In the early Edo period, there was already a Japanese presence in Manila in 1614, when the Christian daimyo Ukon Takayama was forced to flee Japan and set up residence in the Philippine capital because of his Christian beliefs. However, trade between the two countries was halted during the Edo period due to the Tokugawa regime's seclusion policy. After the opening of Japan to the West, in the Meiji, Taisho and early-Showa periods, visits to the Philippines and other Southeast Asian countries by Japanese vessels for trade and in search of marine resources became more frequent, partly as a result of Japan's colonization of Taiwan, the Philippines' closest neighbor to the north. Later, there was a period of tense relations between the two countries, beginning with Japan's occupation of the Philippines during the Second World War and continuing with the end of the war, independence, and, as with several other Southeast Asian countries, the payment of war reparations by Japan (1956). More recently, relations between the two countries have been extremely friendly, with Japan hosting a large number of laborers from the Philippines, providing considerable support in the form of ODA, and setting up automobile and electronics manufacturing plants in that country.With regard to trade between Japan and the Republic of the Philippines, in monetary terms exports to Japan account for 16.6 percent of total exports from the Philippines, placing Japan second behind the ex-colonial power, the United States, with 34.9 percent. Japan also ranks a close second behind the United States in imports, accounting for 19.9 percent of total imports to the Philippines in monetary terms.

Republic of the Philippines export share 1st United States 34.9%2nd Japan 16.6%3rd Netherlands 6.6%4th Singapore 6.4%

Republic of the Philippines import share 1st United States 20.6%2nd Japan 19.9%3rd Netherlands 6.1%4th Singapore 6.0%

It is well known that a large number of workers from the Republic of the Philippines work overseas. The number working in Japan is over 47,000, making Japan the fourth most favored destination behind Saudi Arabia (approx. 198,000), Hong Kong (approx. 114,000), and Taiwan (approx. 84,000). National Statistical Coordination Board homepage, 2000) According to official development assistance (ODA) statistics published by the Japan Bank for International Cooperation (JBIC), in the 33-year period between 1966 and 1998, Japan

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made yen loans to the rest of the world totaling 17.60876 trillion yen, with 9.1 percent of this total going to the Republic of the Philippines, which ranked fifth behind Indonesia, China, India, and Thailand.

Country Total yen loans (From 1966 to 1998)

Indonesia 3,345,859 million yenChina 2,260,873India 1,641,785Thailand 1,631,196Philippines 1,608,706Malaysia 701,804Pakistan 644,664South Korea 595,971

Donors of overseas aid to the Republic of the Philippines rank as follows:

Japan (55.4%) Germany (14.2%) Australia (7.5%)United States (6.1%) France (3.7%)

(Ministry of Foreign Affairs Homepage, Various countries/regions and their relations with Japan)

These figures clearly show that Japan ranks well ahead of other countries in terms of the amount of economic aid it provides to the Republic of the Philippines. While the Philippine economy continues to grow, because the country is still reliant on overseas aid for the provision of its social infrastructure, it is predicted that Japan will continue to provide economic assistance. Also, judging from the number of companies that have chosen in recent years to set up operations in the Republic of the Philippines, it is expected that relations between the two countries will become even closer in the future, both at government and private level.

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1.2 Energy situation in the Republic of the Philippines(1) Energy policy in the Republic of the Philippines

The Republic of the Philippines, which, like Japan, is not blessed with fossil fuel resources, is in a situation of having no choice but resort to imports to procure the greater part of oil and coal requirements representing the majority of primary energy consumption in the country. If the current upward trend of crude oil or oil product prices further continues, it will have great influences on the national economy with increase of imports and rise of commodity prices, to such an extent as to eventually cause a social or political problem depending on the situation. The question of energy especially securing of fossil fuel may therefore be called an extremely important policy matter for today and the future in the Republic of the Philippines.The energy problem in the Republic of the Philippines was temporarily solved during the period of Aquino government which started in 1986 and, later, DOE (Department of Energy) which was revived in 1992 under the Ramos government for the purpose of maintaining consistency of energy policy came to take charge of planning to implementation of policies in all fields of energy. DOE adopts a system of operating the following organizations as sub­organizations by fields of energy for the implementation of priority measures:

• Philippine National Oil Company (PNOC)• National Power Corporation (NPC)• National Electrification Administration (NEA)

Of the energy-related measures on which is placed emphasis by DOE currently, the following items may be enumerated as items of higher priority:

Improvement of national production ratio of energies.Abolition of regulations on energy industries.Promotion of oil development and natural gas development. Promotion of electrification of frontier regions.Renewal for modernization of deteriorated power generation systems.

DOE established a 10-year plan PEP (The Philippine Energy Plan) centering on the demand- supply balance of energies for the period from 2000 to 2009, including those priority issues. PEP is prepared in a way to cover a wide range of energy issues as a whole including demand-supply trend of energies, energy development plan, plan for new installation and renewal of energy-related facilities, etc. in consideration of economic growth, increase of population, increase of disposable income, etc. during the coming 10-year period, and is positioned as constituting the core of the energy policy in the Philippines.PEP sets the average annual expansion rate of energy demand during the 5-year period from 2000 to 2004 as 5.5%, that of the 5-year period from 2005 as 7.2%, and the average annual

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expansion rate through the 10-year period as 6.3%. As a result, the balance of primary energy consumption by conversion into fuel oil is estimated to progress as shown in Table 1- 1-4, and planning is made of energy-related measures on which to place emphasis.

Table 1-1-4 Forecast of demand-supply situation of primary energies in the Republic of the Philippines

Unit: Equivalent to million barrels fuel oil/yearYear 2000 2004 2009

Amount of energy demand 256 317 445Amount of self-supplied energies 108 156 176Amount of imported energies 148 158 269Self supply ratio of energies 42% 49% 39%

Source: Arranged from PEP data

According to the above table, while the amount of energy consumption in the Republic of the Philippines increases by 24% in 2004 compared with 2000, the self-supply ratio of primary energies in the country is expected to temporarily increase from 42% to 49% with oil development, natural gas development, geological heat development, etc. However, 9 years later or in 2009, the amount of energy consumption increases by 74% compared with 2000 and, as a result, the self-supply ratio is expected to drop to 39% which is lower than the level in 2000, thus leaving the current fragile constitution against rise of fossil fuel prices as it is in the medium and long-term perspective.Table 1-1-4 does not include energy saving effects due to improvement of efficiency of energy-related facilities, but PEP sets a target of achieving 1.6% reduction of primary energy consumption in the year 2000 and 3.5% saving of the same in 2009, clearly indicating the necessity of powerfully promoting energy saving to improve the constitution of national economy the management of which is liable to be influenced by the fossil fuel prices.

(2) PetroleumIn the Republic of the Philippines, the amount of oil consumption increased in a way linked with the expansion of economy, with 370,000 barrels/day in 1999, which is a level more than twice higher than 150,000 barrels/day in 1985. The average annual expansion ratio of consumption during this period was 6.7%, showing an expansion higher than the rate of growth of economy in the country. On the other hand, the oil production in the Philippines was 4,000 barrels/day (1999) which represented only 1% of the amount of consumption, the remaining 99% being covered by imports in the form of either crude oil or petroleum products from Middle and Nearest countries.Therefore, if the current high price level of crude oil and petroleum products continues for a long period, it will have extremely serious influences on the Philippine economy. Such

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influences will be produced as a heavy burden, not simply in the form of price hike of crude oil and petroleum products quoted in US dollars but as double punch combined with the aftereffect of a sharp devaluation of the Philippine currency peso against US dollar brought about as a result of the financial crisis which hit the entire Asia during the period from 1997 to 1998.

The Republic of the Philippines not only required import of crude oil but also resorted to import he Republic of the Philippines not only required import of crude oil but also resorted to import for the procurement of fuel oil as well, because of a comparatively high proportion of fuel oil in the fuels consumed in power stations. For that reason, some people fear that the recent high-price trend of crude oil and petroleum products may have great influences on the management of economy and the economic growth of the Philippines in the future. On the other hand, EIA Philippine Country Analysis Brief presented a rather optimistic view, in discussing natural gas development which is getting more and more active in recent years in the country, that the amount of oil consumption in the Philippines would not increase so much under the government's policy of renewing deteriorated fuel oil firing power generation plants with gas turbine combined cycles with higher heat-electricity conversion rate using natural gas as fuel.

However, if the economic growth in the future of this country does not remain to be a simple quantitative expansion of existing labor-intensive industries but changes qualitatively as well with development of petrochemical industry headed by ethylene plant, etc., in this country where the population grows at an annual rate over 2%, it is believed difficult to take an optimistic view that there will be no expansion of oil demand if only the production of natural gas increases.The amount of oil consumption of 370,000 barrels/day in the Philippines in 1999 mentioned earlier is a level equal to approximately one fifteenth of the consumption in Japan the same year of 5,571,000 barrels/day. It means that, even with correction by the difference of population between the two countries, the amount of oil consumption per person in the Philippines remains at a level of one tenth compared with Japan. With a growth of economy in the Philippines which intends to transform itself into an industrial power, the trend for preference of high-class products in people's livelihood is becoming more and more conspicuous.

• Appearance of air-conditioned buses (dual fare system depending on presence or not of air-conditioning).

' Reduced production of jeepnies for joint riding (Decrease of demand for joint riding services).

Consequently, it will be safe to accept a precondition that the demand for oil will expand in line with improvement of people's livelihood as represented especially by motorization

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The coal consumption sharply increased from 1996. This is because new coal fired thermal power generation facilities were constructed for the purpose of diversifying the types of fuels used in power stations which had been overdependent on oil in the past.The coal mines in the Philippines, all of which are of small scale and not provided with sufficient infrastructures for distribution and said to be incapable of maintaining competitive power against imported coal because of problems such as high distribution cost, coal quality with small calorific power, etc. The Philippine government organized National Coal Authority since 1970s and has so far been taking a policy of obligating it to purchase domestic coal in certain proportion against the imported coal, to protect the coal industry in the country. However, some observe that this system will be abolished in the future, judging from the flow of a series of deregulatory measures which have been promoted since 1990s in the Philippines (USA EIA).

(4) Natural gasThe proven total amount of natural gas reserves in the Republic of the Philippines is said to be 2.8 trillion ft3 (79 billion m3). The actual production started only recently and has not yet reached any reliable statistical level, but the achievement in 1997 was 20,000 barrels by conversion into oil while the proven amount for 1998 was 40,000 barrels, according to announcements made by the National Statistical Coordination Board.In the past, development and utilization of natural gas in the Philippines used to be far from active as general situation. In recent years, however, the Philippine government is promoting development and utilization of natural gas as the basis of its energy policy, to reduce the amount of oil imports. The largest-scale natural gas field in the Philippines is the Malampaya gas field off the Palawan Island in the South China Sea with a proven amount of reserves of 2.5 trillion ft3 (71 billion m3), which represents 90% of the total proven reserves in the country. This development is much different from other natural gas developments made in the past, not only because it is the largest natural gas development project in the Philippines but also because a largest scale of overseas capital is introduced in the Philippine for this project.The project is developed in the investment proportions of 45% by Shell Philippine Exploration, 45 % by Texaco and 10% by PNOC, and the natural gas is planned to be sent through a pipeline of the total extension distance of 504 km to 3 power stations located in Batangas in Luzon Island to be consumed there. This natural gas pipeline the installation work of which is currently under execution is expected to become the longest deep-sea pipeline in the world, because one half of the total extension distance of 504 km is installed at a level deeper than 200 m under sea level (DOE report).The production in the Malampaya gas field is expected to start at the end of 2001 or in the early part of the year 2002. The natural gas from the Malampaya gas field will be consumed in the combined cycle to be newly constructed in the 3 power stations in

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Batangas, and the total quantity of power generation will be 2,700 MW. The ratio of reserves to production (R/P) of the Malampaya gas field is estimated to be 20 years, and this is believed to enable to reduce by half the fuel oil consumption in fuel oil fired power stations in the Philippines.Moreover, PNOC is now planning to develop a natural gas field in the Fuga Island located at a distance of approximately 300 km from Taiwan by a joint venture with Australia-based Pancontinental Oil & Gas Company and Stirling Company also based in Australia. A study is now being made of a plan for exporting natural gas to Taiwan, which is currently importing LNG mainly from middle and nearest countries, by installing a pipeline (information from USA EIA).

(5) Other fuelsOn traditional fuels other than fossil fuels widely used in the Republic of the Philippines since olden times, DOE estimates the amount of use as follows:

' Wood — Equivalent to 40.29 million barrels fuel oil/year' Charcoal — Equivalent to 4.56 million barrels fuel oil/year• Bagas (Sugarcane fibers) — Equivalent to 10.68 million barrels fuel oil/year• Agricultural wastes — Equivalent to 16.48 million barrels fuel oil/year• Others — Equivalent to 0.11 million barrels fuel oil/year

The total volume of use of those fuels is equivalent to as much as 48% of the fossil fuels consumed in the Republic of the Philippines, and they are currently indispensable in the discussion of energy problems in the Philippines. However, they are products or byproducts of primary industry after all, and it is hard to expect any remarkable expansion of those items in the future.Therefore, if the amount of energy consumption increases in the future, there is no choice but resort mainly to (increase of) fossil fuels. For that reason, the weight of those traditional fuels in the total energy consumption is believed to gradually decline in the future.

(6) Electric powerThe electric power industry in the Republic of the Philippines is operated as public utility by National Power Corporation (NPC), and 90% of the total power generation in the Philippines is wholesaled to approximately 20 private electric power companies and 119 cooperative associations for electrification placed under the management of local public entities, for distribution to the end users. It is said that, of the 90% of the total amount of power generation in the country handled by NPC, 56% is represented by the amount of power generation in its own power stations, and the remaining 44% is the amount of power generation by independent power generation businesses (IPP) (PEP data).

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As it is apparent in Fig. 1-1-14, the capacity of power generation systems increased to approximately 1.8 times the initial value during the 7-year period from 1991 to 1998.In 1991, the total capacity of hydraulic power generation system and oil fired power generation system represented a little less than 80% of the total capacity of power generation systems in the Philippines. After that, diesel power generation, which is included in oil fired power generation, and geothermal power generation greatly developed. As a result, the ratio of hydraulic power generation system and oil fired power generation decreased, accelerating diversification of power sources.As it is apparent in Fig. 1-1-14, no nuclear power station is operating in the Republic of the Philippines today. Construction of a nuclear power station was made in the Bataan Peninsula during the period from 1976 to 1985, and the facilities were almost completed. However, the accident of explosion of a nuclear power station in Chernobyl in Ukraine of the former Soviet Union cast doubt on the safety of nuclear power generation and, also because of a problem of economic efficiency, collapse of Marcos government, etc., this nuclear power station was stranded without ever getting into any commercial operation. According to a present forecast, it is expected that a shortage of electric power will become serious from the year 2004, but there is no discussion calling for utilization of this stranded nuclear power station as it had originally been planned. An idea is being studied of reviving it as a thermal power station, but this idea does not seem to have been developed into any realistic plan. In the Philippines, there is currently no plan for newly constructing a nuclear power station, and no reference to such idea is made even in PEP's power supply plan for the period up to the year 2009.As described in the preceding paragraph, if thermal power generation using fuel oil as fuel currently constituting the main stream of power generation today is gradually replaced by gas turbine combined cycle which consumes natural gas of high heat to electricity conversion efficiency, power sources such as natural gas, fuel oil, geo-thermal and hydraulic power will be used in a well balanced way in power generation in this country. Fig. 1-1-15 indicates a comparison of power generation systems by source energies for the Republic of the Philippines, Japan and the entire OECD.

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on oil of electric power industry, it is only in the Mindanao Island that location suitable for run-off-river plant with low construction cost, maintenance cost and unit price of electric power can be found. Because of a long distance between candidate areas for location and the places of consumption, some people say not much expectation can be placed on the development of hydraulic power generation in the future.Another characteristic of power generation in the Philippines, other than geo-thermal power generation, is a fairly high proportion of diesel power generation. This is probably because the country is composed of a large number of islands and the respective islands own and operate small and medium-scale independent electric power lines by diesel power generation system.This characteristic is also backed by the fact that, in said book published by the Japan Electric Power Information Center, while the proportion of particularly diesel power generation is high in the Visayas area comprising a lot of small and medium-sized islands, hardly any diesel power generation is found in the Luzon area almost adjacent to the Visayas area.The Philippine government is currently implementing measures for supplying electric power serving as foundation of industries to all of approximately 9,000 villages and detached places where no electric power is available yet. Initially, electrification of the entire areas in the country had been planned to be completed in 2008, but the government of President Estrada, wishing to promote industries through electrification to eradicate poverty and improve livelihood of people in villages and detached areas, made a drastic change of policy and advanced the electrification plan for the entire national areas to be completed in 2004.Since electrification of big cities and major villages is already over, the areas forming the subject of electrification in the coming period are mostly villages and detached areas with small population. For that reason, diesel power generation system suitable for medium and small-scale power generation is believed to continue increasing also in the future.

Rate of electrification in 2000 — 85%Rate of electrification in 2004 — 100%

The progress of demand for electric power in the Republic of the Philippines is as shown in Fig. 1-1-16. The expansion ratio, which remained at the level of an average annual expansion of about 3% during the period from 1980 to 1993, became suddenly high from 1993 when a serious shortage of electric power was produced, and has remained at a high level up to today.

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Blue environment: Encouragement of voluntary protection of coastal resources by local inhabitants in fishing villages.

Measures for environmental protection in Japan are liable to be interpreted as measures almost limited to prevention of air pollution and prevention of water pollution only. In the Republic of the Philippines, where the industrial and social structures are different from those in Japan and the weight of primary industries is high, the measures for environmental protection are also different from those in Japan and considered as more closely related to people's livelihood. Exhaustion of resources due to disorderly deforestation made in the 1970s to 1980s for the purpose of getting foreign currency, drop of water retaining capacity of mountains resulting from such deforestation, outflow of soil from mountainous areas during rainy season, problems of flood in agricultural areas, and exhaustion of marine resources due to excessive fishing and loss of mangrove bushes which are the basic resources are handled as serious environmental problems having direct influences on the livelihood of regional inhabitants.

1) Measures for prevention of air pollutionAlthough the development of industries centering on the manufacturing industries has been remarkable in recent years, the Republic of the Philippines today is not necessarily in a state same as or similar to that of Japan 30 to 40 years ago when pollution of atmosphere due to exhaust gas from large-scale energy consuming facilities such as heavy chemical industries, steelmaking industry, power stations, etc. became serious as we experienced during that period of rapid economic growth. Unlike the situation in which Japan invited pollution of atmosphere as a result of concentration of industries consuming large amounts of energy such as heavy chemical industries, steelmaking industry, etc. in reclaimed land promoted without any sufficient consideration to or measures for environmental protection during the period of rapid economic growth, the industrial structure of the Philippines is mainly composed of light industries at the present moment and, for that reason, there is no case in which industries consuming large amounts of energy flock in any specific area even in industrial areas and it is judged that there is no particularly serious problem of air pollution due to production activities of factory facilities.The problem of air pollution considered as requiring urgent measures is not one due to exhaust air from factories but one due to exhaust air of engines of automobiles which sharply increased in number and reached a state of overcongestion, in the metropolitan area of Manila which is in the state of overpopulation. Metropolitan Manila and the surrounding areas are in a state of chronic traffic congestion day and night, and the presence of old jeepnies driven by diesel engines, large number of imported second-hand buses and trucks for industrial use also accelerates air pollution there. According to DENR's annual report for 1997, of the particle counters for measuring the concentration

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of floating particles in the atmosphere installed at 136 different points all over the country, the greater part indicate values no higher than that of environmental standards, but the 24- hour average value on the counters in metropolitan Manila and Macati indicated a value exceeding the environmental standard by 50% at 469 jug/Nm3, evidencing a very serious situation in those areas.In the year concerned (1997), the government of President Ramos announced a policy of adopting lead-free gasoline, and decided the steps of reducing the amount of lead added to gasoline from 1.6 g/1 to 1.0 g/1 from 1998, and achieving complete elimination of lead in 2000 in the metropolitan Manila where the density of automobiles is particularly high, and in 2002 in the rest of the country.Later, the government of President Estrada which succeeded the Ramos administration announced a policy of reinforcing legal control on air pollution from the viewpoint of protection of inhabitants, establishing the "Philippine Clean Air Act 1999" in 1999, stipulating environmental standards relating to environmental protection of atmosphere and discharge standards by kinds, scales and age of equipment and facilities, and also stipulating details of penalties to be imposed in the case of infraction. The enforcement of Clean Air Act 1999 was not necessarily made smoothly because the industrial circled expressed a concern about possible drop of international competitive power, but the law is expected to be put into effect in November, 2000 subject to establishment of enforcement regulations. Table 1-1-5 compares environmental standard values on major harmful matters relating to atmospheric protection stipulated in the "Philippine Clean Air Act 1999" with those of Japan.

Table 1-1-5 Comparison of environmental standard values for atmosphere in the Philippines and Japan

Concentration by weight was converted into concentration by volume partly.Object matter Philippines Japan Remarks

Sulfur dioxide 0.03ppm 0.04ppm Daily average valueCarbon oxide 15ppm lOppm Daily average valueFloating particulate matters 0.09mg/Nm3 0.1mg/m3 Daily average valueNitrogen dioxide O.OOSppm 0.004 - 0.006ppm Daily average valuePhotochemical oxidant 0.07ppm 0.06ppm 1-hour valueLead & lead compounds l.Omg/Nm3 None

Philippine Clean Air Act 1999 Air pollution handbook edited by Air Pollution Research Association

As seen in the above table, the environmental standards of the Republic of the Philippines hardly have any significant difference from those of Japan, except that they are somewhat severer on sulfur dioxide but slightly more lenient for nitrogen dioxide, and we can understand that the environmental standards of the Philippines are established on about

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the same level as those of advanced countries.Table 1-1-16 compares the control values in the "Philippine Clean Air Act 1999" with those of Japan about the emission standards which are applied to harmful material discharging facilities to achieve the environmental standards.

Table 1-1-6 Emission standards for prevention of air pollutionConcentration by volume was converted into concentration by weight partly.

Object matter Philippines Japan

Sulfur dioxide Existing combustion system 1.5 g/Nm2 3Newly established combustion system 0.7g/Nm3

(No control on concentration of exhaust gas)

Carbon oxide 500mg/Nm3 (Same as above)Floating particulate matters

Urban combustion system 150mg/Nm3Suburban combustion system 200mg/Nm3 (Same as above)

Nitrogen dioxide Existing combustion system l,500mg/Nm

Newly established combustion system Coal l,000mg/Nm3Oil 500mg/Nm3

Existing oil fired boiler270 - 310mg/Nm3

Existing oil fired boiler270 - 370mg/Nm3

Lead & lead compounds 10mg/Nm3 10 - 30mg/Nm3

Philippine Clean Air Act 1999 Air pollution handbook edited by Air Pollution Research Association

In the Clean Air Act 1999, the emission standards of sulfur dioxide and nitrogen dioxide are stipulated separately for existing facilities and newly established facilities. This classification is understood as a kind of transitory measure. Looking back on the history of the Air Pollution Prevention Act of Japan which has undergone several times of revisions since its enforcement in the early 1970s, it is believed that the emission standards of the Philippines will also be reviewed in the same way as those of Japan, as the amount of energy consumption increases in line with development of economic activities and betterment of the people's livelihood in the future.Since the dual-purpose electricity and steam generation system by low-speed diesel engine using residual oil as fuel, the introduction of which is studied in the basic survey for promotion of joint implementation, etc., cannot satisfy the emission standards concerned of sulfur dioxide and nitrogen dioxide in its original form, we will take the measures of providing an exhaust gas desulfurizer by magnesium hydroxide method for the former and an NOx removal system by ammonium reduction method for the latter, to solve the problem.

2) Protective measures against water pollutionWhile the Water Pollution Prevention Act of Japan puts emphasis on the quality of waste water discharged from production facilities containing more or less mainly harmful matters, pollutants or eutrophic materials and the treated water thereof, the water resource user's position is clear also legally in the Republic of the Philippines. For example, we can see a difference from the control in Japan from the fact that the water resources in the

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Philippines are submitted to individual control under the following categories:

[Surface water resources]Class AA: Public water supply Class I — Water source satisfying the standards of

potable water with sterilization only.Public water supply Class II - Water source satisfying the standards of potable water with coagulating sedimentation, filtration and sterilization.

Water for recreational use Class I — Water source for recreational purposes such as bath, swimming, diving, etc.

Class C-l: Water source for fishing in which naturally produced fish and other animals and plants live.

Water for recreational use Class II — (Playing with leisure boat, etc.) Water supply for industrial use Class I (used for industrial purpose, after treatment).Water used for agricultural, irrigation and stock raising purposes.Water supply for industrial use Class II (for cooling water)Other water on the ground

Class A:

Class B:

C-2:C-3:

Class D-l D-2 D-3

[Seashore and seawater resources]Class SA-1

SA-2SA-3

Class SB-1

SB-2:

Class SC-1:

SC-2SC-3

Class SD-1Class SD-2

Water source in fishing water area suitable for growth of shellfish.Water resource specified for use in tourism and national parks.Water source in water area specified for coral reef park.Water area for recreation Class I — Water source in water area specified for public swimming and diving.Water area for fishing Class I — Water source in water area for egg-laying of milk fish (edible fish), etc.Water source for recreational use Class II - (Playing with leisure boat, etc.).Water source for fishing Class II (commercial fishing, etc.).Wetland with mangrove specified as area closed to fishing.Water supply for industrial use Class II water source (cooling water, etc.). Other coastal line and seawater resources.

Table 1-1-7 compares main standard values of the water standard Class A (raw water of tap water requiring ordinary water treatment) of the Republic of the Philippines with those of the Class 2 water quality for tap water in Japan which is considered as equivalent water quality.

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Table 1-1-7 Comparison of water quality standards in the Philippines and JapanCompared item Philippines Japan

Temperature rise 3 r -Hydrogen ion content pH6.5 - 8.5 pH6.5 - 8.5BOD 5mg/l 2mg/lFloating matters 50 25Dissolved oxygen 5 7.5Coli-bacillus l,000MPN/100cc l,OOOMPN/10OccTotal nitrogen 10mg/l -Total phosphor 0.1 -

DENR Administrative Order No.34 "Current situation and problems of environments in Asia",

edited by Economic Cooperation Department, Policy Bureau, Ministry of International Trade and Industry

The water quality standards of the Republic of the Philippines include control values to avoid sudden temperature rise. These control values may be understood as reflecting consideration to influences of water source on ecological system.About the emission standards for maintaining this Class A water quality standards, DENR stipulates the waste water quality from existing facilities and the waste water quality from newly installed facilities separately from each other. This may be understood as a kind of transitory measure, in the same way as in the case of protective measures against air pollution.Table 1-1-8 compares main standard values of the waste water quality into Class SD water area of the Republic of the Philippines with those in the case of discharge into sewer system from factories, etc. in Japan.

Table 1-1-8 Comparison of waster water standards in the Philippines and Japan

VzOmpareu nem Oi waste waici qualityPhilippines

JapanExisting facilities Newly installed facilities

Arsenic & arsenic compound 1.0mg/l 0.5mg/l O.lmg/1Cadmium 0.5 0.2 0.1Hexavalent chromium compound 1.0 0.5 0.5Cyanogen - - 1Lead & lead compound - - 0.1Mercury & mercury compound 0.05 0.01 0.005PCB - - 0.003BOD 150 120 300COD 300 200 300Floating matters - - 300

DENR Administrative Order No.34

"Current situation and problems of environments in Asia",

edited by Economic Cooperation Department, Policy Bureau, Ministry of International Trade and Industry

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The waste water from the dual-purpose electricity and steam generation system by low- speed diesel engine using residual oil as fuel, the introduction of which is studied in the basic survey for promotion of joint implementation, etc., mainly consists of waste water of aqueous solution of magnesium sulfate because magnesium sulfate is used as absorbent in the exhaust gas desulfurizer. Namely, magnesium sulfite in the absorbent liquid from the absorption tower of the desulfurizer is oxide with air in the oxidizing tower into highly soluble and harmless magnesium sulfate solution, and then the treated water is totally discharged toward the sea after solid-liquid separation by filter.

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supply ratio of which is extremely low, diversification of fuels is being promoted by substantially stopping any supplementary installation of oil fired power stations which constituted the mainstream of power generation in the Philippines together with geo-thermal power generation in the past. It can easily be imagined that the entire demand-supply balance of petroleum products will greatly change, if the demand for fuel oil decreases with further promotion of switching of fuel to natural gas in oil fired power stations in the future. Namely, it is difficult to avoid a tendency for demand-supply balance for gasoline and gas oil and excess of fuel oil.A factor which may further accelerate imbalance between demand and supply of light oils and heavy oils due to motorization is reduced demand for heavy oils resulting from environmental protection measures. For example, to be faithful to the provisions of the Clean Air Act 1999, prepared for the purpose of promoting protective measures against air pollution in the Republic of the Philippines, the sulfur content of the fuel usable in existing combustion facilities in the country is estimated to be about 1% at the maximum, and about 0.5% for newly installed facilities. However, regardless of normal-pressure distillation system and reduced-pressure distillation system, substantially the tower bottom which includes a lot of sulfur content is usable only in a very small amount as base material of fuel oil, and it may become difficult to sell the total volume of the remaining portion in the domestic market because of quantitative balance with the cutter stock (gas oil fraction).As described above, under the situation in which the market demand largely leans toward light oil, there will be no choice but accept a dilemma that heavy oils, the production of which must also be increased in line with increased production of light oils, are limited in uses because of restriction on the sulfur content, as part of protective measures against air pollution.

(2) Measures to take on the part of refineriesThe themes to be tackled hereafter by the oil industry of the Republic of the Philippines are measures for increasing production to meet the demand of light oils i.e. gasoline and gas oil on one hand and measures for effectively utilizing heavy oils (fuel oil C, vacuum residue, etc.) the demand of which does not expand so much as the growing demand for those light oils on the other hand. There is no doubt that the course which follows will be the same as that taken by Japanese refineries who concentrated their efforts on measures for switching to clean oil through introduction of catalytic cracking system and thermal cracking system, during the period when motorization took root in our country in the early 1970s).In the case of Japan, imbalance of excessive heavy oils was further aggravated because thermal power stations, which were the largest consumers of fuel oil, either switched their fuel to crude oil burning from the viewpoint of protective measures against air pollution or promoted construction of coal fired thermal power station to avoid confusion resulting from the two waves of oil crisis which hit the country. Considering eventual progress of the people's livelihood symbolized by motorization in the future, it will be necessary for us to

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think that not only the Philippines but also other ASEAN countries will soon find themselves standing in the same situation as Japan in those days. In any case, there is no doubt that those themes must be tackled not only by Petron's Bataan Refinery in the Republic of the Philippines but also by the oil industry and refineries in all ASEAN countries as common tasks.As countermeasures against increase of demand for light oils and reduced demand for heavy oils, a possible solution will either one of the following 2 measures or combined use of both of them:

Increase the yield of light oils through thermal cracking of heavy oils.Correct the imbalance between demand and supply of light oils through effective utilization of heavy oils in the refinery.

About the former point, a feasibility study for Bataan Refinery, which forms the subject of our survey, has already been completed and is believed to be in the stage of detailed study. According to our basic survey, the dilution of vacuum residue by light oil fraction, which is currently practiced for the purpose of adjusting the viscosity and sulfur content of the product fuel oil, will become unnecessary by taking the latter method, i.e. by effectively utilizing heavy oil or, to be concrete, vacuum residue (VR), which is the base material of fuel oil, in the refinery. This intends to eventually promote correction of imbalance between demand and supply of both light oils and heavy oils.By switching part of the self-consumed fuel, which was of the same level as fuel oil sold outside, to vacuum residue itself, it becomes possible to reduce the amount of use of the cutter stock, and divert that part of reduction to external sale and increase the volume of deliveries of light oils, so as to not only correct the imbalance between demand and supply of light oils but also gain profits resulting from upgrading of the products.

Current situation (Power generation by boiler & turbine)

Vacuum residue —(Blending)

Desulfurized light oil components—Fuel oil

Self consumption (Electricity & steam) Products

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After implementation of the project (Combination of power generation by boiler & turbine andpower generation by low-speed diesel engine)Vacuum residue

(Blending)

Vacuum residue (Power generation by low-speed diesel engine) --------------► Fuel oil -

► Self consumption (Electricity & steam)

Desulfurized light oil components------ ► Gas oil---------------- ► Products(Portion of thick line: Implemented in the project)

The utility facilities in many refineries are designed to suit the demand-supply balance of utilities on each occasion. This also applies to various types of private power generation system, and optimization is made by demand-supply balance of electricity and steam, especially in the conventional type boiler & turbine system.It is expected that oil refineries, which are typical energy-consuming facilities, will positively implement energy-saving measures in the future, not only as measures for saving operating cost but also from the viewpoint of protection against global warming. Although the demand will increase for both electricity and steam as a result of construction of new facilities and modernization of systems, etc., it is supposed that the expansion of demand for steam will be not so large compared with the increase of demand for electric power and that the heat-electricity ratio will also become smaller (larger demand for electric power). Therefore, it will have to be considered as an extremely important task for oil refineries to meet this demand through introduction of power generation system with high heat- electricity conversion efficiency.This method is difficult to apply outside a refinery because the vacuum residue is highly viscous and difficult to handle. This is a method which can be implemented only in refineries operating a vacuum distillation system.Petron's Bataan Refinery forming the subject of our survey is currently covering about the entire amount of electric power consumption in the refinery with private power generation system by bleeder turbine. The thermal efficiency of enthalpy base is maintained high because of a comparatively large amount of steam extraction, although the steam conditions are of the same level as those of a general industrial boiler. In the future, however, the increase rate of the amount of steam used will become lower compared with the increase rate of the amount of electricity used with a progress of energy saving or environmental measures, and this will make it necessary to adopt an operating style of covering electricity with steam condensate in existing power generation systems, further reducing the thermal efficiency of private power generation systems. Therefore, it is necessary to consider avoiding drop of thermal efficiency by introducing power generation system with high heat- electricity conversion ratio and excellent partial load characteristics.As described above, we studied composition of a project for joint implementation, etc. about

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introduction of dual-purpose electricity and steam generation system by low-speed diesel engine using vacuum residue as fuel in Petron's Bataan Refinery in the Republic of the Philippines, with a view to realizing effective utilization of heavy oils which will become excessive, and covering the amount of electric power consumption in the refinery, which is believed to increase in the future, by means of high-efficiency private power generation system.

(3) Needs of CDM projectThe essential purpose of this project is to reduce the amount of discharge of greenhouse gases by achieving energy saving through introduction of dual-purpose electricity and steam generation system by low-speed diesel engine with excellent heat-electricity conversion ratio in the refinery. At the same time, it perfectly conforms to the conception of joint implementation or CDM defined by the United Nations Framework Convention on Climate Change. In addition, this project includes not only energy saving but also technical elements of environmental protection such as exhaust gas desulfurization and NOx removal on which no sufficient achievements exist in developing countries. In that sense, it also meets the spirit of joint implementation and CDM for Japan, a country advanced in the technology of environmental protection, provide other country with technology and jointly realize a project. Although the Republic of the Philippines established the Clean Air Act 1999 in the year 1999 to reinforce measures for protection of atmospheric environments, there is a fact that there was a strong opinion of concern about eventual drop of international competitive power due to increased cost burden for environmental protection of domestic industries under this law, and it took a long period of time before the enforcement regulations of this law were actually approved at the parliament to make the law effective in November, 2000. At present when the aftereffect of the financial crisis of 1997 to 1998 is not completely heeled yet, it is believed difficult also from the economic viewpoint, not only for the Republic of the Philippines but also for any ASEAN member country, to achieve this kind of project for environmental production measures independently. Therefore, this project should be realized as a project for implementation with Japan which is a country advanced in the technology of environmental protection and the largest ODA provider, not only from the technical aspect of environmental protection but also from the aspect of fund for construction and operation after that.Moreover, this kind of environmental protection measures projects are considered as objects of big investment in the future in ASEAN member countries and other Asian countries having close relations with Japan. As object enterprise for this project, we are planning to establish close cooperative relations with Petron's Bataan Refinery forming the subject of our survey, so as to realize a project for joint implementation, etc. as the first step for development of environmental protection measures project business in the future.

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2. Necessity of introduction of energy-saving technology in object line of business

In oil refineries in Japan, various energy-saving measures are taken these days and also planned for the future. The Petroleum Association of Japan (PAJ) issued a guidance on energy saving to the respective oil refining companies, setting a plan for achieving approximately 10% energy saving in 2010 compared with 1990. Generally, the following 4 items are taken up for energy saving in oil refinery:

1) Advanced control2) Reduction of amount of steam consumption3) Recovery of exhaust heat4) Introduction of new technologies

The first item or advanced control includes sophisticated control by computer such as DCS, APC (advanced process control), etc. providing the possibility of approximately 3 to 4% energy saving. The amount of steam consumption in the second item can be reduced through reviewing of operating pressure of the system and the general balance. Approximately 2 to 3% energy saving is expected by this method. As for the third item, it becomes possible to promote further recovery of exhaust heat by either reinforcing existing heat exchangers or rebuilding the network of heat exchanger group with utilization of pinch technology. The effect of this measure is believed to reach approximately 2 to 3%. The last item or new technologies include the following:

• Efficient reaction by development of new catalyst (desulfurization catalyst, etc.).• Gas/liquid separation and recovery technology utilizing new separation technology

(membrane, etc.).• New type of high-efficiency heat exchanger (plate heat exchanger in high-pressure area:

Packinox, etc.).' Low-temperature exhaust heat utilization technology.

The effects of those measures are expected to reach approximately 1 to 2%.Utilization of such technologies is believed to enable a total energy saving of approximately 10% on the on-site equipment side. These technologies are applicable also to Petron's Bataan Refinery taken up as a model, and believed to enable energy saving of at least the same level as above.

Next, by turning our attention to the off-site equipment side, we can find items for which energy saving is possible as well. Petron's Bataan Refinery owns a private power generation system from the initial period of construction and has been self supplying electric power in the refinery. However, the situation of equipment and the demand for electricity and steam are much different today from what they were at the time of construction in 1960, and the power generation systems have been gradually extended. As a result, the efficiency of the power generation system as a whole is not so good.Moreover, the refinery also has a plan for newly installing and supplementing equipment in the

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future, and collapse of the demand-supply balance of electricity and steam is predicted. At present, power is received from the adjacent NPC as emergency measures in case of shortage of electric power. However, this power supply is very unstable, frequently causing problems such as sudden voltage drop or interruption of supply, etc. For that reason, Petron Company basically intends to secure 100% private power generation, and is obliged to review the existing power plant in the near future.Furthermore, following the enforcement of the new environmental control "Philippine Clean Air Act 1999" of the Republic of the Philippines which became effective in November 2000, the company is pressed to take desulfurizing and NOx removing measures.In the Republic of the Philippines, switching to lighter products of the demand for petroleum products is progressing, in line with the general flow in the world. Fuel oil started to become excessive in the beginning of the year 2000, and the amount of export of fuel oil is believed to increase in the future. The dual-purpose electricity and steam generation system by low-speed diesel engine utilizing vacuum residue proposed this time has good chance of becoming a very significant proposal, capable of effectively consuming excess oil and preventing environmental pollution due to SOx, NOx, etc. at the same time.

As described above, it will become necessary to review existing power plants in the near future. In this section, we will touch upon the circumstances which led us to the conclusion that dual- purpose electricity and steam generation system by low-speed diesel engine is most suitable for the refinery.

(1) Power generation systems to be studiedWe analyzed the current power plant in the refinery and calculated required amounts of consumption of electricity and steam, considering estimated demand for petroleum products in the future. And a study of optimal cogeneration system was made on the basis of the results of such analysis and calculations.In the first place, we will take up various kinds of power cogeneration system generally adopted as follows, for the comparison. Fig. 1-2-1 indicates a conceptual chart of those systems.

1) Dual-purpose electricity and steam generation by bleeder boiler & turbine2) Dual-purpose electricity and steam generation by gas turbine3) Complex dual-purpose electricity and steam generation by gas turbine (combined cycle)4) Dual-purpose electricity and steam generation by gas engine5) Dual-purpose electricity and steam generation by medium-speed 4-cycle diesel engine6) Dual-purpose electricity and steam generation by low-speed 2-cycle diesel engine

Here, let me touch upon the characteristics of each system before going into a study of those power generation systems. (Reference: "Planning and Designing Manual for Natural Gas Cogeneration: 2000", edited by The Japan Institute of Energy)

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Dual-purpose electricity and steam generation by gas turbine chain cycle

Dual-purpose electricity and steam generation by bleeder boiler & turbine (BTG = bleeder turbine generator)

SteamSteamSteamSteam

Ex. gas

Ex. gas Ex. gas

powercombustion

HRSGBoiler Steam turbine

Elec.power

FW1I

Dual-purpose electricity and steam generation by diesel engine (DEG = diesel engine generator)

Dual-purpose electricity and steam generation by gas turbine (GTG = gas turbine generator)

SteamSteamEx. gas

Ex. gasEx. gas

Re­combustion

HRSG

Re­combustion

HRSG

Complex dual-purpose electricity and steam generation by gas turbine (GTCC = gas turbine combined cycle)

Abbreviations and Symbols

Diesel engine

Gas turbine

Airframe divertible gas turbineADGTSteamturbineHRSG

Heat (energy) recovery steam generatorHRSGElec.

powerpowerFeed water heaterFWH

CondenserFWH

Fig. 1-2-1 Conceptual chart of various kinds of heat engine

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1) Dual-purpose electricity and steam generation by bleeder boiler & turbineThis is a typical system adopted in oil refineries. Namely, it is a system in which steam is extracted from the middle stage of a condensing turbine, to be utilized as process steam in the refinery. This system, based on Rankine cycle using steam and water as operating fluid, is characterized by the possibility of utilizing heat down to comparatively low temperature area. To improve the thermal efficiency of this system, you have to secure high temperature and high pressure as steam conditions at the inlet of the turbine, and this makes it necessary to use materials having high strength at high temperature for a wide range of members from the evaporator and superheater of the boiler to the high-pressure unit of the steam turbine.

2) Dual-purpose electricity and steam generation by gas turbineGas turbine is a motor for converting thermal energy of combustion gas into mechanical energy in the course of suction, compression, combustion, expansion and exhaust processes. The respective processes from suction to exhaust of air which is the operating fluid are executed continuously in different places having independent functions in the order of suction case, compressor, combustor, turbine and exhaust diffuser. This system, based on Brayton cycle using air and combustion gas as operating fluid, is characterized by the possibility of utilizing heat from comparatively high temperature area. To improve the thermal efficiency of this system, it is necessary to increase the gas temperature at the inlet of the gas turbine. On the other hand, since the exhaust gas temperature of the gas turbine is 500 to 600X3, which is much higher compared with approximately 30X2 of the steam turbine outlet temperature, the degree of utilization of heat is very low, and the thermal efficiency of a simple gas turbine is extremely low. For that reason, a heat recovery steam generator (HRSG) is installed on the downstream side to take out steam and thus improve the general efficiency.

3) Complex dual-purpose electricity and steam generation by gas turbineComplex dual-purpose electricity and steam generation (combined cycle power generation) is a system utilizing both the advantage of high maximum utilizable temperature area of gas turbine and the advantage of low minimum utilizable temperature area of steam turbine. Namely, by combining those two cycles, the restriction on higher temperature in the steam turbine is lessened, and the energy loss due to exhaust gas of the gas turbine is also reduced, making it possible to achieve a high efficiency.In addition, since the demand for steam seasonally changes, there exists special turbine called variable heat-electricity gas turbine, to cope with such changes. It includes a Cheng cycle which is also called steam injection gas turbine. This is a system for recovering exhaust heat in the form of high-pressure steam and injecting this steam into the gas turbine to increase the shaft output of the turbine and thereby increase the amount of

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power generation.

4) Dual-purpose electricity and steam generation by gas engineA gas engine sucks a mixture of air and gas, compresses it, ignites and bums it forcibly by means of electric sparks, and obtain alternating motion of the piston by the expansive force due to explosion of the mixed gas. It is an internal combustion engine for taking out motive power by changing this alternating motion of the piston into rotational motion of the crankshaft. Moreover, there is also a system of igniting and burning by means of a pilot liquid fuel. It comprises 4 processes the first of which is suction process for sucking a mixture of gas and air into the cylinder, followed by compression process for compressing this mixed gas, expansion process for igniting and burning the mixed gas and expanding that combustion gas, and exhaust process for discharging this combustion gas to outside the cylinder, and these 4 processes are repeated. These 4 processes (2 turns of crankshaft) correspond to one cycle. In the case of gas engine or diesel engine, those processes are executed in one same place, i.e. in the cylinder one after another, intermittently. This is the point where this type is different from a gas turbine in which the different processes are executed continuously in different places.

5) Dual-purpose electricity and steam generation by medium-speed 4-cycle diesel engine Diesel engine is a system for obtaining motive force by compressing air sucked into a cylinder with a piston and pulverizing fuel in a high-temperature compressed air, to cause self ignition and combustion by explosion. The working principle of a 4-cycle diesel engine consists of 4 processes or suction process, compression process, expansion process and exhaust process, like that of a gas engine, and these 4 processes correspond to one cycle.

6) Dual-purpose electricity and steam generation by low-speed 2-cycle diesel engine While a 4-cycle diesel engine had 4 processes of suction process, compression process, expansion process and exhaust process, a 2-cycle diesel engine consists of 2 processes or compression process and expansion process, and these 2 processes correspond to one cycle. For that reason, it is called 2-stroke cycle, i.e. 2-cycle diesel engine. This 2-cycle diesel engine is a motor which provides highest efficiency in the output range no higher than 50 MW approximately, as you can see from Fig. 1-2-2, in the case where the power generation efficiency is compared in the form of simple motor. In addition to it, a 2-cycle diesel engine has the following features:' As shown in Fig. 1-2-3, it has a high efficiency at partial load and, for that reason, the

thermal efficiency does not much change even at low load. On the other hand, a gas turbine indicates a tendency for sharp drop of thermal efficiency at low load.

• As shown in Fig. 1-2-4, while fluctuations of output and fuel consumption due to ambient temperature are small (with a 2-cycle diesel engine), a gas turbine is much

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affected by ambient temperature, and indicates tendency for sharp drop of output especially with an increase of ambient temperature.

Considering the characteristics described above, and based on various conditions and intention on the part of the refinery, 4 different types or typical dual-purpose electricity and steam generation by bleeder boiler & turbine (BTG), dual-purpose electricity and steam generation by gas turbine (GTG), complex dual-purpose electricity and steam generation by gas turbine (GTCC), and dual-purpose electricity and steam generation by low-speed 2-cycle diesel engine (DEG) will be taken up for study here, from among various kinds of dual-purpose electricity and steam generation systems mentioned before. Dual-purpose electricity and steam generation by gas engine and medium-speed 4-cycle diesel engine were excluded for reasons of small simple-body output, lower efficiency compared with dual-purpose electricity and steam generation by low-speed 2-cycle diesel engine, and difficulty of use of vacuum residue fuel.

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(2) Comparison of various kinds of systemAlthough an analysis of the current power plant and the plan for the future will be discussed in detail in Chapter 2, we evaluated various systems by maintaining the Nos. 1, 2 units of steam turbine with high efficiency, while supposing adoption of a power plant capable of producing approximately 23.4 MW considering the power of about 19 MW produced by the Nos. 3, 4, 5 units plus approximately 4.4 MW to be required in the future plan and capable of producing 87.7 t/h medium-pressure steam including 41.6 t/h plus 45.1 t/h to be required in the future plan. On the basis of this evaluation, we made a comparative study of different systems under the conditions of generated power output of 24 MW and medium-pressure steam of 90 t/h. The heat-electricity ratio in this case is about 3.Fig. 1-2-5 to Fig. 1-2-8 indicate the heat balance of various kinds of power generation system under these conditions. For the sake of reference, pinch chart of DEG, GTG and GTCC will also be given in Fig. 1-2-9. For the convenience of calculations, there are some slight differences among the systems, but this does not have much influence on the evaluation.

Table 1-2-1 Comparison of efficiency of various kinds of power generation systemPower generation system Unit DEG BTG GTG GTCCType of fuel VR VR Gas GasAmount of heat Mcal/h 94,317 103,240 93,139 87,565Total amount of power generation

kW 24,000 24,592 24,000 24,000Mcal/h 20,636 21,145 20,640 20,640

Amount of produced steam Ton/h 90 90 90 90Mcal/h 63,738-3,600

=60,13863,738-3,600

=55,53863,738-3,600

=55,55864,358-3,600

=56,158Steam conditions ata 11.5 11.5 11.5 11.5

MPaG 1.03 1.03 1.03 1.03C 262 262 262 275

Power generation efficiency % 21.9 20.5 22.2 23.6

Heat utilization efficiency % 63.8 53.8 59.6 64.1

Overall efficiency % 85.6 74.3 81.8 87.7

Heat-electricity ratio 2.91 2.63 2.69 2.72

Corresponding drawing Fig. 1-2-5 Fig. 1-2-6 Fig. 1-2-7 Fig. 1-2-8

-1-59 -

Tem

pera

ture

(°C

) Te

mpe

ratu

re (°

C)

Tem

pera

ture

(°C

)

Pinch chart of DEG. HRSG

Steam temperature

Gas temperature

0 0.2 0.4 0.6 0.8 1Heat absorption factor

Pinch chart of GTG HRSG

Steam temperature

Gas temperature

0 0.2 0.4 0.6 0.8 1Heat absorption factor

Pinch chart of GTCC HRSG

Steam temperature

Gas temperature

Heat absorption factor

Fig. 1-2-9 Pinch chart of DEG, GTG, GTCC

-1-64 -

(3) Evaluation of systemsOn the basis of the comparative study described above, we determined overall efficiency by changing the heat-electricity ratio in various ways, as summarized in Fig. 1-2-10. As it is apparent from this chart, we can see that, in the case of a heat-electricity ratio no higher than 2.0, the dual-purpose electricity and steam generation system by low-speed 2-cycle diesel engine (DEG) has by far the highest overall efficiency and is therefore a very attractive system.On the other hand, we can see that, as the heat-electricity ratio exceeds 2.0, the efficiency goes up with both GTG and BTG, coming close to that of DEG. This time, no marked difference of efficiency was shown by DEG against other systems, because this heat- electricity ratio was set rather high at 2.6 to 2.9, but we could see that it is still superior compared with BTG. Here, in the case where the heat-electricity ratio is 2.6 to 2.9 or so, the efficiency of GTG and GTCC is of about the same level as DEG. However, considering that VR (vacuum residue) which is residual oil shows a tendency to become excessive in the future and that, in addition to it, the amount of electric power consumption is greatly increasing but there is no sign of increase of the demand for steam in Bataan Refinery, we reached the conclusion that power plant by DEG is best.Based on this result, composition of a concrete project will be made in Chapter 2 by the system of dual-purpose electricity and steam generation by low-speed 2-cycle diesel engine.

-1-65 -

maintained. It is believed that the upward trend of demand will continue and the imports will be maintained also in the future.

3) Kerosene, jet fuelThe proportion of kerosene and jet fuel in the entire petroleum products during the past 13 years has hardly changed. Also about the demand, no great expansion is seen compared with other petroleum products. No sudden increase of demand is expected, and the demand will show only a modest expansion also in the future.

4) Gas oilThe demand for gas oil greatly increased in line with the expansion of business during the 1990s, and it is expected to make a stable growth even in 2000 and the following years. However, this growth is expected to be not so large compared with the expansion of gasoline, LPG, etc.

5) Fuel oilFrom the beginning of the year 2000, the current of switching to clean oil came to be promoted more and more strongly, and the demand for fuel oil started to drop. From the changes of proportion of fuel oil in the entire petroleum products indicated in Fig. 1-3-6, we can clearly see that switching to light oils is taking place also here.In the Republic of the Philippines, fuel oil is expected to get into a trend of excess in the future. Moreover, in the forecast data for the future, a prospect is given that excess fuel oil which cannot be consumed in the domestic market will start to be exported in the early part of 2000.

-1-72 -

of the Philippines, where the density of energy consumption is only about 10% of that in Japan, the general public is probably not so much conscious of air pollution or prevention of air pollution nor familiar with technical aspect of the subject, except for people living in some limited areas such as metropolitan Manila, etc. Under such situation, we find it significant for us to provide technologies accumulated in Japan for the execution of this project, to promote the project smoothly and successfully.In the case where this project is evaluated as a genuine greenhouse gas reducing project, it can be expected to produce about satisfactory cost-effectiveness and also have a great auxiliary effect of S02 removal against air pollution. However, because of comparatively expensive maintenance cost and chemical product cost, this project is of a level not quite workable as a genuine energy saving project, and it is therefore necessary for us to imagine a case in which the project must be abandoned from the viewpoint of economic efficiency if that problem is left as it is. To avoid such situation, we think it imperative for us to set reasonable financing conditions, etc. and reach an agreement on implementation of the project along CDM with Japan with Petron's Bataan Refinery.

Moreover, because it becomes possible to collectively submit SOx and NOx, which have so far been discharged in various places, to desulfurization and NOx removal, we can also expect great improvement in the matter of environmental production.We are convinced that, if this project is carried out successfully, this idea can be spread not only to other refineries in the Republic of the Philippines (2 places) but also to neighboring countries under similar environments as well.

-1-74 -

Chapter 2 Materialization of the project plan[Summary]

Bataan Oil Refinery of Petron Corporation, located in the town of Limay, Bataan Province, in the central part of the Luzon Island, is the area forming the subject of the project. Limay is a new town created in 1917, and today major industrial facilities and plants of the Peninsula such as Bataan Refinery, petrochemical plant, food processing mill, power station, etc. are concentrated in this town. Furthermore, several plans for installation of petroleum complexes are under study recently and, if such facilities come to be located here, the town of Limay has potentiality of greatly transforming itself into a full-fledged heavy chemical industrial zone, combined with (existing) Bataan Refinery, petrochemical derivatives plant, power station, etc. For that reason, the demand for electric power may also greatly increase and, eventually, it will also be possible (for Bataan Refinery) to not only consume electric power internally but also sell it to external parties in the capacity of an independent power producer (IPP). From the observations set forth in Chapter 1, we reached the conclusion that a power plant adopting low-speed diesel engine is optimal as private power generation system to be planned in this Bataan Refinery. The system construction was planned to have a low-speed diesel engine power generation set and a heat recovery supplementary generator (HRSG) as basic units, locate them in 2 trains and locate 1 exhaust gas desulfurizer on their downstream side, and the specifications were set in consideration of the current equipment situation and the plan for the future. In passing, Petron Corporation, the project owner, is a leading company counted among the top 5 companies in the Republic of the Philippines and has excellent management basis and technical capabilities, and is therefore judged to have a very high project execution capacity. The outline of this project is the following:• Output of dual-purpose electricity and steam generation by low-speed 2-cycle diesel engine: 24

MW; Amount of generation of medium-pressure steam: 90 t/h (74,135 kW); Heat-electricity ratio: Approx. 3

• Cost of the project: 4.12 billion yen• Period of the project from conclusion of contract after survey and procurement of fund to

delivery: 17 monthsBy introducing dual-purpose electricity and steam generation system by low-speed 2-cycle

diesel engine with excellent heat-electricity conversion rate using inexpensive vacuum residue as fuel, it becomes possible to maintain a high thermal efficiency for the refinery as a whole. As a result, in addition to energy saving and reduction of the volume of C02 emission resulting from it, it becomes possible to make harmless the S02 currently discharged from the end user of fuel oil by means of an exhaust gas desulfurizer of the refinery, greatly contributing to environmental protection. The roles expected of Japan will be to provide financial cooperation for the execution of the project, to say nothing of the supply of technical know-how based on our past achievements. However, for the project the economic efficiency of which must be sought only in reduction of fuel cost and reduction of the amount of purchased electricity, it is very difficult to secure profitability. The economic efficiency will greatly improve and the possibility of realization of the project will become higher when a market is formed for trading international permits of greenhouse gases and S02 emission for which establishment of rules will be promoted in the future.

-2-1-

1. Project plan1.1 Situation of the area forming the subject of the project

Bataan Oil Refinery of Petron Corporation is located in the town of Limay of Bataan Province in the central part of the Luzon Island, one of the 7 provinces constituting the third administrative area of the Republic of the Philippines. As its name shows, Bataan Province includes the greater part of the Bataan Peninsula except for the old site of Subic Base which was once a place of stationing of American marines (currently Subic free-trade zone), and its capital is Balanga located at the central part from north to south of the peninsula facing the Manila Bay.The town of Limay where Bataan Oil Refinery of Petron Corporation is operating is located at about 20 km to the south of the Balanga, the provincial capital, and at approximately 150 km by land from the metropolitan Manila area. It takes more than 3.5 hours to travel between Limay and the metropolitan Manila area by car partly because of chronic traffic congestion in the metropolitan area. The distance in a straight line across the Manila Bay is approximately31.2 sea miles (57.8 km) and it takes about 80 minutes to get there by connecting a ferry boat up to Orion adjacent to Limay and then a car from Orion to Limay.Bataan Province is composed of 12 towns scattered along the coastal line of the Peninsula, and those 12 towns have 203 barangays and 11 minority communities as sub-administrative units, to constitute the province.The province has a surface area of 137 km2 and a population of about 400,000. Except for the town of Limay where Bataan Refinery is located and the area around the town of Mariveles at the south end of the Peninsula specified as special economic zone, this province has a general outlook of a land which may well be expressed typical agricultural and fishing village of the Philippines as a whole. The topographic characteristics of the Bataan Peninsula are those of comparatively gentle mountainous or hilly lands, and flat land is limited to an extremely small area along the coastal line.At present, the largest industry in the Province is agriculture, and the main agricultural products include rise, com, sugar cane, fruits, rootcrops and vegetables. After agriculture comes fishing. There are 70 special fishing fields of local autonomous entities around the Peninsula, 4,329 hectares of culture ponds installed in inland areas, 53 ocean fishing boats, and 5,938 traditional canoes including both those provided with engine and those without engine. The number of people engaged in fishing amounts to 9,950 persons including the staff members of local autonomous entities and the general fishing workers.The development of Bataan Peninsula was promoted from around the end of the 16th century toward the early part of the 19th under the colonial rule by Spain, and current Bataan Province was formed in 1754 by General Manuel Alandia, as it is reported (article in E-Z Map 2001 Bataan).On the occasion of the invasion of the Philippines by the Japanese military forces in the outset of World War II, the Bataan fortress, which had been the last battlefield up to temporary withdrawal of the Japanese, was captured by the Japanese forces on 9th April, 1942. The

-2-2-

to greatly change the industrial and social structure of the region. Under such circumstances, the provincial government authorities are rather optimistic about the future development of the province through industrialization, from advantageous geographical position of the area: closeness to the metropolitan Manila area and special positional relation with the current Subic free-trade zone which was once a base of American marines and the current Clark special economic zone which was a place of stationing of American Air Force.Unlike other 11 local autonomous entities in the Bataan Province, the town of Limay was created in 1917 after the colonial rule of the Philippines was transferred from Spain to the United States. At present, main heavy-class industries of the Peninsula such as Bataan Refinery, petrochemical plant, food processing mill, power station are concentrated in Limay, providing this town with striking characteristics different from those of other towns in the province. The year 1917 in which the town of Limay was established was in the midst of World War I and a time when the monopoly of world management and rule by European countries was about to end, and the 14th year of the colonial rule of the Philippines by the Americans. The creation of this town seems to have reflected a strong wish of the new ruler, the United States as rising power which has itself a history of gaining independence out of its status of a former colony, to make a new step toward a modern management of a colony through introduction of secondary industries.In the Republic of the Philippines, there is currently no ethylene plant, which is a typical heavy chemical industry, working, and the operations of petrochemical industry are limited to manufacture of derivative products through import of monomer and its downstream sectors. Out of a thinking that no expansion of petrochemical industry can be expanded under such situation, various plans are being studied these days for constructing a steam cracker and eventually a petrochemical complex having a steam cracker at the top. One of the leaders who announced his candidacy for the establishment of steam cracker is PNOC, which is a major shareholder of Petron Corporation, and the proposed place of location is said to be the town of Limay.If a new plant is located in Limay, it will provide various advantages such as exchange of raw materials and byproducts or common use of harbor facilities and marine cargo handling facilities, etc. with Bataan Refinery. Limay is also in an advantageous position of already having a plant of derivatives working with annual production of 200,000 tons of polyethylene and 230,000 tons of polypropylene. The plan for petrochemical complex is an idea of establishing Philippine Olefin Company (POC) working for steam cracking as main operation with PNOC Petrochemical Development Company (PPDC) under PNOC as leading promoter with participation of existing derivative manufacturing company or overseas capital, etc., and developing a series of operations of a petrochemical complex. The production scale of this petrochemical complex is planned to be 600,000 tons/year of ethylene and 300,000 tons/year of propylene.

-2-4-

Naphtha1

PhilippineOlefin

-f Ethylene '\_ y 600 J(Time of construction

undecided)

___f PropyleneV 300 /

BataanPolyethylene

LL/HD200

Itochu, etc. LD/EVA

140 (Undecided)

Mabuhai Vinyl VCM

200 (Undecided)

Philippine Resins PVC

90 + 70 (2002.6)

Itochu, etc.SM

400 (Undecided)

D&L IndustriesPS

60 (Undecided)

Petro Corp. PP 225

C4 residue )-----------( )

-(cracked gasoline)--------------- ^Hydrated gasoline)

: Under operation

Fig. 2-1-2 Conception of Limay ethylene complex

Polyolefin operation is an industry with wide bases. If a petrochemical complex including ethylene plant is located in the town of Limay, it will provide the town of Limay and surrounding areas with a possibility of greatly transforming themselves into a full-fledged heavy chemical industrial zone in combination with the existing Bataan Refinery, petrochemical derivative plant, Bataan Power Station, etc.Therefore, for rational equipment planning and management in the future of Bataan Refinery boasting of the largest scale in the Republic of the Philippines, it is important to not only (consider) a common trend of oil industry in the Philippine and take countermeasures for it butlien fal/p Q fl<aviK1p t m aw fV*Atn x 7afi rvi io on rrl oo

uiow luivu a iiCAiuiC v iv vv JLi Viii VaUUUo aiigiCo, COriSidCrixlg thv pOSltlOUfll FClcltlOIl With thv

metropolitan Manila area, Subic free-trade zone and Clark special economic zone, as well as the trend of petrochemical complex the location plan of which is currently under study, etc.

1.2 Contents of the projectRegarding the private power generation system to be planned in Bataan Oil Refinery of Petron Corporation, we reached the conclusion that a power plant adopting low-speed diesel engine is optimal, from the observations set forth in Chapter 1.Based on this conclusion, we will plan to newly install dual-purpose electricity and steam generation system by low-speed diesel engine using vacuum residue (VR) as fuel, in addition to the existing boiler-turbine power generation system constituted by 7 boilers and 5 steam

-2-5-

turbines.As for the capacity of the power generation system to be planned, we estimated the amount of increase in the demand for electricity and steam required for the isomerization system, depth desulfurizer for gas oil, which are planned to be constructed in the near future, and determined specifications of the new equipment and facilities with capacities satisfying such requirements. In this case, no reception of electricity from external source (NPC) was taken into account. The construction of the power generation system was planned to have a low-speed diesel engine power generation set and a heat recovery supplementary generator (HRSG) with built- in NOx removal system as basic units, dispose them in 2 trains and dispose 1 exhaust gas desulfurizer on their downstream side. The concrete specifications and the system construction of the existing facilities and the power generation system to be planned are described in detail in paragraphs 2.2 (3) and 2.4 of the present Chapter.After this power generation system is newly installed, the dual-purpose electricity and steam generation system by low-speed diesel engine will be put into operation, in place of the equipment which fails to provide high efficiency because of low heat-electricity ratio, among the existing boiler-turbine power generation system. This will enable to sharply improve the efficiency of the power generation system as a whole.

1.3 Object greenhouse gas, etc.The greenhouse gas forming the subject of our study this time is limited to carbon dioxide. The greenhouse gas discharged from the power plant of the refinery is carbon dioxide produced with combustion of fuel in the boiler for power generation and the dual-purpose electricity and steam generation by low-speed 2-cycle diesel engine proposed this time. Fuel oil is used as fuel in the existing power plant, while vacuum residue will be used as fuel in the system proposed this time. Both of them are composed of hydrocarbons and produce carbon dioxide with combustion.

Moreover, SOx and NOx are also produced though they are not considered as greenhouse gases. While fuel oil, which is the fuel of the existing power plant, contains about 3% sulfur content, the vacuum residue to be used as fuel of the system proposed this time contains about 5% sulfur content. At the same time, generation of NOx is unavoidable with boilers, diesel engines, etc.

Therefore, by introducing energy-saving system for the power plant facilities of the refinery with implementation of the present proposal, it becomes possible to not only reduce the amount of fuel consumption and reduce the amount of emission of carbon dioxide which is a greenhouse gas, but also to reduce SOx and NOx at the same time.

-2-6-

2. Outline of implementation site2.1 Level of interest of implementation site

As described in Chapter 1, energy-related issues to be tackled as urgent tasks by not only the Republic of the Philippines but also any country in Southeast Asia are as shown below. Petron Corporation must also take effective measures on those issues as the largest oil company in the Philippines, as a matter of course.

• Countermeasures to increase of demand for energy due to increase of population and expansion of industrial activities.

• Measures for improvement of people’s livelihood and adaptation to qualitative change of demand for energy.

• Measures for environmental protection in response to increase of energy consumption.

In the face of increased demand for energy due to increase of population and expansion of industrial activities, the Republic of the Philippines is producing some positive results in the diversification of fuel energy sources for power generation and reduction of amount of oil fuel consumption, by constructing coal fired power station to switch the fuel of power stations, which has been highly dependent on oil, from fuel oil to coal the reserves of which are abundant in the world, and developing geo-thermal power generation, in addition to countermeasures against rise of oil energy cost which was caused after the first oil shock. Moreover, by promoting participation of independent power operator i.e. IPP in electric power business for introducing private capital in the state-operated electric power operation, the government successfully constructed supplementary power generation facilities after the electric power crisis in 1993 which was brought about with sudden economic growth and increase of demand for electric power resulting from it, and now the problem of shortage of electric power is solved. However, there is a prospect that the demand-supply situation will become tight again in 2004.It is presumed that, on the basis of such achievements and prospect, the Philippine government will take measures aiming at diversification of energy sources for electric power for stable supply of electric power according to its initial policy, and eventual privatization of electric power industry in the future.Betterment and improvement of people's livelihood and qualitative change of demand for energy lead, to put it briefly, to necessity of countermeasures against said increase in absolute amount of electric power demand and countermeasures against expansion of the range of fluctuation of the demand for electric power between daytime and nighttime, and imbalance in the demand for petroleum products resulting from an increase of demand for gasoline and gas oil i.e. light petroleum products due to expansion of motorization, which can be seen in the steady progress of automobile industry in recent years, on one hand and stagnation of demand for heavy oils relating to diversification of fuels in power stations or environmental protection measures on the other hand.

-2-7-

As for absorption of fluctuations in the demand for electric power between daytime and nighttime, introduction of power generation system easy to start and stop or with excellent partial load characteristics should be studied to cope with fluctuations of demand for electric power, in addition to simply promoting lending of pumped power generation system or effective utilization of nighttime electric power. On this question, it is believed that the Republic of the Philippines is already well prepared to cope with fluctuations in the demand for electric power between daytime and nighttime, considering the fact the natural gas currently under development is to be used as fuel in combined gas turbine power station, in addition to comparatively high proportion of power generation system by diesel engine from earlier times. As countermeasures against switching to light products of demand for petroleum products, there are several different methods such as obtaining light crude oil with high yield rate of light fractions on a short term as the easiest method. However, as realistic and just method to be taken in a long perspective, use of either one or both of the following 2 methods is conceivable:

• Method which consists in increasing the yield of light fractions by submitting superfluous heavy oil to thermal cracking.

• Method of effectively utilizing superfluous heavy oil, the marketability of which dropped, in the refinery.

Bataan Oil Refinery of Petron Corporation well recognizes the importance of countermeasures against switching to light oils of the demand for petroleum products and treatment of heavy oils which tend to be superfluous in the future. As for the method about the former point, the company already released to mass media, in 1998, a conception of recovering light oils by cracking vacuum residue, and generating electric power with a generator driven by steam turbine by burning the coke after the treatment in a fluidized bed boiler, to cover the electric power to be used internally and sell the excess electric power to electric power companies as IPP, and has already completed the stage of feasibility study for it. According to the press release distributed at that time, the completion of the facilities was planned to be either 2003 or 2004, but the actual movement of the company is not following the schedule disclosed in the press release. No construction of cracking system nor IPP power generation plan are included in the present project plan.The concrete method of the latter method, namely of effective utilization of heavy oil or vacuum residue in the refinery is a method which consists in using the residue directly as fuel in a low-speed diesel engine with high heat-electricity conversion ratio, and producing electric power by driving a generator. By this method, there is no need of diluting the vacuum residue with light fractions for the purpose of lowering the viscosity and adjusting the sulfur content, and it becomes possible to sell the light fractions currently used for dilution in the market as gas oil.In the basic survey for promotion of joint implementation, etc., composition of project was

-2-8-

taken up as theme with a view to applying the latter method to the private power generation system of Bataan Refinery, but the conclusion of the feasibility study for introduction into Bataan Refinery is not alternative, about those 2 countermeasures against switching to light products of the demand for petroleum products. In this project, adoption of dual-purpose electricity and steam generation system by low-speed diesel engine for the private power generation system of the refinery is taken up as theme. This will facilitate adaptation to fluctuations of demand for electric power between daytime and nighttime, if the generated electric power is transmitted, in the company's capacity of an IPP, to the power network of the electric power company, as it is conceived by Petron Corporation.Although the oil industry is officially privatized in the Republic of the Philippines, 40% of the shares of Petron Corporation are still owned by PNOC which is a public corporation. The request for increase of domestic product prices, made by the oil industry to cope with the international price hike of crude oil and petroleum products and fluctuations of exchange rate of the Philippine currency during the period from 1999 to 2000, was braked for reason of strikes in the transportation industry and social unrest. In this way, the situation of oil industry in the Philippines is far from complete privatization and free competition. Under such situation, there is an opinion, in Petron Corporation, that the company's profitability is restricted with genuine oil refining and sale of petroleum products only. Therefore, this company seems to have a strong wish to participate in the electric power industry which is also an energy industry, as IPP. However, the present survey is restricted to introduction of dual-purpose electricity and steam generation system by low-speed diesel engine to the private power generation system of the refinery.

2.2 Situation of relative equipment and facilities on the implementation site(1) Outline of Petron Corporation and Bataan Refinery

Bataan Oil Refinery of Petron Corporation, located in Limay in the Bataan Peninsula about 150 km away from the metropolitan Manila area, was completed and put into operation in April, 1961. Initially, the treating capacity of the first normal-pressure distillation system was 25,000 BPSD.At the time of construction of the second normal-pressure distillation system (72,000 BPSD) in 1972, construction was also made of vacuum distillation system (31,000 BPSD), catalytic reforming system (17,000 BPSD), PCC system (15,500 BPSD), hydrodesulfurization system for naphtha & kerosene (30,500 BPSD), and hydrodesulfurization system for gas oil (18,000 BPSD).LPG recovery system was constructed in 1973, followed by construction of a gasoline blending system, a hydrodesulfurization system for gasoline (6,000 BPSD) and a polymerization system (2,100 BPSD) in 1977 respectively. In 1978, a desalter (1,400 BPSD) was also introduced. In this way, upgrading of the refinery was positively promoted in the 1970s.And, the construction in 1980 of the third normal-pressure distillation system with a treating

-2-9-

capacity of 25,000 BPSD fixed the basic frame of Bataan Refinery. The first normal- pressure distillation system was modified to increase its treating capacity to 55,000 BPSD, while the second normal-pressure distillation system was modified and expanded to have a treating capacity of 100,000 BPSD, and the refinery is currently operating as a refinery with a crude oil treating capacity of 180,000 BPSD. Moreover, in line with the reinforcement of the second normal-pressure distillation system, reinforcement of hydrodesulfurization system for naphtha (5,000 BPSD) and new installation of LPG recovery system (3,000 BPSD) was implemented. In 1999, a continuous catalytic reforming system (17,000 BPSD) and a sulfur recovery system (70 tons/day) were also completed.

(2) Situation of on-site equipment and facilities of Bataan RefineryThe current flow of on-site equipment composition of Bataan Refinery is as shown in Fig. 2- 2-1 "Process block flow diagram".

- 2-10 -

to

Petron Bataan Refinery Process Block Flow Diagram

Naphtha

APS155,000BPSD

APS2100,0008PSD

APS325,000BPSD

Refinery Gas

NHT135.000BPSD

NHT219.000BPSD

[1Kerosene

/ 7Merox Treater

16.000BPSD /

z_____zKero Hydro Sweetener 6,000BPSD /

Gas Oil

Bottom

LPG

PWF17.000BPSD

CCR17.000BPSD

GOHF18.000BPSD

&GO DU

18.000BPSD

Solvent Unit 3.000BPSD

Amine Treater 5,000BPSD

7

/SRU

70T/D

VPS32.000BPSD

LVGO

|^HVGO

TCC15.000BPSD

Refinery Fuel

/-------------------7LPG Treaters

8.000BPSDLPG*

Gasoline(XLL.XLF)

FRN EXPORT

CRN EXPORT

KeroseneJET-AlFuel

Solvents

Sulfur

Diesel

IndustrialFuel Oils

Asphalt

XLL Extra Low LeadXLF Extra Lead FreeFRN Full Range NaphthaCRN Catalytically Reformed Naphtha

APS Atmosnheric PioestillNHT Naphtha HydrotreaterPWF Power FormerCCR Continuous Catalytic ReformerVPS Vacuum PipestillTCC Thermofor Catalytic CrackerGOHF Gas Oil HydrofinerGODU Gas Oil Desulfurlize UnitSRU Sulfer Recovery Unit

Fig. 2-2-1: Process block flow diagram of Bataan Oil Refinery of Petron Corporation

- 2-11 -

An outline of the respective equipment units is summarized below.1) Normal-pressure distillation systems

First normal-pressure distillation system: Constructed in 1961. Treating capacity of55.000 BPSD.Second normal-pressure distillation system: Constructed in 1972. Treating capacity of100.000 BPSD.Third normal-pressure distillation system: Constructed in 1980. Treating capacity of25.000 BPSD.

2) Vacuum distillation systemThis is a system for distilling residue of normal-pressure distillation to separate it into raw material for catalytic cracker (vacuum gas oil), asphalt, etc., and is currently under operation with a treating capacity of 32,000 BPSD.

3) Catalytic reforming systemsThis is a system for reforming heavy naphtha of low octane value (straight run naphtha) to manufacture oil with high octane value containing a lot of aromatics. In Bataan Refinery are operating a catalytic reforming system and a continuous catalytic reforming system with a treating capacity of 17,000 BPSD each.

4) Hydrodesulfurization systemsThe refinery owns hydrodesulfurization systems for naphtha, kerosene and gas oil respectively. These are systems for performing hydrodesulfurization by making material oil react with hydrogen in a catalytic layer. There are 2 units each of the system for naphtha and gas oil, and 1 unit for kerosene currently working.First hydrodesulfurization system for naphtha: 35,000 BPSD Second hydrodesulfurization system for naphtha: 19,000 BPSD First hydrodesulfurization system for gas oil: 18,000 BPSD Second hydrodesulfurization system for gas oil: 18,000 BPSD Hydrodesulfurization system for kerosene: 6,000 BPSD

5) Cracking systems (TCC)This is a system for collecting gasoline fraction by cracking heavy oil, to meet the rising demand for gasoline. It produces gasoline, gas oil, fuel oil, etc. on a catalyst, by using vacuum gas oil generated from a vacuum distillation system as raw material. It is currently working with a treating capacity of 15,000 BPSD.

6) Other systemsThe following systems exist in addition to above, and are working with the indicated

- 2-12 -

treating capacity respectively:Hydrodesulfurization system for kerosene (Merox Treater): 16,000 BPSDLPG recovery system: 8,000 BPSDSolvent recovery system: 3,000 BPSDAmine treating system: 5,000 BPSDSulfur recovery system: 70 tons/day

7) Construction plan for the futureThe following equipment units are planned to be constructed in the near future: Isomerization system: 10,000 BPSD Depth desulfurizer for gas oil: 22,000 BPSDIn addition to the above 2 systems, it seems that construction of fourth normal-pressure distillation system, mixed xylene manufacturing system, etc. is also in sight.

(3) Situation of power plant equipment and facilities in Bataan RefineryBataan Refinery owns a power plant for manufacturing and supplying electricity and steam to various points inside the refinery. Moreover, they are linked with the power generation facilities of adjacent NPC (National Power Corporation), so that they may receive power from NPC immediately in case of shortage of private power generation.

1) Balance of power planta) Specifications of existing power plant

2 steam turbine power generation systems were constructed at the time of construction of Bataan Refinery (1960), to start with a setup capable of internally covering electricity and steam requirements of the refinery. After the construction and reinforcement rush of equipment in 1970s, 1 steam turbine was supplemented in 1990 and 2 other units were added in 1999. The power plant of Bataan Refinery is not very efficient as equipment at present, because the heat-electricity ratio of the system gradually dropped.Table 2-2-1 indicates details of the power generation system.

- 2-13 -

Table 2-2-1 Power generation system of Bataan RefineryItem Number Service & Construction Specification

TG-1001 Steam Turbine Generator (1960)

Rated Capacity : 3.98MWInlet Steam Press. : 4.14MPaGInlet Steam Temp. : 399CCExtraction Steam Press. : 1.03MPaG Extraction Steam Flow : 44.5t/h

TG-1002 Steam Turbine Generator (1960)

Rated Capacity : 4.69MWInlet Steam Press. : 4.14MPaGInlet Steam Temp. : 399X3Extraction Steam Press.: 1.03MPaG Extraction Steam Flow : 47.0t/h

TG-1003 Steam Turbine Generator (1990)

Rated Capacity : 4.69MWInlet Steam Press. : 4.14MPaGInlet Steam Temp.: 399X3Extraction Steam Press.: 1.03MPaG Extraction Steam Flow : 10.6t/h

TG-1004 Steam Turbine Generator (1999)

Rated Capacity : 6.82MWInlet Steam Press.: 4.14MPaGInlet Steam Temp.: 399X3Extraction Steam Press.: 1.03MPaG Extraction Steam Flow : 15.5t/h

TG-1005 Steam Turbine Generator (1999)

Rated Capacity : 6.82MWInlet Steam Press. : 4.14MPaGInlet Steam Temp. : 399X3Extraction Steam Press.: 1.03MPaG Extraction Steam Flow : 15.5t/h

In case of shortage of electric power during a period of regular maintenance of the power generation system, etc., electricity is purchased from adjacent NPC (National Power Corporation).The current power generating & receiving capacities of Bataan Oil Refinery of Petron Corporation are the following:Power generating capacity: 27 MWPower receiving capacity: 7 MW

(b) Specifications of existing boilersA power plant consisting of 3 boilers and 2 steam turbines was constructed at the time of construction of Bataan Refinery (1960). The maintenance conditions of the system thereafter were excellent, and the system continues working smoothly even today after the normal period of service life already passed. Moreover, in line with the construction of steam turbines in 1990 and 1999, a total number of 4 boilers were newly constructed. In addition to above, there is also one CO boiler currently under operation, and steam generators for recovering waste heat are provided in various

- 2-14 -

places for the sake of energy saving.The power plant of Bataan Refinery is designed based on the design philosophy of holding one spare boiler even at the time of an operation treating the maximum volume of crude oil, securing a margin in the demand-supply balance of steam. However, 3 boilers constructed in 1960 are now deteriorated, and it is believed that the time will come in the near future when proper measures such as renewal of equipment or modernization including energy saving, etc. are required, although it is out of the scope of the present project.Table 2-2-2 indicates details of the boiler system.

Table 2-2-2 Boiler system of Bataan RefineryItem No. Service & Construction SpecificationSG-1001 Boiler Maximum Capacity : 43.1ton/hSG-1002 (1960) Operating Press.: 4.48MPaGSG-1003 Outlet Temp : 3990SG-1004 Boiler Maximum Capacity : 59.0ton/hSG-1005 (1990) Operating Press.: 4.31 MPaG

Outlet Temp : 399°CSG-1006 Boiler Maximum Capacity : 68.0ton/hSG-1007 (1990) Operating Press.: 4.31MPaG

Outlet Temp : 3990E-560 CO Boiler at TCCU Maximum Capacity : 24.5ton/h

(No Data) Supply Steam Press. : 4.14MPaGSupply Steam Temp : 3850

2) Analysis of current power plantAs described above, 7 boilers for supply to power generation system are installed, and another 1 unit of boiler for on-site equipment is also installed. These boilers are ordinary industrial boilers with a pressure of 4.14 MPaG. The steam produced there is led to 5 steam turbines and submitted to bleeding of medium-pressure steam at 1.03 MPaG necessary for the operation of the refinery and also for power generation. The steam turbines are all composed of high-pressure stage and low-pressure stage respectively, and the medium-pressure steam at 1.03 MPaG is bled from the high-pressure stage, while the remaining portion of the steam is led to the low-pressure stage and, after generating electric power, led to the condenser. The No. 1 and No. 2 steam turbines (TG-1001, TG- 1002) have a high heat-electricity ratio of 8 to 9, because the greater part of the steam passing there is bled as medium-pressure steam. For that reason, a high value of 86.2% (heat-electricity ratio 9.2) is given as overall efficiency of the No. 1 unit, and 82.3% (heat- electricity ratio 8.3) as that of the No. 2 unit. On the other hand, the overall efficiency of the Nos. 3, 4, 5 units (TG-1003, TG-1004, TG-1005) is rather low at about 47.6%, because their heat-electricity ratio is 1.9 or so. If the heat-electricity ratio is high, their overall efficiency can also be raised, but because the No. 1 and No. 2 units mainly

- 2-15 -

intended for steam (heat) are producing the necessary steam, the Nos. 3, 4, 5 units constructed later are inevitably used for electricity, and this is the reason why their heat- electricity ratio is low, and their overall efficiency is also low accordingly. Supposing the boiler efficiency as 90%, the overall efficiency of the No. 1 and No. 2 units is about 78% and 74% respectively, but the overall efficiency of the No. 3 through No. 5 units is as low as about 43%. These figures are summarized on Table 2-2-3 and Table 2-2-4, and analytical flow is given in Fig. 2-2-2 through Fig. 2-2-6.

Table 2-2-3 Efficiency of steam turbines (without taking account of boiler efficiency)Steamturbine

Heat-electricityratio

Power generation output

Efficiency(heat)

Efficiency(electricity)

Overallefficiency

TG-1001 9.2 4.0 MW 77.8% 8.4% 86.2%TG-1002 8.3 4.7 MW 73.4% 8.9% 82.3%TG-1003 1.9 4.7 MW 31.0 % 16.6% 47.6 %TG-1004 1.9 6.8 MW 31.1 % 16.6 % 47.7%TG-1005 1.9 6.8 MW 31.1 % 16.6% 47.7 %

Table 2-2-4 Overall efficiency in the case where boiler efficiency is taken into accountSteam turbine Power generation

outputEfficiency

(heat)Efficiency(electricity)

Overallefficiency

TG-1001 4.0 MW 70.0 % 7.6% 77.6%TG-1002 4.7 MW 66.1 % 8.0% 74.1 %TG-1003 4.7 MW 27.9% 14.9 % 42.8%TG-1004 6.8 MW 28.0% 14.9 % 42.9%TG-1005 6.8 MW 28.0% 14.9 % 42.9%

- 2-16 -

3) Supply of electricity and steam from power plant to the refineryAs it was already mentioned in Chapter 2, paragraph 2.2 (3), the power plant of Bataan Oil Refinery of Petron Corporation is provided with 7 boilers and 5 steam turbines. The current power generating capacity and power receiving capacity from outside are the following:

Power generating capacity;. 27 MWPower receiving capacity; 7 MW

At present, the situation of electricity and steam supplied from the power plant to the refinery at the time of maximum crude oil treatment (180,000 BPSD) is the following:

Electric power; 27,0 MW High-pressure steam (4.14 MPaG): 31.8 t/hMedium-pressure steam (L03 MPaG); 133,1. t/h

"Isomerization plant", "depth desulfurizer for gas oil", etc., are planned to be constructed in the near future, and increase of demand for electricity and steam is expected. Table 2-2- 5 indicates the results of estimation of increase of demand for electricity and steam from the power plant after construction and start of operation of those 2 systems.

Table 2-2-5 Amount of increase of demand for electricity and steamElectric power [MW] Medium-pressure steam [t/h]

Isomerization system 0.5 32.6Depth desulfurizer for gas oil 2.0 12.5

CCR gas compressor 1.9 0Total 4.4 45.1

Therefore, the amount of supply of electricity and steam in the future is expected to increase as follows:

Situation of supply in the futureElectric powecLApprox, 31,4 MW High-pressure steam (4.14 MPaG); 31.8 t/hMedium-pressure steam (1.03 MPaG); 178,2 t/h

(4) Operating situation 1) Crude oil to be treated

Because of the relation with Saudi Armco which has a share of investment of approximately 40% in Petron Corporation, about 75% of the crude oil refined in Bataan Refinery comes from Saudi Arabia. The remaining portion is procured from the nearby Southeast Asian area. Because this plant treats a lot of crude oil of Middle East origin, its products have a high sulfur content. Therefore, the vacuum residue oil to be used as fuel

- 2- 22 -

this time will probably contain approximately 5.2 wt% of sulfur content.

2) Operating situationThe average crude oil treating volume during the past one year was approximately 140,000 BPSD.

2.3 Project execution capability of implementation site(1) Technical capability

Petron Corporation which is the implementation site initially started as Esso Philippines, a joint venture of Exxon and Mobil, and it still maintains exchanges with those 2 companies. The generation composition of the refinery is also strongly affected by the American standards, and the engineers have sufficient technical capabilities acquired through study in the United States, etc. Even after taking over the business from Esso Philippines, the company has experiences of making a lot of extensions of equipment and facilities as described in Chapter 2, paragraph 2.2, and it is also promoting a construction plan of isomerization plant, depth desulfurizer for gas oil, etc.Moreover, as for the power plant closely related to the present project, boilers and steam turbines were introduced and put into operation in 1999, and it is judged that there is no problem at all as far as the technical capabilities of the implementation site are concerned.

(2) Control setupAmong the 3 general oil companies engaged in refining to sales of oil existing in the Republic of the Philippines, Petron Corporation is the largest in scale, and the company's organization includes 5 divisions or 3 operational divisions and 2 staff divisions under the president. One of those operational divisions is Oil Refinery Division i.e. Bataan Refinery, where 1,261 employees are working. This Bataan Refinery obtained IS09002 approval in 1999 from the certifying organization "Bureau Verutas", and the refinery is controlled and managed according to it. Fig. 2-2-7 indicates organization of the refinery. The refinery has 3 Divisions or Administration, Planning and Energy, and Refinery, with a vice president at the top of each division. The study of the present project is taken charge by Planning and Energy, which is constituted by 4 departments; Operations planning, Energy, Budget & Economics, and Quality systems.In the existing private power generation facilities is installed dual-purpose electricity and steam generation (system) by bleeder boiler & turbine. In recent years, extension projects were executed steadily in 1990 and 1999, and it is judged that there is no particular problem also with the power generation system to be installed this time, considering the past achievements, etc. of the company, though different from the existing equipment in the portion of low-speed diesel engine, because the work is to be carried out by about the same procedure as before in the execution of the project.In addition, the existing private power generation facilities are working normally, and it is

- 2- 23 -

judged that they will be controlled and managed properly also after installation of the equipment of the present project.

Refinery

Administration Planning & Energy

Operations

Refining Division

Economics

Budget &EnergyOperations

Planning

Quality

Systems

Maintenance Engineering Project

Management Group

Fig. 2-2-7 Organization of Bataan Oil Refinery of Petron Corporation

(3) Management base and management policyThe Republic of the Philippines, where the degree of dependence on oil for the supply of energy exceeded 90% at the time of the first oil shock in 1973, received a hard blow from this oil shock. Out of this bitter experience, the government established state-run Philippine National Oil Company (PNOC), for the purpose of diversification of energy supply and improvement of self supply ratio, by adopting a policy of improving energy situation through development of energies, etc. Today PNOC is one of the giant enterprises in the Philippines having over 6,000 employees and, regardless of its designation of "National Oil Company", the company has several enterprises under its control and is discharging a variety of functions over the entire energy fields such as coal, geothermal, etc. in addition to petroleum.The enterprises currently placed under PNOC's control are the following:

• PNOC-Petrochemical Development Corporation• PNOC-Shipping and Transportation Corporation• PNOC-Energy Development Corporation• PNOC-Coal Corporation' PNOC-Exploration Corporation

Bataan Refinery, which is the project site forming the subject of the basic survey for promoting joint implementation, etc., is the largest oil refinery in the Republic of the Philippines owned by Petron Corporation, largest oil refining and sales company in the

- 2- 24 -

Philippines, established on 21st December, 1973 through purchase by PNOC of Esso Philippine immediately after establishment of this National Company.A brief history of Petron Corporation during the period a little less than 30 years since its foundation up to today is as follows (from Petron Corporation's homepage):

21/Dec/1973: Established (later renamed as Petrophil Corporation)l/Apr/1974: Merged with Filoil group for expansion of market. Filoil Marketing

Corporation, Filoil Refinery Corporation, Filoil Industrial Estate, Inc.Jan/1975: Automobile Parts Division (tires, batteries, etc.) broke away from

Petrophil as Petron TEA Corporation.17&18/Dec/1987: Merged with Bataan Refining Corporation and Petron TEA for the

purpose of rationalization.23/Feb/1988: Changed company name from Petrophil Corporation to Petron

Corporation, and renamed Bataan Refining Corporation simply as Bataan Refinery.

3/Feb/1994: PNOC transferred 40% of shares to Saudi Armco.

As it is apparent from the previous paragraph, Petron Corporation was 100% under the protection of the state (PNOC), as key industry of the country, for approximately 20 years from its foundation in 1973 up to 1994. After that, in the series of flow of privatization of state-run & public corporations, free competition, introduction of foreign capital, and invitation of foreign enterprises under the Ramos administration, Saudi Armco acquired 40% of Petron's shares. At present, PNOC and Saudi Armco have 40% of Petron's shares respectively, and the remaining 20% are owned by as many as 220,000 general investors or institutional investors. The current capital of the company is 9,375 million pesos (23,400 million yen @2.5 yen/peso) (from Petron Corporation's homepage).The number of employees of Petron Corporation as of the end of 2000 is said to be 1,261, and the sales amount per employee in 1999 of approximately 1 million dollars/person is about the double that of Kochi Refineries Limited of India which registers about the same turnover (approx. 500,000 dollars/person). Petron is therefore reputed as a company with higher sales amount per employee compared with other companies.Fig. 2-2-8 indicates the progress of sales amount, profit after tax per share and dividend of Petron Corporation after privatization.

- 2- 25 -

("Rapidly changing Asian oil market", Edited by Agency of Natural Resources and Energy)

Table 2-2-6 Oil companies in the Republic of the Philippines

Oil company Refiningcapacity

Sales volume Number of service stations

Petron 42% 41% 34%Shell 40% 32% 31%

Caltex 18% 27% 35%

In the statement of accounts (1998 edition), Petron Corporation describes its position in the oil industry as supplying no less than 40% of the domestic oil consumption, a volume corresponding to approximately 25% of the amount of power generation in the country, 33% of the amount of consumption of automobile fuel, and a little less than 50% of the oil consumption in other industries, putting emphasis on the company's contribution to the tax revenues of the country. In the ranking of the 300 top enterprises in the Philippines, Petron Corporation is registered in the third place after National Power Corporation (NPC) in the first place and Manila Electric Company (MERALCO) in the second place, and the solid status of this company is self evident from this fact. In passing, Shell and Caltex are registered in the fourth and fifth places respectively, among the 300 top enterprises. Thus the 3 oil companies are ranked all in high positions, and we can see than oil industry is a big business in the Philippines.Each of the 3 general oil companies in the Republic of the Philippines adopts the form of operating by holding a single refinery unlike Japan, where each oil company adopts a system of holding and operating a plural number of refineries scattered in various parts of the country. Therefore, only 3 oil refineries exist in the entire Philippines. Because of the geographical conditions that the national territory is composed of a very large number of islands of different sizes and the fact that the supply sources of petroleum products to the entire country are limited to the 3 refineries only, Petron Corporation is also in a situation of having many related facilities such as oil terminals and lubricating oil mixing plants, etc. all over the national territory composed of many archipelagoes. According to the statement of accounts (1998 edition), Petron Corporation is currently operating related facilities such as oil terminals, etc. at more than 50 places all over the Philippines. Moreover, the number of service stations (SS) receiving supply of petroleum products from those facilities amounts to as many as 1,200.

As shown in Fig. 2-2-9, the management system of Petron Corporation has president as key person, under the chief executive officer, and 3 operating division of crude oil procurement, oil refining and oil sales and 2 staff divisions of planning and finance, by placing a vice president as responsible person at each of the total number of 5 divisions. In addition, there are legal and government-related functions independent of the president's powers.

-2-21 -

President

State relations

Procurement (Vice President)

Legal council

Oil Refining Division (Vice President)

Marketing Division (Vice President)

Finance Division (Vice President)

Planning Division (Vice President)

Chairman/Chief executive officer

Fig. 2-2-9 Management system of Petron Corporation

In the statement of accounts for the year 1998 of Petron Corporation, emphasis is put on thefollowing points as ideas or policy about the future trend of petroleum products, in thebusiness operations to be developed in the future by the company:

(a) From the long-term strategy of diversification of fuels, there is no prospect for rebuilding the old equipment in the fuel oil fired power station after withdrawal, and the proportion of the amount of fuel oil consumption in the power station is expected to decrease against the total amount of consumption.

(b) The future expansion of petroleum products in the future will possibly be brought about mainly by the transportation and housing sectors.

(c) With a reduction of the amount of consumption of fuel oil in the power station, the focus of competitive power will be shifted to light oils i.e. gasoline, gas oil, LPG, and jet fuel.

(d) The fact that the amount of consumption of gasoline and LPG did not drop even during the financial crisis tells that light oils will show greater expansion in the future.

(e) The citizens' awareness will grow and legal control will be strengthened also about measures of environmental protection, calling for supply of clean fuels.

(f) To cope with such situation, Petron Corporation installed a catalytic reforming system at the end of 1998 with a view to producing lead-free gasoline. However, the company must also implement measures for increasing LPG production in the future.

(g) To secure profits in the future, investment should be made in power generation project in linkage with measures for switching to production of light oils by sophisticated treatment of petroleum, in conformity to product standards which will be further strengthened in the future. If such measures can be executed, the profitability of Petron Corporation will greatly improve.

We can see that the proposal for using fuel oil i.e. vacuum residue directly for powergeneration and utilizing cutter stock as gas oil, made by the basic survey for promotion of

- 2- 28 -

joint implementation, etc., perfectly conforms to the gist of Petron Corporation's prospect for the future.

(4) Fund bearing capacityAs described in detail later, we cannot but say that the present project, which intends to promote reduction of expenses and energy saving and eventually reduction of the amount of emission of greenhouse gases, by introducing dual-purpose electricity and steam generation system by low-speed diesel engine using vacuum residue of low unit price as fuel in Bataan Refinery, may not be so attractive as genuine energy-saving project, considering the fact that it is not very economical under the current balance of electricity-steam consumption in the refinery or that in the near future.However, the present project is of a nature to be positioned as a precursory project, in the case where due consideration is given to the future trend of demand-supply balance of petroleum products in the Republic of the Philippine and measures of environmental protection.Therefore, it is presumed that, as leading company having a 40% share in the oil industry of the Philippines, Petron Corporation will study adoption or not and time of implementation of this precursory project, after carefully examining the concrete rules of joint implementation between advanced countries or CDM between an advanced country and a developing country toward 2008, which is the target year for the reduction of greenhouse gases as provided in the COP protocol, and checking influences of the project on the economic efficiency of the company's operations.At present, the profit-expenditure situation of not only Petron Corporation but also the oil industry of the Philippines as a whole is not necessarily favorable and solid because of such problems as rise of crude oil price, impossibility of diverting the increase) cost of petroleum products due to fluctuations of exchange rate produced after the financial crisis to selling price, etc. However, the sales amount of Petron Corporation did not drop so much even in 1998 when the domestic economy registered a negative growth and, in the medium and long-term perspective, there is no doubt that the company will continue expanding its operations by maintaining an upward trend of sales amount also in the future, as a leader of the growing industry. This makes us easily understand that the oil industry of the Philippines will continue growing with the progress of economic activities in the future, also from the fact that the amount of oil consumption in the Philippines, the population of which exceeds 60% of the population of Japan, is only 370,000 barrels/day or about one fifteen of 5.5 million barrels/day consumed in Japan. As shown in the previous paragraph, the sales amount of Petron Corporation in 1999 was of a level of 60 billion pesos or 170 - 180 billion yen, and there seems to be no problem about the company's capability of bearing the investment amount of this project (approx. 4.7 billion yen) in the current state of management, even without placing expectation on the future expansion of the company's operations. The financial burden on Petron Corporation will be reduced and this project will

-2-29-

have a much greater chance of realization if economic efficiency of the project is secured, with preparation of arrangements such as grant of advantageous yen loan by the Japanese government or receipt of incentive regarding right of emission of greenhouse gases or favored financial treatment for reduction of emission of SOx, etc.

(5) Personal bearing capacityThe engineers in the group executing the project have adequate technical capabilities through studying in the United States, etc. In addition, they have so far much experienced planning and execution of installation and modification of various kinds of equipment in the refinery, and there is nothing to worry about execution of the work. As a matter of course, they have sufficient capabilities for dealing with installation of equipment units for which they have no experience as those of this project without problem, if only sufficient support and training are provided by foreign engineers. Indeed, in the Republic of the Philippines, a lot of diesel power generation systems are operating, and support system by local corporations providing after-sale services are available, as far as products supplied by Japanese manufacturers are concerned.

(6) Organizational setup for implementationMany of the expansions and reinforcements of Bataan Refinery of Petron Corporation were implemented after the business was taken over from Esso Philippines, predecessor of Petron Corporation. In the case of implementation of the present project, it is understood that an organizational setup for implementation will be built up on the basis of such experiences. Therefore, we presume that the organizational setup for implementation to be taken in Bataan Refinery of Petron Corporation will be no inferior to that in refineries in Japan where the number of cases of any large-scale projects for reinforcement or modification of equipment and facilities is getting smaller in recent years.

2.4 Contents of the project on implementation site and specifications after modification of related equipmentFig. 2-2-10 indicates the system flow of the current power plant at Bataan Refinery. As shown in Table 2-2-1 and Table 2-2-2, there are currently 7 boilers, and high-pressure steam of 4.14 MPaG produced by those boilers is led to 5 steam turbines, to be bled as medium-pressure steam of 1.03 MPaG there, and used for power generation at the same time.

-2-30-

Fig. 2-2-10 System flow of current power plant

Fig. 2-2-11 indicates the flow in the state where a dual-purpose electricity and steam generation system by low-speed diesel engine utilizing vacuum residue proposed this time is installed in addition to this current power plant.

-2-31-

Boiler Steam turbineGenerator

SG-1001

TG-1001

To condensatorSG-1002

Medium-pressure steam lineSG-1003 TG-1002

SG-1004

TG-1003

SG-1005

SG-1006TG-1004

SG-1007

TG-1005

Proposed power plant

DEG-1001 HRSG-1001

> FGD

DEG-1002 HRSG-1002

Fig. 2-2-11 System flow after addition of power plant proposed this time

Next, the detailed specifications of the power generation system proposed this time will be described.In the first place, the layout of the power generation system is shown in Fig. 2-2-12. As you see in this chart, low-speed diesel engine, generator and heat recovery steam generator

-2-32-

(HRSG) are used as basic units, and these basic units are installed in 2 lines. On the downstream side of them is provided 1 desulfurizer integrated with a chimney. The diesel engine and those auxiliary equipment units will be installed indoors while the boilers and the units beyond them will be designed for outdoor installation.

-2-33-

-2-34-

109000«£■ ■»

Sub Station

Radiator

•L 5 10 15mI I I I I I I i L» I I 1 1 I I 111

INF0.N0,A3

TTP& 9K50MC-S x 2 MITSUI aSSEoSc coj-TiKSCRimw „ „ ,

Power House Layout u/3ISENTNQ,

FINAL USER INF UNO, nwLu$DtKscmiwi FINAL USER DENI JO,3E-63481

Fig. 2-2-12 Layout of dual-purpose electricity and steam generation system by diesel engine (DEG)

In addition, Fig. 2-2-13 and Fig. 2-2-14 indicate equipment layout drawings, Fig. 2-2-15 indicates a drawing of power generation set, and Fig. 2-2-16 shows a foundation drawing. The specifications of the basic units constituting the dual-purpose electricity and steam generation system of this project and of the desulfurizer, as well as various pipelines will be described below.

-2-35-

.fiBML -><- MOD 6000 ^ <---60D0 2)i < 1 6000---> t " ■ SOAP ^-36000-

Auxlllay Annex » 2FL

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D.O.SERVICE TANK 1@ H.F.OSERVICE TANK 10 H.F.O.BUFFER TANK 19 FUSEPSLUDGE PUMP 19 DIRTY L.O.SEPARATOR 19 H.F.D.SEPARATDR 2

CONTROL AIR DRYER 1CONTROL AIR COMPRESSOR 1

a CONTROL AIR RECEIVER 1g STARTING AIR COMPRESSOR 1a STARTING AIR RECEIVER I

WASTE OIL TANSFPUMP 1© WASTE OIL TANK 1

SLUDGE HOLDING TANK 1§ OILY WATER SEPARATOR 1a OILY WATER SEPARATPUMP 1|p OIL/WATER SEPARATPIT 1a L.T.COOLING WATER PUMP 2

CAMSHAFT L.0JOOSTPUMP 2© MAIN L.O.BYPASS FILTER 2© MAIN L.O.AUTO.FILTER 2© MAIN L.O.PUMP 2

MAIN L.O.COOLER 2MAIN L.D.TANK 2

Q AIR COOL.CHEMI.CLEAN.UNIT 10 JACKET WATER COLL.TANK 1s> JACKET WATER PRE-HEAT.UNII 2

H.T.COOL1NG WATER PUMP 2© LJ3.SEPARATOR UNIT 2© LH.SEP.SUPPLY PUMP 2© L.O.SEP.SLUDGE PUMP 2© STUFF .BOX LUPINE FILTER 21

STUFF.BOX LJXDRAIN TANK 2© SCAV.OILY DRAIN TANK 2© FXJ.SUPPLY PUMP UNIT 2© GENERATOR 2© DEIS EL ENGINE 2

•0$ NAME OF PART m

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TYPE' 9K50MC-S x 2 MITSUI chats.

XSUKPTIW y^vEQUIPMENT LAYOUT IN POWER HOUSE (^7

lDCNT.Mli

FINAL USER UFONOLi FOWL USE* XSCBPTDt FINAL USER noma, 3E-63479

Fig. 2-2-13 Equipment layout drawing (1/2)

-2-37 -

Stack

10m

INFQNQiA3

TtPE. 9K50MC-S x 2 MITSUI aonEnumic coatiXSMimi* s-\

EQUIPMENT LAYOUT IN POWER HOUSEIDENTXIi

FINAL USER 1NF0N0. FINAL USER DESCRIPTION FINAL USER IDENTJCi 3E-634B2

Fig. 2-2-14 Equipment layout drawing (2/2)

- 2-38 -

9105

vy Vi

SCALEil/125

lNFOMOiA3

TYPE' OXS0MC-S MITSUI $j§rawLm6 cairnDESCRIPTION

LAYOUT OF ENGINE/GENERATORIDENT.Mli

FINAL USER INFONfc FINN. USER KSCHPTDA FINAL USERBENTML3E-63477

MM » (IfIM'IIHIMI III

Fig. 2-2-15 Drawing of power generation set

-2-39-

ffli i i i i i i

dan no

:ddQ&

iii:i 1:1 i:ili

□

SCALE,1/125

INFO.NO,A3

TYPE, QKSOMC-S MITSUI sSSKmnG nUTJ.KSCRVnW,

LAYOUT OF ENGINE/GENERATOR FOUNDATIONIDENTIC,

FINAL USER 1NFDNO- FINN. USER KSCR1P7KM FINAL USER DENTJfl-3E-63478

Fig. 2-2-16 Drawing of foundations for equipment and power generation set

a) Specifications of diesel engine (2 units)Type: 2-cycle low-speed diesel engine, 9K50MC-S Output power: 12,300 kW (crankshaft end output)Illustrated average effective pressure: 17 barsNumber of revolutions: 180 rpmAverage piston speed: 8.22 m/sCylinder diameter: 500 mmStroke: 1370 mmNumber of cylinders: 9Distance between cylinders: 890 mmConnection system with generator: Direct connectionDirection of rotation: Clockwise, as seen from generator sideSimple engine weight: 284 tons (dry)

b) Specifications of generator (2 units)Type: Brushless 3-phase AC synchronous generator Rated output: 15,000 kVA (12,000 kW)Rated voltage: 6.6 kVNumber of phases: 3Frequency: 60 HzNumber of revolutions: 180 rpmNumber of poles: 40Power factor: 0.8Generator efficiency: 97.3%

c) Specifications of heat recovery boiler with supplementary firing (2 units)Flow rate of exhaust gas: 91,000 Nm3/h Inlet temperature of exhaust gas: 249°C Outlet temperature of exhaust gas: 180^0 Evaporation: 45 tons/h Outlet pressure of steam: 11.3 ata Outlet temperature of steam: 262t2 Feed water temperature: 110°C

d) Denitrification plant (2 units)Denitrification system: Selective catalytic reduction process Point of installation: Incorporated in HRSG Reducing agent: Ammonia (NH3)Inlet temperature of exhaust gas: 400°C

-2-40-

NOx removal efficiency: 90%

e) Desulfurizer (1 unit)Desulfurization system: Magnesium hydroxide desulfurization system Flow rate of exhaust gas: 182,000 Nm3/h Inlet temperature of exhaust gas: 180°C SOx removal efficiency: 95%

f) PipelinesOf various pipelines, Fig. 2-2-17 indicates the flow of the fuel oil, lubricating oil and drain lines, Fig. 2-2-18 illustrates that of the cooling water, air and steam lines, while Fig. 2-2-19 shows that of the desulfurizer. The scavenging cooler of the diesel engine is planned to recover heat by circulating the water for HRSG. However, the scavenging cooler will be provided in 2 stages, because the circulation of the cooling water stops in case of stop of HRSG, to circulate water on one stage through a radiator and recover waste heat of the water for HRSG on the other stage. Moreover, in case of occurrence of said situation, it will be necessary to take measures such as lowering the load of the diesel engine or stopping the diesel engine, etc. Here, we are planning to dispose a radiator of proper capacity, to avoid stop of the diesel engine.

- 2- 41 -

-2-42-

SYMBOLS

X VALVE

■ FILT8*

®

© FLOE MITIft

& fwiroraraemetoL valvi

s CONTtOL VALVI

8 I-IAVpirreai valvi

PIPE LINE_ iiAikFIFE LIES

POWER HOUSE

CAM. L. O. PUMP

SEBV. TANKNO. 1L. O. COOLER

NO. 1 MAINU 0. PUMP

L.O.SUPPLV

HF(XVR>5UPPLY.NO.B Dl

BUFFER SBRV,TANK

IHBATEEHEATER

NO. 2 BE

(CLEAN)

TANK

SLUDGE PUMP

NO. 1

Ef. O. PUMPNO. 1F. O. SUPPLY F. O. BOOSTER WASTE OILPUMP

WASTE OIL TANKSLUDGE PUMP

NO. IP. O. HTR

TANKSLUDGE

SLUDGE TANK

SLUDGE

NO. 1 MAINL. 0. TANK

(DIRTY)

NO. 1 DE

INFO.NO,A3

9K50MC-S x 2 MrTSUI sSbuESRg coxti.RESCRIPT!!*

FLOW DIAGRAM (F.0..L.0.1 DRAIN SYSTEM)IDENTXQ,

FINAL USER INFONOi FINN. USER KSCRIPTHM FINAL USER DENT.N0, 3E-63183

Fig. 2-2-17 Flow of fuel oil, lubricating oil and drain lines

-2-43-

| SYMBOLS |

■<9<9 nVIHKIH—

eovrtoL vim5 ri™ mn

P'i«r» ■«PIM LI III--- — Flit LIMTlTfu"™

INFQNa-A3

TYPD 9K50MC-S x 2 MITSUI SSnULBMG COXTB.KSCRIPTlDk

FLOW DIAGRAM (F.V..AIR 1 STEAM SYSTEM)IDENTNOi

FINAL USER INFQNOf FINN. USER DESCRIPTION) FINAL USER DENTJUi3E-63484

I II IMIIIIIIIIHI

Fig. 2-2-18 Flow of water, air and steam lines

-2-44-

SYMBOLSVALVI

F1LTBK

$ eaffTXOL VALVE

H DAMPER

© THERMO MCTER

LEVEL METER© LEVEL METER§

LEVEL METER© FLOW METERQ FLOW METER@ PH METER§

PH METER© LEVEL SWITCH

o— imoirsnPIPE LIU!

INFQMIiA3

TYPE. 9K50MC-S x 2 MITSUI sJSSSJSg numKscRipnm

FLOW DIAGRAM (DE-SOx SYSTEM)IDEMT.Mli

FINAL USER WONO. row. USER EESCmiCN. FINAL USER IDENUti.3E-634B5

l ii i»eeeeeMeseee

Fig. 2-2-19 Flow of desulfurizer

Explanation has so far been given on the specifications of the respective equipment units and various pipelines. The point of installation of the private power generation system will be selected at a point close to the area where the receiving & transforming facilities are to be installed and also considering the position of the existing power generation system. The vacuum residue serving as fuel of the power generation system, supplied from the vacuum distillation system, must be available at a comparatively short distance. Basically, the residual oil produced by vacuum distillation will be treated in a short period, after cleaning, and stored in a tank capable of storing the fuel for 4 to 5 days. Depending on the demand of electricity and steam, operation will be made by adjusting the load for the diesel power generation system and the volume of fuel for reheating of HRSG.

2.5 Scope of supply of fund, facilities & equipment, services, etc. by both parties for the implementation of the projectIn implementing this project, the largest problem is where to procure the necessary fund for it. First we may think of application of a new financing system for CDM which will be established in the future on greenhouse gas reducing effects. In this project, however, we suppose application of a financing system comparable to the special yen loan for environments of the Japanese government which is believed to the most advantageous among the existing financing systems. We set the respective shares, on the supposition that this loan is applied to the portion representing 85% of the total amount of equipment investment, and that the remaining 15% portion will be covered by open market finance in the Republic of the Philippines.1) Scope of share by the Japanese side

In principle, the Japanese side shall provide supports such as research, procurement offund, basic plan, technology, etc. relating to this project described below.a) Execution of further detailed field survey based on this survey.b) Support to elaboration of basic project plan.c) Support to application for approvals and licenses for the project.d) Support to basic design and detailed design of facilities and equipment units to be

newly installed.e) Support to procurement of funds such as yen loan for environments, etc.f) Support to purchase of all equipment and materials necessary for this project.g) Support to education and training of operation and maintenance personnel on newly

installed equipment.h) Support to elaboration of field work plan and supervising of on-site work.i) Support to preparation of measuring procedure for discharge amount of carbon

dioxide.j) Guidance on test run and operation for verification of performances.

-2-45-

2) Scope of share by the Philippine sideIn principle, the necessary fund shall be procured on the side of the beneficiary country, and the project shall be executed based on that procurement.a) Soil strength survey near the place of installation of new equipment, etc., and

designation and leveling of ground of construction site.b) Collection of basic design data such as atmospheric conditions, etc.c) All government procedures and applications regarding execution of this project.d) Procurement of funds for the project.e) Supply of design documents for existing facilities and equipment units.f) Procurement of equipment and materials for the project.g) Implementation of the project.h) General education and training for newly employed operators, maintenance personnel,

if any.i) On-site work (equipment installation, piping, civil engineering, building construction,

instrumentation, electrical work, painting, etc.).j) Test run and operation for verification of performancesk) Continuous measurement of discharge amount of carbon dioxide for certain period

before and after implementation of the project, in accordance with the measuring procedure for discharge amount of carbon dioxide, to be prepared by the Japanese side.

l) Supply of sources of water, electricity, steam and compressed air for temporary facilities for the execution of work.

m) Disposal of waste materials produced in the work.n) Measures for exemption of duties and taxes such as customs duty, corporation tax,

individual income tax, VAT, etc. regarding imported goods to be agreed upon by contract concluded in the future.

Table 2-2-7 indicates the results of calculation of the project cost. The cost of the equipment supposed to be procured in Japan and incidental cost are given as portion to be procured in Japan (off-shore) and the expenses incurred on the side of the beneficiary country are given as portion to be procured locally (on-shore).

-2-46-

Table 2-2-7 Calculation of project cost (see Chapter 2, paragraph 2.4)(Unit: Million yen)

Item TotalBreakdown

Off-shore On-shore

Diesel elements 2,400 2,280 120

HRSG elements 590 531 59

Denitrification system (SCR) elements 360 324 36

Desulfurizer (FGD) elements 390 232 158

Others 380 265 115

Total project cost 4,120 3,632 488

2.6 Preconditions for implementation of the project, and problemsThe characteristics of design conditions and operating situation of the private powergeneration facilities at Bataan Oil Refinery of Petron Corporation which became clear as aresult of this survey for promotion of CDM are the following: •

• The existing power generation facilities at Bataan Oil Refinery of Petron Corporation is primarily intended for self supply of electric power with greater emphasis on reliability rather than thermal efficiency, unlike that installed in many oil refineries in Japan, which is intended for energy saving or effective utilization of energy.

' Namely, the pressure and temperature conditions of the main steam line from the boiler are controlled in the range of use of carbon steel for general use, and air-cooled condenser is adopted for the steam turbine in spite of high atmospheric temperature conditions. With this design, it is impossible to obtain high degree of vacuum, and the heat drop by adiabatic expansion of the power generating turbine is small.

• However, the utility facilities of the Refinery are designed in a way to meet the actual demand for electricity and steam of the oil refining facilities and, as a result, maintain a fairly high level of general thermal efficiency for both electricity and steam.

• The turbine of the power generation system constructed at the time of starting of operation in 1961 is designed to have a large bleeding volume and minimal volume of condensate. Therefore, this turbine is operated at a high thermal efficiency around 75%.

• The turbine of the power generation system supplemented later is designed with a bleeding

-2-47-

volume and a volume of condensate fit to the actual situation of fluctuations in the demand for electricity and steam, and is operated at a thermal efficiency around 46%.

To maintain a high general thermal efficiency, by newly introducing dual-purpose electricity and steam generation system by low-speed 2-cycle diesel engine with excellent heat-electricity conversion rate, the operation of, not the power generation system constructed at the time of starting of operation in 1961, but the power generation system supplemented later shall be stopped, and its load shall be covered by the dual-purpose electricity and steam generation system by low-speed 2-cycle diesel engine.A new power generation system by boiler and turbine was supplemented in 1999 in Bataan Refinery, and the system is being operated in a way to meet the current balance between electricity and steam. For that reason, introduction of dual-purpose electricity and steam generation system by low-speed 2-cycle diesel engine using inexpensive vacuum residue as fuel and with excellent heat-electricity conversion rate does not necessarily enable to achieve any conspicuous energy saving or reduction of fuel expenses, and it is rather difficult to compose any attractive project from the viewpoint of economic efficiency under the current petroleum product price system (see Chapter 4).This project produces effects of reducing the amount of emission of S02 and NOx, which will become necessary with reinforcement of countermeasures against excess of heavy oils and environmental protection measures along Clean Air Act 1999 due to motorization which is expected to appear in the Republic of the Philippines in the future, in addition to effects of reducing the amount of emission of greenhouse gas (carbon dioxide) by energy saving. However, at the present time when no special method is established yet for economically evaluating such effects of the project, we have no choice but evaluate the profitability of the project only with energy saving and reduction of fuel cost.Namely, the economy of the present project is governed by the economy of the dual-purpose electricity and steam generation system by low-speed 2-cycle diesel engine and the series of auxiliary equipment and facilities, which is determined by the possibility of selling the light oil components, which are currently consumed as mixed base material for adjusting the viscosity sulfur content of fuel oil, to external parties not as fuel oil but as gas oil, and the possibility of sharply reducing the amount of purchased electric power, with reduction of fuel cost by energy saving and use of vacuum residue as fuel, in place of a reduction in the amount of sale of fuel oil to external parties from the refinery. As a result, the effects of reducing the amount of emission of S02 and NOx are not reflected in the economic efficiency.To promote this kind of project, it is believed necessary to introduce a system similar to that of joint implementation regarding reduction of the amount of emission of greenhouse gases or supply of project incentives by CDM for prevention of global warming which will be concretized in the future, or introduce trade of emission rights of S02 practiced in the United States or Canada, or establish a system and a mechanism, on the world-wide scale, for quantitatively evaluating the economy of project for environmental protection measures and

-2-48-

guarantee such evaluation with finance, subsidy, favored treatments in taxation, etc.

2.7 Schedule for implementation of the projectThis project intends to construct a dual-purpose electricity and steam generation system for internal use, capable of securing an amount of power generation and an amount of steam calculated based on the modernization plan of Bataan Refinery. Therefore, the implementation schedule of the project must be adapted to the modernization plan of Bataan Refinery. Table 2- 2-8 indicates an implementation schedule starting with survey and procurement of fund up to delivery including design, manufacture, transportation and on-site work. Moreover, Table 2-2- 9 indicates a detailed schedule from conclusion of agreement to delivery.

Table 2-2-8 Proposed project implementation scheduleYear 1st year 2nd year 3rd year 4th year 5th year

Preliminary survey & evaluation •---- -#iiiDetailed survey & evaluation, implementation plan

ii-----------,

Procurement of fund#- —#i

Design, manufacture and transportation

iiii-------- -------11

On-site work, adjustment, test run and delivery e

iii —#

Some supplementary matters will be described below.To fix the implementation schedule of the project, it is necessary to study the critical pathsindicated below, in relation to implementation of the project.a) From fixing of specifications for implementation to closing of finance

Securing profitability is not an easy job for this project the economic efficiency of which must be achieved by reduction of fuel cost and reduction of amount of purchased electricity. However, if rules are established in the future on such measures as trading in emission shares for greenhouse gases and S02, the economic efficiency of the project will greatly improve. It will therefore be necessary to promote concretization of fund plan, by providing financial cooperation in combination with such incentive.

b) Manufacturing of equipmentThe main equipment of this project is diesel engine, and the manufacturing process of this equipment forms a critical path. Use of other equipment units is determined

-2-49-

subject to the diesel engine, but they do not form any critical path in the manufacturing processes because they can be delivered in a shorter period compared with the diesel engine.

c) TransportationAs large equipment, there are diesel engine, generator, HRSG, desulfurizer, radiator and cooler. Among those equipment units, the transportation of diesel engine forms a critical path from the viewpoint of its weight. Although the land bridge of the refinery may be utilized, it is necessary to also study use of another port, when carrying in the engine in a state integrated to some extent.

- 2- 50 -

-2-51-

Progress schedule

Item

Month-2 -1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Contract

Engineering

I

Foundation <k building

D :sign & manufactureTrans-ortation Installatic n

Diesel engine

Design & manuiTrans

Installation

Generator

Des1

ien & manufactureTrans- r

Installation

HRSG-SCR

rtm & man ifacture

Transportatic)n Installatior

Desulfurizer

equipment

Installation uf

equipment

Piping work

Wiring work

Adjustment & test

Delivery

run

1

Table 2-2-9 Detailed progress schedule

-2-51-

* Manufacturing process of diesel engineLow-speed 2-cycle diesel engine not only is the main equipment of this project but also forms a critical path in all processes of manufacture, transportation and on-site work. It is therefore useful to understand the manufacturing process of diesel engine, to grasp its influences on the entire processes. Low-speed 2-cycle diesel engine is usually of rated number of revolutions of 100 - 250 rpm, and is quite variable in output in the range of several thousand to 70,000 kW, cylinder diameter at 26 - 98 cm, and dry weight at tens to 2,000 tons, depending the model. Those diesel engines are manufactured by a method of product mix in one production line, to enable to supply optimal engines. Fig. 2-2-20 indicates a sectional view of a diesel engine, while Fig. 2-2-21 indicates the flow of manufacture of a diesel engine. A diesel engine is composed of 3 major skeleton portions of bed plate, frame box and cylinder frame from the bottom. In those 3 major skeleton portions are incorporated large component parts such as crankshaft, cam shaft, scavenging cooler, scavenging pipe, cylinder cover, supercharger, exhaust receiver, etc., and lastly auxiliary equipment such as piping, instrumentation parts, etc. are mounted to complete a diesel engine.This diesel engine is manufactured in the flow of design, arrangement of materials & purchased products, mounting by welding, machining, assembling, test run in the factory, and delivery. The type of the diesel engine taken up this time is 9K50MC-S, which takes 7 months for design and manufacture. The delivery patter of this diesel engine is decided for an optimal packing style, in consideration of the transportation procedure, capacity of the vessel or of the crane in the harbor, restrictions on the site, etc. *

* Transportation of diesel engineThe diesel engine 9K50MC-S adopted in the present project has an overall integrated weight of 284 tons, with approximate dimensions of 12.4 m in length, 5.5 m in width and 8.3 m in height. Although transportation in integrated state is possible, the delivery pattern B2 will be selected according to the results of the local route survey. The delivery pattern of this model was studied as shown in Table 2-2-10. The maximum weight can be kept at 159.1 tons if the delivery is made by the pattern B2. Transportation by pattern B3 or B4 must also be made, depending on the situation.

-2-52-

-2-54

Welding Flow of Structure Production

riepafalion

M*kr>g NC tape lot NC |U cutting•'•chin# sod temple sheet for phot* Method:u«ce s«« anting machine 4n *cotd*nt« o NC git tutting machineu«h Cutting pWt «od pmi drawings o Fhoio-tiacr gas cviur* mathine.

Block Asscmbfing

Side p/iie

long!, block Cross block

Block Welding find Assembling A We Wing

0 Submeiged welding 0 CO* sic wekfingQ $hleU meUi ue welding

O Submeiged «ic wekfing O Cty wc wekfing O Shield metal ere welting

Posl-wcld Heal irtalmcnl Machine Shop

Me chining

Assembling Flow from Bedplate Laying to Engine Start

Ovfill MiCnkfltf

Unit assembly shop

• Column"Sub-assembling line

■Sub-assembling line

Fig. 2-2-21 Flow of manufacture of diesel engine

Table 2-2-10 Delivery pattern of diesel enginePattern Section Weight

in tonsLength in mm

Height in mm

Width in mm

B1 Engine complete 283.7 12.4 8.3 5.5

B2 Top section 113.3 12.4 4.5 5.5Bottom section 159.1 12.0 5.1 4.6Remaining parts 11.3

B3 Top section 113.3 12.4 4.5 5.5Frame box section 65.1 12.0 2.9 4.6Bed plate/Crankshaft 94.1 10.1 2.9 2.7Remaining parts 11.3

B4 Top section 79.8 10.0 3.2 3.6Exhaust receiver 7.9 9.6 1.8 1.7Scavenge air receiver 10.8 10.1 2.8 2.0Turbocharger - each 5.1Air cooler - insert 2.1Air cooler box 6.3 2.2 3.8 4.7Frame box section 65.6 10.0 2.9 4.1Crankshaft 56.8 10.1 2.4 2.4Bed plate 37.3 9.7 2.2 2.8Remaining parts 12.2

Regarding local inland transportation of 9K50MC-S engine, we surveyed the port of Orion adjacent to the Refinery. However, the route from the port is very narrow and unfit for transportation also because of slopes, etc. and we finally abandoned the idea of using this route. For that reason, we surveyed other routes and, as a result, found that carrying made by using the port of Subic is convenient. 2 different routes are conceivable for transportation from the port of Subic to the Refinery and both of them have a sufficient width. Further survey will be made to select a suitable route for this transportation.

-2-55-

3. Concretization of fund planIn the case where this project is implemented, in which part of the load of the existing private power generation facilities by boilers and turbines is replaced by dual-purpose electricity and steam generation system by low-speed diesel engine with excellent heat-electricity conversion ratio using vacuum residue as fuel, it will make great contributions to environmental protection with energy saving and reduction of the amount of emission of C02 as well as removal of S02 by exhaust gas desulfurizer of the refinery which is currently discharged by the end user of fuel oil. It is quite significant for Japan to support such project providing measures for environmental protection which will have to be tackled not only in the Republic of the Philippines but also in other ASEAN countries maintaining close relations with Japan in the future, as part of international cooperation by Japan which is an advanced country in the matter of environmental protection. The roles to be expected of Japan in the realization of this kind of project will probably be financial cooperation for the execution of the project, together with supply of technical know-how based on our achievements in the past.At present, there are 2 different forms of financial cooperation which can be provided by Japan for projects in the Republic of the Philippines, i.e. institutional financing by the Japan International Cooperation Bank and supply of international cooperation fund (ODA) by the Japanese government. The selection of one or the other of those forms of financing may be considered in the stage of concrete negotiations to be held with Bataan Oil Refinery of Petron Corporation in the future toward realization of the project.In the case where the former type is selected, a buyer's credit for Petron Corporation as beneficiary of the finance may be suitable. However, it is difficult to secure profitability under the financing conditions of annual interest rate of 2.7% and reimbursement period of 10 years, for this project which has no choice but rely on reduction of fuel cost and reduction of the amount of purchased electricity for its economic efficiency. Therefore, when buyer's credit is applied, we think it necessary to study combined use with economic incentives, etc. regarding reduction in the amount of emission of greenhouse gases for which building of rules will probably be promoted in the future.

- 2- 56 -

Types of institutional financing:

Institutionalfinancing

Domestic ~ lending

Directloan

Supplier's credit Import finance Overseas investment finance Overseas operations finance

— Buyer's creditExport finance —Investment finance — Bank loan

• Export finance _ Technical assistance finance

Untied loan Refinance

In the case where a buyer's credit is applied, the correlations among the related organizations are supposed to be as shown in Fig. 2-3-1.

-2-57-

Guarantee of payment

Guarantee of paymentLease contract

Coordination

Execution of lease contract

Leasecontract

Contract/Execution

Philippine National Bank

Executor on Japanese side

Philippine Ministry of Finance

Japan Bank for International Cooperation

Bataan Oil Refinery of Petron Corporation

Fig. 2-3-1 Correlational chart of related organizations in the case of application of buyer's credit

In the case of the latter, i.e. application of yen loan, either one of the 3 kinds of standard conditions will apply.

Type of yen loanStandard yen loanOrdinary yen loan for environmentsSpecial yen loan for environments

Interest rate 2.2%

1.7%0.75%

Reimbursement period (Grace period) 30 years (10 years)30 years (10 years)40 years (10 years)

As described at the outset of this paragraph, this project greatly contributes to environmental protection, and we believe it is well eligible for application of a special yen loan for environments, which is the most favored among said yen loans. However, a problem is that the reimbursement period of 40 years including 10 years of grace period far exceeds the project life of 20 years set here. This is a problem common to a case of standard yen loan and ordinary yen loan for environments as well, and must be carefully examined and adjusted in the case where this project comes to have a good chance of realization and that appellation of yen loan to it is studied in the future.The existing 3 types of yen loan mentioned above all adopt a system of granting a grace period for the first 10 years, and the total reimbursement period including the grace period is 40 years. The method of exempting reimbursement of the principal for the first 10 years is understood as consideration for allowing the debtor to give priority to the reimbursement of debts (of higher interest rate) other than yen loan or consideration to the long period of time required

-2-58-

before the project produces any economic effects as in the case of project for improvement of infrastructure such as road construction and construction of bridge, etc. In the case of combustion systems and machines forming the subject of the basic survey for joint implementation, etc., the number of years of depreciation is generally set for 15 years or so at the maximum, because of the problems of deterioration or going out of fashion of the machines and equipment. Moreover, these systems and machines have a characteristic of producing economic effects such as energy saving, etc. from immediately after the equipment investment. For those reasons, the existing yen loan which sets the period of reimbursement including a long grace period for reimbursement is not quite fit for the present project. Therefore, regardless if the project is executed by the method of joint implementation or CDM, a problem is posed for apply the existing yen loan as it is, and we have to study introduction of a financing system suitable to the actual situation of this kind of combustion systems and machines.However, if a method is established for executing a project by incorporating into a joint implementation or CDM for which building of rules will be promoted regarding reduction of greenhouse gases in the future, there will be no more need of sticking to the existing institutional financing or yen loan only, and a way will be opened for using a new system independently or in combination with an existing financial cooperation system.Since Petron Corporation, the project owner, is a leading company counted among the top 5 companies in the Republic of the Philippines, and also because PNOC and Saudi Armco hold 40% shares of this company respectively, its management basis if quite stable, and there is no problem about satisfying the conditions of financing, whether it is yen loan or institutional financing.4. Tasks for and prospect of realization of CDM

-2-59-

4. Task and Prospect for realization of CDM4.1 Tasks for realization of CDM

Fairly positive achievements can be expected of the energy saving effect and greenhouse gas emission reducing effect by combination of the power generation system construction in early period and the dual-purpose electricity and steam generation system by low-speed diesel engine proposed in the survey for joint implementation, etc. as described in detail in Chapter 3. On the other hand, the economic effects dependent on genuine energy saving only cannot reach a level justifying the amount of investment under the current price systems of gas oil and fuel oil and the unit price of purchased electricity, as described in Chapter 4.Therefore, to realize a favorable situation for a project of joint implementation, etc. in the present stage, some considerable incentives are necessary on the part of the executor of the project (Bataan Oil Refinery of Petron Corporation) in addition to the expected economic merits by genuine energy saving. For example,

* Low-interest loan to investment:To enable application of low-interest credit conditions comparable or superior to those of special yen loan for environments provided by the Japanese government.

* Preferential investment system:To establish an international system on building of subsidy system or exemption or reduction of tax and duties for environmental investments.

* Incentives to reduction of greenhouse gas emission:To expedite elaboration of concrete rules for joint implementation and CDM and organization of control mechanism, and build up a system which can guarantee incentives to project owners contributing to the reduction of greenhouse gas emission.

* Incentives to reduction of SOx, NOx emission:A system guaranteeing incentives to project owners contributing to environmental protection measures, in the same way as the case of reduction of greenhouse gas emission. Since several years of positive achievements already exist in the United States and Canada, it is important for us to make efforts for enlightenment of the world about incentives to implementation of environmental protection measures, on the basis of those achievements.

The present project is characterized not only by greenhouse gas emission reducing effect by energy saving but also by great reducing effect of sulfur dioxide (S02) and nitrogen oxides (NOx) emission which are main causes of air pollution and acid rain, especially reducing effect of S02 emission. Namely, since the dual-purpose electricity and steam generation system by low-speed diesel engine uses vacuum residue of high sulfur content (approx. 5%) directly as fuel, it is indispensable to provide an exhaust gas desulfurizer also from legal

-2-60-

From the above table, we can see that the trade in emission rights of S02 in 2000 in the United States formed a large market exceeding a total amount of 2.5 million US dollars (approx. 3 billion yen at exchange rate of US$ = 120 yen), with a traded amount of 128,338 tons for the current year, 125,000 tons for 7 years ahead and an average traded unit price of 130/69 US$ and 68.32 US$ respectively.Regarding trade in emission rights of greenhouse gases, studies are being made for setting unit prices on the levels of the world, individual countries or organizations and bodies, etc., but no agreement has yet been reached about the subject. Supposing this unit price as 20 US$/t-C02 and also supposing the unit price for S02 as 130/69 US$-S02 from the average traded unit price in the United States for spot transaction, the impact of reductions on the present project will be as shown below, and we can see that it is a level greatly contributing to formation of the project (see Chapter 4 for the details).

Discharged gasCarbon dioxide (C02) Sulfur dioxide (S02)

Amount of reduction of emission153,600 t-CQ2/Y

7,450 t-SQ2/Y

Unit price for trade in emission rights

20 US$/t-C02 130.69 US$/t-S02

Expected amount of trade in emission rights

3.07 million US$/y 0.97 million US$/y

Therefore, while formation of this project is impossible in the case where the economic merits on the part of the executor of the project are evaluated in terms of energy saving effect only, it is expected that the economic efficiency will greatly improve and formation of the project will have a greater chance of realization, if a market is formed for trading emission rights of greenhouse gases and S02.

Clean Air Act 1999 for atmospheric environmental protection of the Republic of the Philippines became effective as enforcement regulations were established in November, 2000, after a long period of discussions. The sulfur dioxide (S02) content in exhaust gas of combustion facilities controlled under this law is stipulated to be no more than 1.5 g/Nm3 in existing facilities and no more than 0.7 g/Nm3 in newly installed facilities, and these areestimated to be around 1% and 0.5% respectively by conversion into sulfur content of fuel oil. Therefore, to rigorously observe this law, it is difficult for the oil industry to meet the requirement with the conventional indirect desulfurization system only, and introduction of either direct desulfurization system for fuel oil or exhaust gas desulfurizer into the combustion system using fuel oil as fuel becomes indispensable. Another problem is that, if general enterprises wish to purchase fuel oil of low sulfur content, Petron Corporation which is a supplier of petroleum products is obliged to consume heavy oil of high sulfur content by itself. Therefore, the superiority of this project which uses vacuum residue as fuel and makes the exhaust gas harmless with exhaust gas desulfurizer may become still higher, but never lower, in the future.The only problem of this project is that the investment is not so attractive from the viewpoint

-2-62-

of economic efficiency. If various systems for supporting projects as enumerated in the previous paragraph are introduced, it will enable not only Bataan Oil Refinery of Petron Corporation but also other oil refineries in developing countries such as ASEAN member countries, etc. facing motorization and (the necessity of) environmental protection measures, to smoothly promote necessary measures in the future.

-2-63-

4.2 Prospect of realization of CDMIn the case where conditions are ready for implementation of this project, namely if profitability of the project becomes certain with international or domestic trade in emission rights of greenhouse gas (C02) and harmful gas (S02) or preferential fiscal treatment or subsidity system, etc. for reduction of amounts of emission, Petron Corporation which is the executor of the project will probably recruit partners of trade in emission rights offering advantageous conditions, as parties guaranteeing the economic efficiency of the project.In recent years, the Republic of the Philippines maintains introduction of foreign capital or invitation of overseas enterprises by deregulation as a basic policy for economic development and modernization and expansion of industries in the country. It is believed certain that Petron Corporation, 50% of shares of which are held by national company PNOC even after privatization, will seek a way for realization of the project in the procurement of funds from overseas countries by means of joint implementation, etc. based on this basic policy.As far as this project is concerned, it is believed that a good chance for participation by Japan or a Japanese organization or a Japanese enterprise in the project as joint executor is justified not only by the close and intimate relations between the two countries which seem to even exceed the relations with the United States, former suzerain of the Philippines, but also by the following facts relating to joint implementation of the project:

' The main theme of this project is energy saving. As a precursor in the projects in this field, Japan has a wide range of positive achievements in oil refineries in Japan, and technical information based on such achievements. It is therefore not difficult for Japan to acquire confidence of Petron Corporation which is the executor of the project about execution of the job.

• At the same time, this project contains elements of prevention of air pollution and anti­pollution project such as elimination and decomposition of harmful components from exhaust gas from combustion. The past achievements and experiences accumulated by Japan are useful for execution of the project by Petron Corporation also in this respect.

• As a result of implementation of this project, the vacuum residue which the Refinery has no choice but sell as fuel oil content as present, though small in quantity, will be internally consumed, contributing to shifting to light oils of the demand for petroleum products. This is another point in which experiences of oil refineries in Japan may be transferred to Petron Corporation, through joint implementation of the project, etc., as an important theme common to our two countries not blessed with fossil fuel resources.

• In recent years, the Philippines is tackling with electrification in depopulated areas as one of important themes. While diesel engine which is the main equipment of the present project is indispensable for medium and small-sized independent power stations in depopulated areas, Japanese diesel engine manufacturers have records of delivery of diesel engine to several power stations in the Philippines, and have gained sufficient confidence of the Philippine users through after-sale inspections or regular repairs, etc.

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To realize this project according to the rules of joint implementation or CDM to be established on the international level in the future, agreement of the government, administrative or other related organizations will be required in addition to the agreement of Petron Corporation which is the executor of the project.

Ministry of Energy and subordinate mechanisms (see Chapter 1 & Chapter 2)Agreement of the Ministry of Energy and subordinate mechanisms will be required in their capacity of general controller of planning, implementation and management of energy policies in the Republic of the Philippines.Ministry of Environments and subordinate mechanismsApproval or agreement of the Ministry of Environments and subordinate mechanisms will be required, in relation to management of trade in emission rights by joint implementation or CDM, in their capacity of general controller of international or national measures regarding reduction of greenhouse gases for prevention of global warming.Ministry of Finance and subordinate mechanismsIntroduction of joint implementation or CDM is believed to involve international investment and finance. Approval or agreement of the Ministry of Finance and subordinate mechanisms will be required, about their role of guarantor on the government side for reimbursement of debts.Ministry of Foreign Affairs and subordinate mechanismsApproval or agreement of the Ministry of Foreign Affairs and subordinate mechanisms will be required, in their capacity of general or common contact mechanisms between the two countries.OthersThe above contents are based on the supposition that the existing relative governmental and administrative organs will deal with joint implementation or CDM. However, the reduction of greenhouse gases for prevention of global warming is sure to be implemented on the world-wide level, and it is highly possible that new organizations and functions be established, in addition to the existing organizations, in the stage of implementation.

In any case, in the case where introduction of joint implementation or CDM of a greenhouse gas reducing project for prevention of global warming is supposed between Japan and the Republic of the Philippines, there exists no conflict of interest with any of the above-described relative organizations, and it is believed therefore that there will be no particular problem about the matter.

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Chapter 3 Effects of the project[Summary]______________________________________________________________________

In the case of a system adopting low-speed diesel engine, the high-temperature potential energy of the fuel can be utilized more effectively compared with the existing boiler-turbine system.

As ground for the production of energy saving effect and the reduction of greenhouse gases, we may cite the following:

* High heat-power conversion ratio (approx. 50%).* High resistance to load fluctuations.* Little influence of atmospheric temperature (not much affected by site conditions).

At Bataan Oil Refinery of Petron Corporation, an increase of demand for electric power and steam is expected because of the equipment to be newly installed in the near future. Here is an estimation of demands in the future.

Electric power: Approx. 31.4 MW High-pressure steam: Approx. 31.8 t/h (28,030 kW)Medium-pressure steam: Approx. 178.2 L/h (146,779 kW)

The amount of annual consumption (converted into standard fuel) in the case where the above demand is covered by the existing facilities (including purchase of electricity from outside) is taken as the base line. Here, the annual energy-saving effect producing time was adjusted to the annual operable time of the low-speed diesel engine, and set as 8,000 hours for the first 7 years, and 7,800 hours from the 8th year onward. No production of energy-saving effect is counted for the period out of operation, because the demand during that time is covered by the existing facilities.The concrete values will be indicated below.

* Comparison of overall thermal efficiency of power plant:Approx. 62.1% (current operation, with existing facilities)Approx. 64.4% (estimation for the future, with existing facilities)Approx. 84.2% (estimation for the future, with present project)

* Energy-saving effect (annual reduction of fuel consumption):220,373 - 168,672 = 51,701 [toe/y] (during first 7 years)214,864 -164,455 = 50,409 [toe/y] (8th year onward)

* Accumulated energy-saving effect:51,701 x 7 + 50,409 x 13 = 1,017,224 [toe] (for 20 years)

* Annual greenhouse gas reducing effect:= 663,922 - 528,847= 135,075 [t-C02/y] (during first 7 years)= 647,324 - 515,626 = 131,698 [t-C02/y] (8th year onward)

* Accumulated greenhouse gas reducing effect:135,075x7 + 131,698x13 = 2,657,599 [t-C02](for 20 years)

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1. Energy-saving effect1.1 Technical ground for production of energy saving effect

In the case of a system adopting low-speed diesel engine, the high-temperature potential energy of the fuel can be utilized more effectively compared with the existing boiler-turbine system. The reasons for production of energy saving effect will be described below.(1) By converting a high temperature no lower than approximately 1,500^3 by combustion in a

diesel engine, we can obtain a high heat-power conversion ratio of approximately 50%.(2) A diesel engine can maintain a high thermal efficiency in a wide range from low-load areas

to high-load area. Moreover, because of small fluctuations in output and thermal efficiency due to atmospheric temperature, the influences of the site conditions can be minimized. On the other hand, in the case of a gas turbine including a combined cycle, the thermal efficiency greatly drops at partial load and (the system operation) is strongly influenced by the atmospheric temperature. For that reason, this system has a general tendency of having its output sharply reduced especially with an increase of the atmospheric temperature.

1.2 Base line serving as foundation for the calculation of energy-saving effectFig. 3-1-1 indicates the balance of electricity and steam supplied from the power plant facilities to the Refinery, in the case where operation with maximum crude oil treatment (180,000 BPSD) is made at Bataan Oil Refinery of Petron Corporation. Here, the boiler efficiency is uniformly supposed to be 90% for the calculation, because the efficiency of existing boilers is unknown. In the current operation, approximately 22.4 t/h of fuel oil are consumed as fuel of the boilers, and the overall efficiency is calculated to be approximately 62.1%. The details of this calculation are the following:

Input* Calorific power of fuel: 22.4[t/h] x 10,200[kcal/kg]

Output* Amount of power generation:* High-pressure steam: 31.8[t/h] x 3176.2[kJ/kg]

* Medium-pressure steam: 133.1 [t/h] x 2965.4[kJ/kg]

Total output

Overall efficiency (Output/Input)

= 2.28 x 10A8 [kcal/h]= 265,347 [kW]

= 26,991 [kW]= 1.01 x 10A8 [kJ/h] = 28,030 [kW]= 3.95 x 10A8 [kJ/h] = 109,662 [kW]= 164,682 [kW]

= 62.1 %

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An increase of demand for electric power and steam is expected because of the planned construction of equipment and facilities (isomerization plant, depth desulfurizer for gas oil) in the near future. The amount of annual fuel consumption (converted into standard fuel), in the case where the increase of demand for electricity and steam in the future as described in Chapter 2, para. 2.2 (3) is covered by the existing facilities and purchase of electricity from outside, will be taken as the base line. A daily operation is supposed to treat the maximum amount of crude oil (180,000 BPSD). The annual operating time of the power plant is supposed to be 8,000 hours. The time available for annual operation of the newly introduced facilities is estimated to be 8,000 hours for the first 7 years after introduction, but 7,800 hours from the 8th year onward because of maintenance work, etc. Therefore, the comparison will be made based on an annual operating time of 8,000 hours for the first 7 years, and 7,800 hours from the 8th year onward. In that case, the remaining 200-hour period will be considered as not producing any energy-saving effect, because only the existing facilities are put into operation during that time.

Amount of electricity and steam to be sent from power plant to refinery (after increase ofdemand in the future)Electri£.p.Qwer; Approx. 31.4 MWHigh-pressure steam (4,14. MPaG); Approx. 3.1,8 L/h (28,030 kW)Medium-pressure steam (LQ3 MPaG); Approx, 178.2 L/h (146,779 kW)Total enthalpy of steam; (174,809 kW)

Since the future increase of demand for electricity cannot be covered by the current facilities, we prepared a balance including purchase of electricity from NPC. This balance is indicated in Fig. 3-1-2. Here, the power manufacturing efficiency at NPC was calculated as approximately 32.5% from the value of efficiency of purchased electricity (2,646 kcal/kWh). Moreover, the efficiency of the existing boilers is uniformly supposed as 90%. In the balance of Fig. 3-1-2, approximately 25.9 t/h of fuel oil is consumed as fuel of the boilers, and the overall efficiency comes to approximately 64.4%. The calculations were made as shown below.Furthermore, it was supposed that the demand for medium-pressure steam is covered with high- pressure steam in the existing facilities, to keep equilibrium in the value of total enthalpy of the steam.

InputAmount of heat generation by fuel: 25.9[t/h] x 10,200[kcal/kg] = 2.64 x 10A8 [kcal/h]

= 306,587 [kW]Electricity purchased from NPC: 4,409[kW]/0.325 = 13,565 [kW]Total input = 320,153 [kW]

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OutputAmount of power generation: 26,991 [kW] + 4,409[kW] High-pressure steam: 73.8[t/h] x 3176.2[kJ/kg]

Medium-pressure steam: 133.1[t/h] x 2965.4[kJ/kg]

Total outputOverall efficiency (Output/Input)

= 31,400 [kW]= 2.34 x 10A8 [kJ/h] = 65,146 [kW]= 3.95 x 10A8 [kJ/h] = 109,662 [kW]= 206,208 [kW]= 64.4 %

Amount of annual fuel consumption in the case where future electricity & steam areoblained-with existing facilities

320,153[kW] x 8,000[h/y] = 2.561 x 10A9 [kWh/y]= 2.204 x 10A12 [kcal/y] = 220,373 [toe/y]

220,373 toe/y (Operated 8,000 hours per year)320,153[kW] x 7,800[h/y] = 2.497 x 10A9 [kWh/y]

= 2.149 x 10A12 [kcal/y] = 214,864 [toe/y]

214,864 toe/y (Operated 7,800 hours per year)

The specification of the converted standard fuel oil was set for 10,000 kcal/kg.

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1.3 Concrete amount, period of production and accumulated amount of energy saving effects(1) Concrete amount of energy saving effects and amount of reduction of fuel

The concrete amount of energy saving effects was calculated by the following formula:(Energy saving effect) =(Amount of use of fuel on base line) - (Amount of use of fuel after improvement)

Fig. 3-1-3 indicates the balance adapted to an increase of demand for electricity and steam in the future with "introduction of low-speed diesel power generation system" proposed in the present study. Approximately 12.0 t/h of fuel oil is consumed as fuel of the existing boilers. The efficiency of the existing boilers is set for 90% uniformly. Moreover, approximately 4.3 t/h of vacuum residue (VR) is consumed as fuel of the diesel power generation system. In addition, approximately 5.2 t/h of vacuum residue is consumed for supplementary firing of the waste heat boilers. As a result, the overall efficiency was calculated to be 84.2%, showing a great improvement over the existing system. The details of the calculation are the following:

InputAmount of heat generation by fuel oil fuel: 12.0[t/h] x 10,200[kcal/kg] = 1.23 x 10A8 [kcal/h]

142,354 [kW]Amount of heat generation by VR fuel: 9.5[t/h] x 9,335[kcal/kg] 8.84 x 10A7 [kcal/h]

Total input102,689 [kW]245,042 [kW]

OutputAmount of power generation:High-pressure steam: 31.8[t/h] x 3176.2[kJ/kg]

31,400 [kW]1.01 x 10A8 [kJ/h] 28,030 [kW]5.28 x 10A8 [kJ/h]Medium-pressure steam: 178.2[t/h] x 2965.4[kJ/kg]

Total output146,779 [kW]206,208 [kW]

Overall efficiency (Output/Input) 84.2%

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As for the amount of reduction of fuel, both fuel oil and residual oil are used after introduction of the new system, although only fuel oil is consumed by the existing facilities. Here, we first determined the amount of heat generation, and converted it into standard fuel oil at 10,000 kcal/kg, for the comparison. The results of calculation are as shown below. Moreover, this calculation was made separately for the first 7 years after introduction of the system and the 8th year onward, because of the difference in the annual equipment operating time.

Annual energy saving effects during first 7 years (annual operating time: 8,000 hours!Calorific power with fuel consumption at base line Annual production of heat with fuel at base line

Annual fuel consumption at base lineCalorific power with fuel consumption after improvement Annual production of heat with fuel after improvement

Annual fuel consumption after improvementTherefore, the energy saving effects will be as follows:220,373-168.672 = 51,701 ftoe/yl - First 7 years

= 320,153 [kW]= 320,153[kW]*8,000[h/y] = 2,561,222,301 [kWh/y]= 2,203,729 [MMkcal/y]= 220,373 [toe/y]= 245,042 [kW] 245,042[kW] *8,000[h/y]= 1,960,339,545 [kWh/y]= 1,686,717 [MMkcal/y]= 168,672 [toe/y]

Condition: 1 [toe] = 10,000 [kcal/kg]

Annual energy saving effects from 8th year onward (annual operating time: 7,800hours)Calorific power with fuel consumption at base line Annual production of heat with fuel at base line

Annual fuel consumption at base lineCalorific power with fuel consumption after improvement Annual production of heat with fuel after improvement

Annual fuel consumption after improvement

= 320,153 [kW]= 320,153[kW]*7,800[h/y] = 2,497,191,744 [kWh/y]= 2,148,636 [MMkcal/y]= 214,864 [toe/y]= 245,042 [kW]= 245,042[kW] *7,800[h/y] = 1,911,331,056 [kWh/y]= 1,644,549 [MMkcal/y]= 164,455 [toe/y]

Therefore, the energy saving effects will be as follows:214.864-164.455 = 50.409 rtoe/v] - 8th year onward

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(2) Period of production and accumulated amount of energy saving effectsIf this project is implemented, the energy saving effects (amount of reduction of fuel) will be maintained up to the end of service life of the system. Since the general service life of power generation system is 20 years, the accumulated amount was calculated by setting the period of production of energy saving effects as 20 years.

Period of production of energy saving effects - 20 yearsAccumulated amount of energy saving effects - 51,701 [toe/y] x 7\y]+50,409[toe/y] x 13[y]

= 1,017,224 [toe]

1.4 Concrete method for checking energy saving effectsWith introduction of dual-purpose electricity and steam generation system by low-speed diesel engine, the fuel used is also changed partly. Although the energy saving effects can be judged directly by the amount of reduction of fuel consumption, it becomes necessary to once convert that amount into calorific power for comparison to check the effects, because of the difference in the type of fuel oils used. The calorific powers of the respective fuel oils are the following:

Fuel oil: 10,200 [kcal/kg]Vacuum residue: 9,335 [kcal/kg]

The items to be measured for the verification of energy saving effects are the following:(1) Amount of consumption of fuel (fuel oil) for boiler in existing system(2) Amount of consumption of fuel (VR) for diesel engine(3) Amount of consumption of fuel (VR) for heat recovery steam generator(4) Amount of power generation by existing system(5) Amount of power generation by diesel engine(6) Amount of transportation to oil refinery of high-pressure steam(7) Amount of transportation to oil refinery of medium-pressure steam

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2. Greenhouse gas reducing effects2.1 Technical basis of production of greenhouse gas reducing effects

The greenhouse gas targeted this time is the carbon dioxide produced with combustion of the fuel consumed by the boilers of the power plant facilities. As it was described in the paragraph of "energy saving effects", the power generation efficiency improves and energy saving is achieved with (implementation of) this proposal for improvement. As a result, it becomes possible to reduce the carbon dioxide by an amount corresponding to the reduction in the fuel consumption.

2.2 Base line serving as basis for the calculation of greenhouse gas reducing effectsThe base line for calculating greenhouse gas reducing effects is the amount of greenhouse gas produced in the case where the increase of demand for electricity and steam in the future is covered by the existing facilities and with purchase of electricity from NPC. Also in this case, the annual amount of greenhouse gas produced with an annual operating time of 8,000 hours will be taken up as base line for the first 7 years after introduction (of the new system), and the annual amount of greenhouse gas produced with an annual operating time of 7,800 hours will be taken up as base line for the 8th year onward after introduction (of the new system).The amount of production of carbon dioxide which is a greenhouse gas is calculated from the amount of fuel consumption and the calorific power.In this project, fuel oil and vacuum residue are used as fuels.The amount of production of carbon dioxide was calculated according to the IPCC Guidelines as follows:(IPCC Guidelines for National Greenhouse Gas Inventories: Reference Manual 1.4.1 Approaches for Estimating C02 Emission)

A = Amount of fuel consumption [t/y]B = Conversion factor (Net calorific value) 40.19 [TJ/kt]C = Unit requirement of carbon emission (Carbon emission factor) 21.1 [ton-Carbon/TJ]D = Oxidization coefficient of carbon (Fraction of carbon oxidized: 0.99)E = Molecular weight ratio of C02 and C (44/12)By using those A - E, the amount of production of carbon dioxide is determined by the folkformula:C02 emission = AxBxCxDx E/100 [t-C02/y]Note) The value of residual fuel oil in the IPCC Guidelines was used for the respective coefficients (B, C) of fuel oil and vacuum residue.

The base line of the amount of emission is calculated as follows:Fuel consumption: Fuel oil 25.9 t/h

Electricity purchased from NPC: Fuel oil .1 t/h

206,880 t/y (at 8,000 h/y) -» 201,708 t/h (at 7,800 h/y) -» 8,800 t/h (at 8,000 h/y)

8,580 t/h (at 7,800 h/y)

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Carbon dioxide emission during first 7 years after introduction (annual operating time: 8.000hours)C02 emission-Base = (206,880+8,800) x 40.19 x 21.1 x 0.99 x (44/12)/1000

= 663,922 [t-CCVy]

Carbon dioxide emission from 8th year onward after introduction (annual operating time: 7,800 hours)C02 emission-Base = (201,708+8,580) x 40.19 x 21.1 x 0.99 x (44/12)/1000

= 647,324 [t-COVy]

2.3 Concrete amount, period of production and accumulated amount of greenhouse gas reducing effects

(1) Concrete amount of greenhouse gas reducing effects and amount of reduction of fuel The concrete amount of greenhouse gas reducing effects was calculated by the amount of production of carbon dioxide in the model case of the project according to the IPCC Guidelines, and compared with the base line.

C02 emission in the model case of the projectFuel consumption: Fuel oil 12.0 t/h —> 96,080 t/y (at 8,000 h/y)

-» 93,678 t/h (at 7,800 h/y)Vacuum residue 9.51 t/h —* 75,720 t/h (at 8,000 h/y)

-> 73,827 t/h (at 7,800 h/y)

Carbon-dioxide emission during first 7 years after introduction (annual operating time: 8.000hours)C02 emission-Model = (96,080+75,720) x 40.19 x 21.1 x 0.99 x (44/12)/1000

= 528,847 [t-COVy]

Carbon dioxide emission from 8th year onward after introduction (annual operating time:7,80QJiQurs)C02 emission-Model = (93,678+73,827) x 40.19 x 21.1 x 0.99 x (44/12)/1000

= 515,626 [t-COVy]

In combination with the results in paragraph 2.2, the concrete amount of greenhouse gas reducing effects is calculated as follows:

-3-12-

Greenhouse gas reducing effects during first 7 years after introduction (annual operatingtime; 8,000 hours)Greenhouse gas reducing effects (first 7 years) = 663,922-528,847

= 135,075 [t-COj/y]

Greenhouse gas reducing effects from 8th year onward after introduction (annual operatingtime: 7.800 hours)Greenhouse gas reducing effects (8th year onward) = 647,324-515,626

= 131,698 [t-COVy]

(2) Period of production and accumulated amount of greenhouse gas reducing effects Since the general service life of power generation system is 20 years, the period of production of greenhouse gas reducing effects will be set as 20 years. Namely, the accumulated amount of greenhouse gas reducing effects is calculated as follows:

Period of production of greenhouse gas reducing effects — 20 years Accumulated amount of greenhouse gas reducing effects = 2,657,599[t-COJ135,075 [t-C02/y] x 7[y] = 945,525 [t-COJ (First 7 years)131,698 [t-C02/y] x 13[y] = 1,712,074 [t-C02] (8th year onward)

2.4 Concrete method for checking greenhouse gas reducing effectsThe amount of C02 emission can be calculated, based on the calculation method of IPCC Guidelines, by totalizing the fuel consumed by the power plant facilities. Namely, the amount of reduction of C02 emission i.e. greenhouse gas reducing effects can be calculated from the amount of reduction of fuel consumption. The items to be measured for the verification of greenhouse gas reducing effects are the following:(1)(2)(3)(4)(5)(6)(7)

Amount Amount Amount — Amount Amount Amount Amount

of consumption of fuel (fuel oil) for boiler in existing system of consumption of fuel (VR) for diesel engineof consumption of fuel (VR) for heat recovery steam generator of power generation by existing system of power generation by diesel engine of transportation to oil refinery of high-pressure steam of transportation to oil refinery of medium-pressure steam

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3. Influences on productivityIn the case of implementation of this project, it becomes possible to not only obtain energy saving effects calculated earlier but also reduce the amount of internal consumption of light oils with higher value by consumption of fuel oil and commercialize that portion of difference. Moreover, it meets the general trend for superfluity of heavy oils in the world, enabling self consumption of fuel the value of which continues dropping. And, the fuel with high sulfur content which has so far been used in many different places comes to be used in one place, making introduction of exhaust gas desulfurizer effective. In short, it also plays an important role as environmental measures.

-3-14-

Chapter 4 Profitability[Summary]

The private power generation system of Bataan Refinery, by bleeder turbine, is apparently working with good efficiency at present because of a large volume of bleeding. However, it is rather difficult to make a project to be attractive from the viewpoint of economic efficiency, only with the fuel cost reduction and energy saving effects, even if the current system is simply replaced with a dual-purpose electricity and steam generation system by low-speed diesel engine which uses inexpensive vacuum residue as fuel. The merit obtained by delivering as product gas oil the gas oil fraction consumed as cutter stock of fuel oil is evaluated by the difference in unit price between fuel oil and vacuum residue.

Amount of initial investment: 4,732 million yenAnnual amount of saving: 1,274 million yen/year (average amount during a period

of 20 years)Annual operating cost: 688 million yen/year (average amount during a period

of 20 years)Profit after tax: 5.2% (period of investment recovery)

Supposing that trade in C02 emission permits and trade in S02 emission permits are introduced and that those permits are traded at market prices of 1,200 yen/t-C02 and 15,000 yen/t-S02 respectively, for example, the rate of profit after tax of the project comes to 9.7%, the period of investment recovery 7.3 years, providing a chance for realization of the project.

In addition, if the price of light oils becomes much higher than that of heavy oils with a trend of demand for petroleum products, the chance for realization of the project will become still higher.

The cost effectiveness of the project regarding environmental protection is the following:Energy saving effects: 10.7 toe/year-million yen (average amount during a period of 20

years)Reduction in C02 emission 28.1 t-C02/year-million yen (average amount during a period of

20 years)Reduction in S02 emission: 1.56 t-S02/year-million yen (average amount during a period of

___________________________ 20 years) _________

1. Economic investment pay-back effects1.1 Amount of investment

As indicated in paragraph 2.5 in Chapters 2, the amount of investment of this project comes to 4,120 million yen in total, by calculating the goods exported from Japan in the cost value on CIF basis, and the goods procured in the Republic of the Philippines in the cost before VAT. This amount plus various taxes and duties imposed in the Philippines constitute the total investment amount.The main taxes and duties imposed in the Philippines are as shown on the next page. Of the taxes and duties given here, those imposed in connection with the investment for the project are customs duty and value added tax (VAT). At present, the rate of customs duty is 3% for general imported raw materials and 10% for finished products. However, a rate of 5% is applied here, because the rate of customs duty will be unified to 5% for both raw materials and finished products from the year 2004. A 10% VAT is imposed uniformly on all project items in the Philippines. (For imported goods, a 10% VAT is imposed uniformly on the customs clearance cost after taxation of customs duties.)

-4-1-

Table 2-2-7: Totalization of project costs (repeat)(Unit: Million yen)

Item Total BreakdownOff-shore On-shore

Diesel elements 2,400 2,280 120HRSG elements 590 531 59Denitrification system (SCR) elements 360 324 36Desulfurizer (FGD) elements 390 232 158Others 380 265 115Total project cost 4,120 3,632 488

[Taxes and duties in the Republic of the Philippines]National taxes Customs duty Raw materials 3%

ProductsInternal revenue tax

10%

Income taxInheritance tax & gift tax

32%

Value added taxPercentage taxInternal consumption taxStamp duty

10%

Other taxes & duties (automobile tax, energy tax, etc.)Local taxes Business tax

— Fixed assets tax0.375%2%(Cosmopolitan area 3%)

(Edited from "Business Guide Philippines" by JETRO)

Therefore, the cost required for the construction including customs duties and VAT, i.e. the total amount of investment for the project comes to the following:

CIF cost of goods exported from Japan 3,632 million yenvusiums uuues irom 04;Cost cleared of customs of goods exported from Japan

Cost of procurement in the Philippines

mimon yen3,814 million yen

488 million venTotal cost before VAT 4.302 million venVAT (10%) 430 million yenTotal amount of investment 4,732 million yen

-4-2-

1.2 Reduction of cost by investmentEconomic merits obtained in the case where part of the load of the current private power generation system of Bataan Refinery, by fuel oil fired boiler and bleeder turbine, is replaced with a dual-purpose electricity and steam generation system by low-speed diesel engine using vacuum residue (VR) as fuel come from reduction of fuel cost due to lower unit price of fuel and improvement of thermal efficiency (The merit obtained by delivering as product gas oil the gas oil fractions consumed as cutter stock of fuel oil is evaluated by the difference in unit price between fuel oil and vacuum residue, and is already taken into account), and reduction in the amount of purchase of electricity from public power corporation (NPC) (The amount of purchase of electricity in normal operation is set for zero in the present project.). By putting the case where the future demand for electricity and steam at Bataan Refinery is covered by the existing power plant and with purchase of electricity from NPC as base case, and the case where a dual- purpose electricity and steam generation system by low-speed diesel engine is introduced to meet the demand in combination with the existing power plant as project case, a comparison of operating costs in both cases may be given as follows:

[Base case: Case where the demand is met by existing boilers and with purchase of electricity fromoutside]

Amount of fuel oil used Unit price of fuel oil Fuel oil cost

First 7 years25.9t/h14,279 yen/t2,959 million yen/year

8th year onward 25.9t/h14,279 yen/t 2,885 million yen/year

Amount of electricity purchased Unit price of purchased electricity Electric power charge

4,409kW 12 yen/kWh 423 million yen/year

4,409kW12 yen/kWh413 million yen/year

Total operating cost 3,382 million yen/year 3,298 million yen/year

[Project case: Case where the demand is met by existing boilers and with purchase of electricityfrom outside]

Amount of fuel oil used Unit price of fuel oil Fuel oil cost

First 7 years 12.0 t/h14,279 yen/t 1,371 million yen

8th year onward 12.0 t/h14,279 yen/t 1,337 million yen/year

Amount of VR used Unit price of VR Cost of VR fuel

9.5 t/h9,456 yen/ton 716 million yen/year

9.5 t/h9,456 yen/ton 698 million yen/year

Total operating cost 2,087 million yen/year 2,035 million yen/year* Because no unit price is set for VR as petroleum product used for the dual-purpose electricity

and steam generation system by low-speed diesel engine, the unit price of fuel oil was led from that of a mixture of 40% gas oil and 60% VR.

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The unit prices of gas oil and fuel oil were set with reference to the prices in the Singaporean market in February 2001. The power charge was set for an intermediate value of the unit prices 0.09 - 0.11 $/kWh introduced by "Cost of Doing Business in the Philippines" by the Board of Investment (BOI) of the Republic of the Philippines. (Exchange rate between Japanese yen and US dollar: 120 yen/$)

Therefore, the annual average saved amount of operating cost by implementation of this project comes to 1,295 million yen during the first 7 years and 1,263 million yen in the 8th year onward.

1.3 Expenses produced in connection to implementation of the projectAs direct expenses related to the operation of the equipment and facilities of the present project, we may cite the following in addition to fuel oil and VR mentioned in the previous paragraph:

[Expenses related to dual-purpose electricity and steam generation system by low-speed dieselengine]

First 7 years 8th vear onwardElectric power 11 million yen/year 10 million yen/yearLubricating oil supply 67 million yen/year 66 million yen/yearRepair expenses 182 million yen/year 182 million yen/yearSub-total 260 million yen/year 258 million yen/year

[Expenses related to heat recovery boilers] (The utilities are offset by existing boilers.)First 7 years 8th year onward

Electric power 6 million yen/year 5 million yen/yearRepair expenses 26 million yen/year 26 million yen/yearSub-total 32 million yen/year 31 million yen/year

[Expenses related to exhaust gas denitrification system and desulfurizer]First 7 years &th year onward

Cost of magnesium hydroxide 226 million yen/year 220 million yen/yearCost of ammonia 44 million yen/year 42 million yen/yearElectric power 3 million yen/year 3 million yen/yearProcess water 2 million yen/year 2 million yen/yearRepair expenses 17 million yen/year 17 million yen/yearSub-total 292 million yen/year 284 million yen/year

[Expenses related to other ancillary equipment and facilities]Repair expenses 8 million yen/year (2% of the amount

corresponding to investment)

Total 592 million yen/year 581 million yen/year

As shown above, the direct annual expenses related to the operation of dual-purpose electricity and steam generation system by low-speed diesel engine amount to 592 million yen/year during

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the first 7 years and 581 million yen from the 8th year onward.Next, as capital expenditure accompanying the investment for the project, a business tax which is a local tax is imposed on the revenue of Petron Company the operator (here it is presumed that the saved fuel cost directly leads to an increase in the sales revenue) and a fixed assets tax is imposed on the assets value (here the amount of investment is given as assets value, because this assets value is not necessarily the book value), from among the taxes and duties of the Republic of the Philippines mentioned earlier. In addition, a damage insurance premium is required at a certain rate on the assets value of the equipment and facilities. (The business tax produces a difference between the first 7 years and the 8th year onward, but is treated as identical here because this difference remains within the range of a computing error.)

Business tax 3 million yen/year (0.375% of saved fuel cost)Fixed assets tax 95 million yen/year (2% of the amount of equipment

investment)Damage insurance 5 million yen/year (0.1% of the amount of equipment

investment)Total amount of capital burden 103 million yen/year

Therefore, the total amount of annual operating expenses to be newly required with the implementation of this project comes to 695 million yen/year for the first 7 years and 684 million yen/year from the 8th year onward.

1.4 Economic effects for recovery of investmentThe saved amount and the amount of increase of the operating expenses by the project were studied in the previous paragraph and the paragraph before last. The difference between the two, i.e. 600 (= 1,295 - 695) million yen/year for the first 7 years and 579 (= 1,263 - 684) million yen/year from the 8th year onward constitutes the profit of this project. The annual average project of 586 million yen/year during the project period of 20 years remains about 12% of the total investment amount of 4,732 million yen/year. It is therefore difficult to form a project by raising funds in the financial market in the Philippines where the long-term annual interest rate is said to exceed 14% ("Business Guide Philippines" by JETRO).Since this project has great greenhouse gas and S02 emission reducing effects, the revenue and expenditure for the project life of 20 years will be studied hereunder, on the supposition that a financing plan comparable to the special yen loan for environments by the Japanese government (annual interest 0.75%, reimbursement period 40 years including 10-year grace period), which is considered to be the most advantageous among the current financing systems, is applied to the portion equivalent to 85% of the total equipment investment amount, while the remaining portion equivalent to 15% is covered with the open market loan in the Republic of the Philippines (annual interest 14%, set for reimbursement in equal amount of principal for 10 years).

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Fund raising conditions:Total investment amount: 4,732 million yenPreferential loan: 4,022 million yenDomestic borrowing: 710 million yen

Unit: Million yenNumber of years elapsed 1 2 3 4 5 6 7

Saved amount of expenses 600 600 600 600 600 600 600Preferential loanInterest subsidy 30 30 30 30 30 30 30

Reimbursement of principal — — — — — — —

Open market loanInterest subsidy 99 89 80 70 60 50 40

Reimbursement of principal 71 71 71 71 71 71 71Total payment for finance 200 190 181 171 161 151 141

Depreciation 300 300 300 300 300 300 300Profit before tax 100 110 119 129 139 149 159Profit after tax 68 75 81 88 95 101 108

Number of years elapsed 8 9 10 11 12 13 14Saved amount of expenses 579 579 579 579 579 579 579

Preferential loanInterest subsidy 30 30 30 30 29 28 27

Reimbursement of principal — — — 150 150 150 150Open market loanInterest subsidy 30 20 10 — — — —

Reimbursement of principal 71 71 71 — — — —

Open market loan 131 121 111 180 179 178 177Interest subsidy 300 300 300 300 300 300 300

Reimbursement of principal 148 158 168 99 100 101 102Total payment for finance 101 107 114 67 68 69 70

Number of years elapsed 15 16 17 18 19 20 TotalSaved amount of expenses 579 579 579 579 579 579 11727

Preferential loanInterest subsidy 26 25 23 21 19 17

Reimbursement of principal 150 150 300 300 300 300 2100Open market loanInterest subsidy — — — — — —

Reimbursement of principal — — — — — — 710Open market loan 176 175 323 321 319 317Interest subsidy 300 232 — — — — 4732

Reimbursement of principal 103 172 256 258 260 262Total payment for finance 70 117 174 175 177 178 2103

■ 4~ 6 ~

What has become clear from the balance of revenue and expenditure given above is that the cumulative amount remaining in hand including depreciation and profit after tax at the point in time when 20 years set as project life have passed is 6,835 million yen, and that the project comes to an end by settling the remaining amount of borrowing of 1,922 (= 4,022 - 2,100) million yen of the preferential loan of 4,022 million yen. The substantial profit is therefore 4,913 million yen in cumulative total and approximately 246 million yen in annual average, with an annual rate of profit after tax for the initial investment amount of approximately 5.2%, and the period of investment recovery of 10.2 years. It means that this investment is not very attractive as a purely commercial project, considering the burden of indirect costs on the part of the project owner required for the actual construction, the burden of interests during the construction period required prior to the start of operation or risk of exchange fluctuations against overseas loan, etc. Under the situation in which environmental protection measures are discussed as important subject on the global level, it seems absolutely necessary to take measures for building a system for urging economic incentives with participation of advanced countries, without leaving the matter to the domestic policies of the country concerned such as tax exemption for investment, etc., in view of the fact that the object countries requiring investment for this kind of project in the future are mostly developing countries such as ASEAN member countries, etc. (see Chapter 2, paragraph 4.1). For reference, supposing that a system of trade in emission permits is established for C02 and S02 and that it is applied to the present project, the profitability of the project will improve to a considerable extent thanks to the trade in emission permits in addition to the reduction of fuel cost and saving of purchased electricity. Namely, by putting the incentive on reduction of the amount of C02 emission as 1,200 yen/t-C02 and the incentive on reduction of the amount of S02 emission as 15,000 yen/t-S02, the balance of revenue and expenditure of this project will become as shown below.

Fuel saving effectPurchase electricity reducing effect Operating cost

First 7 years872 million yen/year423695

8th vear onward 850 million yen/year 413684

Sub-total of project revenue 600 579

C02 emission reducing effect 162 158SO, emission reducing effect 112 109Total of project revenue 874 million yen/year 846 million yen/year

Note) The unit price for the trade in C02 emission permits is variable in the range between 10$/t- C02 and 50$/t-CO2. Here, 10$/t-CO2 (@120 yen/$) is set as the most realistic unit price, while a unit price of 125$/t-S02 (@120 yen/$) is set with reference to the average unit price in the past in the United States.

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Therefore, supposing that an advantageous loan comparable to the special yen loan for environments is provided in the same way as in the previous paragraph, the balance of revenue and expenditure during the 20 years of project life will be as follows:

Fund raising conditions:Total investment amount: 4,732 million yenPreferential loan: 4,022 million yenDomestic borrowing: 710 million yen

Unit: Million yenNumber of years elapsed 1 2 3 4 5 6 7

Saved amount of expenses 600 600 600 600 600 600 600Revenue by transfer of C02 162 162 162 162 162 162 162Revenue by transfer of SO? 112 112 112 112 112 112 112

Total amount 874 874 874 874 874 874 874Preferential loanInterest subsidy 30 30 30 30 30 30 30

Reimbursement of principal — — — — — — —

Open market loanInterest subsidy 99 89 80 70 60 50 40

Reimbursement of principal 71 71 71 71 71 71 71Total payment for finance 201 191 181 171 161 151 141

Depreciation 300 300 300 300 300 300 300Profit before tax 373 383 393 403 413 423 433Profit after tax 254 261 267 274 281 288 294

Number of years elapsed 8 9 10 11 12 13 14Saved amount of expenses 579 579 579 579 579 579 579Revenue by transfer of CO? 158 158 158 158 158 158 158Revenue by transfer of SO? 109 109 109 109 109 109 109

Total amount 846 846 846 846 846 846 846Preferential loanInterest subsidy 30 30 30 30 28 26 23

Reimbursement of principal — — — 300 300 300 300Open market loanInterest subsidy 30 20 10 — — — —

Reimbursement of principal 71 71 71 — — — —

Total payment for finance 131 121 111 330 328 326 323Depreciation 300 300 300 300 300 300 300

Profit before tax 415 425 435 216 218 220 223Profit after tax 282 289 296 147 148 150 151

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Number of years elapsed 15 16 17 18 19 20 TotalSaved amount of expenses 579 579 579 579 579 579 17116Revenue by transfer of CO? 158 158 158 158 158 158Revenue by transfer of SO? 109 109 109 109 109 109

Total amount 846 846 846 846 846 846Preferential loanInterest subsidy 21 19 17 13 9 5

Reimbursement of principal 300 300 500 500 500 500 3800Open market loanInterest subsidy — — — — — — —

Reimbursement of principal — — — — — — —

Total payment for finance 321 319 517 513 509 505Depreciation 300 232 — — — — 4732

Profit before tax 225 295 329 333 337 341Profit after tax 153 201 224 226 229 232 4647

What has become clear from this table is that 9,157 million yen remains in hand, after settling the remaining amount of 222 million yen for reimbursement of the preferential loan from the total amount of cumulative depreciation and profit after tax of 9,379 million yen. The annual rate of profit after tax for the amount of initial investment comes to approximately 9.7% and the period of investment recovery 7.3 years, reaching a level enabling to study implementation of the project. Here, the study was made by keeping the price of petroleum products at the market price today (beginning of 2001). However, if the expansion of the demand for light oils exceeds that for fuel oils and the difference of prices becomes larger in the future, it is estimated that the economic efficiency of this project will greatly improve and the chance for its realization will become higher.As described above, the key to realization of this project lies in a wide range of energy-related issues such as control and countermeasures regarding C02 emission, price system of petroleum products in the future, etc., and it is important to well grasp the trend of those factors.

2. Cost-project effects2.1 Cost-energy saving effect

The relation between the energy saving effect and the investment effect of the project will become as shown below, in the case where the project life of this project is set for 20 years from the viewpoint of obsolescence, etc. of the system and that the operating time is put as 8,000 hours/year for the first 7 years and as 7,800 hours/year for the 13 years from the 8th year onward considering increased stop time due to inspection, repair, etc.

Amount of energy saving during first 7 years 51,701 toe/year x 7 years = 361,907 toe

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Amount of energy saving from 8th year onward 50,409 toe/year x 13 years = 655,317 toe

Total amount of energy saving 1,0170,224 toe

Investment cost-effects1,0170,224 toe/(20 years x 4,732 million yen) = 10.7 toe/year-million yen

2.2 Cost-greenhouse gas emission reducing effectIn the case where the project life and the annual operating time are set in the same way as for energy saving in the previous paragraph, the relation between the amount of reduction of greenhouse gas (C02) emission and the effect of investment for the project becomes as follows:

Amount of reduction of greenhouse gas (C02) emission during first 7 years 135,075t-CO2/year x 7 years = 945,525t-C02

Amount of reduction of greenhouse gas (C02) emission from 8th year onward 131,968t-C02/year x 13 years = l,712,074t-CO2

Total amount of reduction of greenhouse gas (C02) emission2.657.599- C02

Investment cost-effects2.657.599- CO2/(20 years x 4,732 million yen) = 28. lt-C02/year-million yen

2.3 Cost-S02 emission reducing effectDual-purpose electricity and steam generation system by low-speed diesel engine uses vacuum residue with high sulfur content as fuel. For that reason, it is essential to install exhaust gas desulfurizer to not only satisfy the provisions of the S02 emission standard of the Clean Air Act 1999 of the Republic of the Philippines but also maintain the state of atmospheric environmental protection in and around the Refinery. At present, S02 produced with combustion of vacuum residue consumed as base material of fuel oil in the refinery or as fuel after being sold to external users is discharged directly into the atmosphere. The present project is planned to make this S02 harmless by making it react with magnesium hydroxide to turn into magnesium sulfate, and then discharge it into the sea area. Although the sulfur content contained in the vacuum residue is variable depending on the type of crude oil to be refined, the sulfur content contained in the vacuum residue of Bataan Refinery is estimated to be comparatively high at about 5.2%, because of crude oil refined in this refinery mainly consists of Arabian medium. On the other hand, Clean Air Act 1999 stipulates that the S02 content in combustion gas must be controlled no higher than

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0.75 g/Nm3 in any newly installed combustion facilities. This content corresponds to a sulfur content in the fuel of approximately 0.5% in the case of ordinary combustion facilities. Therefore, the desulfurizing performance required for the exhaust gas desulfurizer to be adopted in this project is approximately 95%, and the amount of S02 removal from the exhaust as in the project case is calculated as follows:9.5t/h x 0.052 x 64/32 x 0/95 = 0.935t - S02/h

9.5t/h: Amount of use of vacuum residue 0.052: Sulfur content in vacuum residue 64/32: Molecular ratio of S02 and sulfur 0.95: S02 removal rate

In the case where the project life is set for 20 years, the operating time during the first 7 years for8,000 hours/year and the operating time from the 8th year onward for 7,800 hours/year in the same way as in the preceding paragraphs, the relation between the treated amount of S02 and the effect of investment for the project becomes as follows:

Treated amount of S02 during first 7 years 0.935t - S02/h x 8,000h/year x 7 years = 52,360t-SO2

Treated amount of S02 from 8th year onward 0.935t - S02/h x 7,800h/year x 13 years = 94,809t-SO2

Total treated amount of S02 147,169t-S02

Cost-S02 treating effect147,169t-SO2/(20 years x 4,732 million yen) = 1.56t-S02/year-million yen

3. OthersThe effectiveness of this project as measures for adaptation to switching to lighter petroleum products due to motorization and environmental protection measures was qualitatively described in "Needs for CDM project", paragraph 1.3 in Chapter 1. In this paragraph, a quantitative explanation will be attempted. Since the total amount of fuel oil consumed in the power plant of Bataan Refinery and that consumed in the NPC's power station for supplying power to the Refinery is 27 t/h, this may be divided into light fractions and vacuum residue which are base materials as follows:

Breakdown of fuel consumption in base case:Light fractions 10.8 t/h (Fuel of boiler: Weight proportion 40%)Vacuum residue 16.2 t/h (Fuel of boiler: Weight proportion 60%)

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On the other hand, in the project case, the amount of use of fuel oil in the refinery is 12 t/h. This is also divided into light fractions and vacuum residue which are base materials, and 9.5 t/h of vacuum residue is used in addition to it. Therefore, the breakdown of fuel consumption in the project case will be as follows:

Light fractions 4.8 t/h (Fuel of boiler: Weight proportion 40%)Vacuum residue 7.2 t/h (Fuel of boiler: Weight proportion 60%)Vacuum residue 9.5 t/h (Fuel of diesel engine)

The amount of use of vacuum residue comes to 16.7 t/h in total. Namely, in the project case, the amount of use of light fractions is 6.0 t/h smaller and the amount of use of vacuum residue increases by 0.5 t/h compared with the base case. In the project case, while the amount of external sale of fuel oil decreases (approx. 0.8 t/h) because the amount of consumption of vacuum residue increases, the light fractions which have so far been consumed as mixing base material of fuel oil (approx. 0.3 t/h) can be directly sold to external users. Therefore, in the project case, it becomes possible to increase the deliveries to outside of light fractions by a total amount of 6.3 t/h compared with the base case. (The amount of external sale of fuel oil decreases by 0.8 t/h.)

In the case where the project life is set for 20 years, the operating time during the first 7 years for8,000 hours/year and the operating time from the 8th year onward for 7,800 hours/year in the same way as in the preceding paragraphs, the increase of the amount of deliveries of light fractions at Bataan Refinery becomes as follows:

Increase in the amount of deliveries of light fractions during first 7 years6.3 t/h x 8,000h/year x 7 years = 352,800t-GO (Gas oil)

Increase in the amount of deliveries of light fractions from 8th year onward6.3 t/h x 7,800h/year x 13 years = 638,820t-GO

Total increase in the amount of deliveries of light fractions = 991,620 t-GO

Average annual increase in the amount of deliveries of light fractions991,620t- GO/(20 years x 4,732 million yen) = 10.5t-GO/year-million yen

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Chapter 5 Verification of diffusive effects[Summary]

Estimation was made of the energy saving effects and the greenhouse gas reducing effects obtained by applying this project to other sites in the Republic of the Philippines.

Here, we thought that diffusive effects will be demonstrated in the following 2 oil refineries of about the same scale and construction year as Bataan Refinery of Petron Corporation:

• Tabangao Refinery: 151,000 BPSD, Shell Philippines Co.• Batangas Refinery: 147,000 BPSD, Caltex Co.

It is believed that the petrochemical plant, etc. in the neighbourhood of the Refinery are well eligible for diffusion, in addition to those 2 refineries, but they were left out of the scope of our study this time.

The results of calculations turned out as follows:

Annual energy saving effects: 137,294 [toe/y] (First 7 years)133,864 [toe/y] (8th year onward)

Cumulative energy saving effects: 2,701,290 [toe] (20 years)

Annual greenhouse gas reducing effects: 358,699 [t-C02/y] (First 7 years)352,564 [t-C02/y] (8th year onward)

Cumulative greenhouse gas reducing effects: 7,057,402 [t-C02] (20 years)_______________

The present project consists in introducing dual-purpose electricity and steam generation system by low-speed diesel engine in Bataan Refinery of Petron Corporation in the Republic of the Philippines, for the purpose of achieving energy saving and reduction of the amount of C02 production. The diffusive effects in the Republic of the Philippines expected from implementation of this project will be studied on the following pages.

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1. Possibility of diffusion in the object country of the object technologies introduced through the project

In the Republic of the Philippines, 3 oil companies own one oil refinery respectively, and the total treating capacity of their normal-pressure distilling plants exceeds 400,000 barrels/day. Moreover, some oil refineries plan to expand their production capacities in the near future, and the total treating capacity of normal-pressure distilling plants is expected to reach almost 500,000 barrels/day around the year 2005. Both of those 2 oil refineries are believed to have private power generation system of poor efficiency, judging from the oldness of their facilities. Furthermore, it is supposed that heavy oils tend to be superfluous in those oil refineries which do not possess any heavy oil cracking system. For those reasons, we judged that this proposal is sufficiently workable. As a general trend in the Philippines Republic, crude oil is mostly imported from Middle East countries, and this makes us believe that both the trend of superfluity and the properties of heavy oils are similar in all oil refineries. The following oil refineries may be named as places where we can expect similar effects as those in Bataan Refinery:

• Tabangao Refinery: 151,000 BPSD, Shell Philippines Co.• Batangas Refinery: 147,000 BPSD, Caltex Co.

Here, energy saving effects in the case where diffusive effects are produced in those 2 oil refineries will be calculated.At the same time, the petrochemical complex adjacent to Bataan Refinery of Petron Corporation has a series of plans for new installation and expansion. Although our present proposal is subject to some restriction from the viewpoint of location, we believe it has sufficient potentiality of diffusion to facilities other than oil refineries.

2. Effects considered to be diffused2.1 Energy saving effect

The diffusability of energy saving effect is estimated from proportional calculation of crude oil treating capacity, made by using the results of study at Bataan Refinery of Petron Corporation. The results of calculation made on the respective oil refineries are the following:

• Bataan Refinery, Petron Corporation (Crude oil treating capacity 180,000 BPSD)Annual energy saving effects: 51,701 [toe/y] (First 7 years)

50,409 [toe/y] (8th year onward)Cumulative effects: 1,017,224 [toe] (20 years) •

• Tabangao Refinery, Shell Philippines Co. (Crude oil treating capacity 151,000 BPSD)Annual energy saving effects: 43,371 [toe/y] (First 7 years)

42,288 [toe/y] (8th year onward)Cumulative effects: 853,341 [toe] (20 years)

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• Batangas Refinery, Caltex Co. (Crude oil treating capacity 147,000 BPSD)Annual energy saving effects: 42,222 [toe/y] (First 7 years)

41,167 [toe/y] (8th year onward)Cumulative effects: 830,725 [toe] (20 years)

Therefore, the energy saving effects in the entire Philippines Republic are given as follows:

Annual energy saving effects : 51,701 + 43,371 + 42,222= 137,294 [toe/y] (First 7 years): 50,409 + 42,288 + 41,167= 133,864 [toe/y] (8th year onward)

Cumulative effects: 137,294 [toe/y] x 7 [y] + 133,864 [toe/y] x 13 [y]= 2,701,290 [toe] (20 years)

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2.2 Greenhouse gas reducing effectFrom the results of calculation made on the items of energy saving effects described in paragraph2.1 of this Chapter, the greenhouse gas reducing effects can be determined as follows:

Bataan Refinery, Petron Corporation (Crude oil treating capacity 180,000 BPSD)Annual greenhouse gas reducing effects : 135,075 [t-C02/y] (First 7 years)

: 131,698 [t-C02/y] (8th year onward) Cumulative effect : 2,657,599 [t-C02] (20 years)

Tabangao Refinery, Shell Philippines Co. (Crude oil treating capacity 151,000 BPSD)Annual greenhouse gas reducing effects : 113,313 [t-C02/y] (First 7 years)

: 110,480 [t-C02/y] (8th year onward) Cumulative effects : 2,229,430 [t-C02] (20 years)

Batangas Refinery, Caltex Co. (Crude oil treating capacity 147,000 BPSD)Annual greenhouse gas reducing effects

Cumulative effects

Therefore, the greenhouse gas reducing effects follows:

Annual greenhouse gas reducing effects

Cumulative effects

: 110,311 [t-C02/y] (First 7 years): 107,553 [t-C02/y] (8th year onward): 2,170,373 [t-C02] (20 years)

in the entire Philippine Republic are given as

: 135,075 + 113,313 + 110,311 = 358,699 [t-CCVy] (First 7 years): 131,698 + 110,480 + 107,553 = 352,564 [t-CCVy] (8th year onward) : 358,699 x 7 + 349,731 x 13 = 7,057,402 [t-COz] (20 years)

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Chapter 6 Influences on others[Summary]______________________________________________________________________

In 1999, the Philippine government established environmental control regarding prevention of atmospheric pollution "Philippine Clean Air Act 1999", and this law was put into effect in November 2000 following establishment of enforcement regulations. In the case where dual- purpose electricity and steam generation system by low-speed diesel engine is introduced along this project, it is naturally subject to the control of sulfur oxides (SOx) emission, because this system uses vacuum residue of high sulfur content as fuel. Similarly, though this is inevitable for any combustion system, the system is also subject to the control of nitrogen oxides (NOx) emission.

Here, we will describe the results of a study made on the equipment and facilities necessary for clearing the environmental control regarding SOx and NOx.________________________________

1. Influences on other environmental, economic and social aspects, produced in exchange for energy saving effects and greenhouse gas reducing effects obtained through implementation of the project

1.1 SOx reducing effectsIn the present proposal, vacuum residue containing sulfur of high concentration is used as fuel of dual-purpose electricity and steam generation system by low-speed diesel engine. This inevitably necessitates introduction of exhaust gas desulfurizer, and its effects will be described hereafter.(1) Environmental regulations in the Republic of Philippines

The Philippine government established environmental control regarding prevention of atmospheric pollution "Philippine Clean Air Act 1999" in 1999, and this law was put into effect with establishment of enforcement regulations in November 2000. The control values regarding SOx are the following:

Control values of SOx (CAA)Existing facilities: 1.5 g/Nm3 (converted into S02)New facilities: 0.7 g/Nm3 (converted into S02)

(2) Situation of exhaust gas from diesel engine power generation system and heat recovery steam generatorUse of vacuum residue (VR) is planned as fuel, in the low-speed diesel engine power generation system and heat recovery steam generator (HRSG) which are currently under study for being introduced. Vacuum residue, which contains high concentration of sulfur at around 5 wt%, emits SOx of high concentration. The properties of exhaust gas used for studying exhaust gas desulfurizer this time are as shown on the table below.Here, the study will be made by setting a target of reducing the SOx emission to no more than one half of the control value, which means a SOx removal efficiency of 95%.

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Properties of exhaust gas (SOx)Exhaust gas volume 182,500 Nm7h

SOx concentration before desulfurizer 5.74 g/Nm3 (2009 vol-ppm)SOx concentration after desulfurizer No more than 0.287 g/Nm3 (100 vol-ppm)

Exhaust gas temperature before desulfurizer Around 170 °C

(3) Outline of exhaust gas desulfurizerIn the exhaust gas volume and SOx concentration area given above, either magnesium hydroxide method or lime-gypsum method are generally used. This time, we decided to use magnesium hydroxide method for the following reasons:

1) Bataan Refinery faces the sea (advantageous for magnesium hydroxide method)2) Little operating troubles with magnesium hydroxide method (advantageous for

magnesium hydroxide method)3) Great difference in initial cost (advantageous for magnesium hydroxide method)4) Non establishment of sales route of gypsum (disadvantageous for lime-gypsum method)5) Great dependence on selling price of gypsum of the running cost (unknown this time)

(4) Construction and running costs of exhaust gas desulfurizer (magnesium hydroxide method) The calculations were made on the supposition that the equipment is exported from Japan.

Construction cost: Approx. 390 million yenRunning cost: Approx. 221 million yen 5

(5) Effects of introduction of exhaust gas desulfurizerAir pollution is a subject of strong concern in the Republic of the Philippines, as exemplified by the putting into force of Clean Air Act (CAA) in January 2001 Tfct 2000 11 <h ? ]. The fuel planned to be used in the dual-purposeelectricity and steam generation system by low-speed diesel engine this time contains high concentration of sulfur. For that reason, introduction of exhaust gas desulfurizer enables to perform desulfurization collectively for the entire facilities. This produces extremely large effects, eliminating no less than 7,000 tons of S02 annually according to our calculation.

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1.2 NOx reducing effectsIn the present proposal, low-speed diesel engine is adopted as motor, and NOx removal system is to be installed for controlling the amount of emission of nitrogen oxides discharged from this diesel engine. Here, the situation of denitrification technology will be explained and the effects of the NOx removal system installed this time will be described.(1) Environmental control in the Republic of Philippines

The control values of NOx in the Republic of Philippines under the environmental control introduced in paragraph 1.1 of this Chapter are the following:

Control values of NOx (CAA)Existing facilities: 1,500 mg/Nm3 (converted into N02)New facilities: 500 mg/Nm3 (converted into N02)

(2) Situation of exhaust gas from diesel engine power generation system and heat recovery steam generatorThe properties of exhaust gas used for studying exhaust gas denitrizer this time are as shown on the table below.Here, the study will be made by setting a target of reducing the NOx emission to no more than one half of the control value, which means a NOx removal efficiency of 90%.

Properties of exhaust gas (NOx)Exhaust gas volume 182,500 Nm3/hNOx concentration before denitrizer

2,245 mg/Nm3 (1,093 vol-ppm)

NOx concentration after denitrizer

No more than 225 mg/Nm3 (No more than 109 vol-ppm)

Exhaust gas temperature before denitrizer

350-400 “C

(3) Outline of exhaust gas denitrizerAs method for reducing NOx discharged from diesel engine power generation system, there are 2 different kinds of method: methods of treating the gas in the diesel engine by means of retarded fuel injection (timing retard), water emulsion fuel, feed air humidification, etc. (primary methods), and methods of treating exhaust gas discharged from the engine by means of a denitrizer.The former method of treating the gas in the diesel engine is also effective, but the NOx removal efficiency is rather low with this method at about 60% max. under the present situation. Therefore, it is necessary to adopt the latter method, in the case where an NOx removal efficiency no lower than 80% is required as in the present case. Table 6-1-1 summarizes the current situation of technological development level of major dry type

- 6- 3 -

exhaust gas denitrizers.As it is apparent from this table, in diesel engines, the method of selective catalytic reduction (SCR) by ammonia using ammonia as reducer is the only applicable method at present. The characteristics of this method of selective catalytic reduction by ammonia are the following:

1) Easy operation with simple process.2) High reliability with little troubles.3) No need of waste water treatment, because NOx are decomposed into harmless and

inodorous nitrogen (N2) and steam (H20) without producing any by-product.4) Simple operation.

This time, heat recovery steam generator is installed on the downstream side of the diesel engine power generation system. Exhaust gas denitrizer will be incorporated at the point with a temperature of 300 - 400 °C which is a temperature optimal for denitrification reaction in this steam generator.

(4) Construction and running costs of exhaust gas denitrizerThe construction cost is calculated to be approximately 360 million yen, assuming that the equipment is exported from Japan. The running cost the greater part of which is represented by the cost of ammonia is presumed to be approximately 44 million yen per year. 5

(5) Diffusion of exhaust gas denitrizerIn the Republic of Philippines, a large number of diesel engine power generation systems are installed including high-speed and medium-speed types, partly because the country is composed of many islands. By supplying denitrizer for diffusion to such facilities in the future, it will become possible to further promote environmental protection.

- 6- 4 -

Table 6-1-1 Technological development level and major dry type exhaust gas denitrification technologies in Japan and abroad

ClassificationCatalytic cracking

method (Direct reduction of NOx)

Catalytic reduction method (Reduction of NOx by reducer)

Non-selective catalytic reduction method (condition: non­

coexistence of oxygen)

Selective catalytic reduction method

(condition: coexistence of oxygen)

Selective catalytic reduction method

(condition: coexistence of oxygen)

Method Catalytic cracking method Three-way catalyst Selective reduction of

NH-,Selective reduction of

HCReducer Not required CO, Hydrocarbon Ammonia Hydrocarbon

Catalyst Copper zeolitePerovskite Platinum-Rhodium Titanium oxide

Vanadium oxideZeoliteAlumina

NOx removal efficiency

XUnknown o

90% or overA

Around 60%Applicability to diesel

engineX X o o

Fuel containing sulfur X Unknown o ARunning cost © o X A

Technical level Under basic study Put to practical use: Gasoline car

Put to practical use: Diesel engine, boiler

Under study for putting to practical use

FeaturesUltimate method of denitrification bysimple catalyst

Put to practical use in 1977High reliability

High NOx removal efficiencyHigh reliability

Applied to mobile power generation sources (ships, automobiles)

ProblemsActivity reduced in the presence of coexistent gases (02, H20)

Non applicable to DE Toxicity of ammoniaHigh operating cost

NOx removal efficiency of 60% or so

Classification Absorption method (Combination of absorbent and reducer)

NOx occlusion reduction method Catalytic absorption method Absorption & discharge reduction method

Method Absorbent + Three-way catalyst Absorbent + Reducer Absorbent + Flame crackingReducer CO, Hydrocarbon ch4 CACatalyst Barium oxide-Platinum-Alumina isium carbonate MnOx-Zr02

NOx removal A © oefficiency 80% or over 90-99% Target 90% or over

Applicability to diesel engine o o o

Fuel containing sulfur X A ARunning cost o X o

Technical level Put to practical use: [Lean-burn?] Put to practical use: Gas fired Under study for putting togasoline car power plant practical use

Features Use of three-way catalyst by Control by EPA (Environmental Small volume of reducercontrol of air fuel ratio Protection Agency) Low running cost

Problems Activity reduced in the presence of sulfur

High running cost?Necessity of desulfurizer Proof test required

©: Excellent O: Good A: Slightly inferior* X: Poor

- 6- 5 -

Conclusion

Natural gas field was discovered in the Republic of the Philippines, importing country of energy resources, and the supply of natural gas is planned to start in 2001. However, the use of this natural gas is limited to power generation at present, and securing of fossil fuels still remains an extremely important task for the Philippines.

The amount of energy consumption in the Philippines continues growing, and realization of energy saving through improvement of efficiency of energy-related facilities is urgently required. Under such circumstances, the Philippine government established "Philippine Clean Air Act 1999" toward implementation of environmental protection measures, and is promoting reinforcement of legal control. This time, we studied (possibility of implementation of) dual-purpose electricity and steam generation by low-speed diesel engine in Bataan Oil Refinery of Petron Corporation intended for energy saving and effective utilization of residual oil which tends to become superfluous in this country, and the results of this study indicated a C02 reduction of 133,000 t/y, an increase of deliveries of light oils of 50,000 t/y by utilization of residual oil, and S02 removal of no less than 7,000 t/y by installation of exhaust gas desulfurizer. However, the economic efficiency of this project is not so bright only with increase of deliveries of light oils and reduction of the cost of purchase of electricity from NPC, and its realizability seems to be greatly dependent on the possibility or not of getting a help of trade in emission rights, joint implementation and clean development mechanism (CDM) which are believed to be actualized in the near future. Bataan Refinery of Petron Corporation is also very much interested in energy saving, and we believe they will continue studying possibility of introduction of new co-generation system also in the future, although it depends on the decision of important issues such as time of construction of various systems planned to be constructed in the future, method of utilization of residual oil, etc.

Lastly, we would like to express our heartfelt thanks to all people concerned of Bataan Refinery of Petron Corporation for their kind cooperation to our field survey. At the same time, we wish to make it clear that we are firmly determined to continue making our best efforts toward realization of the present project.

Attachment:

1. List of figures and tables

- Attachment 1-1 -

Chapter 1Fig. 1-1-1 Map of the Republic of the Philippines Table 1-1-1 Average monthly temperatures at meteorological

stations in the Republic of the Philippines as shown on world climate charts

Fig. 1-1-2 Mount Mayon volcanic eruptionFig. 1-1-3 A view of Mount MayonFig. 1-1-4 Administrative System of the Republic of the

PhilippinesTable 1-1-2 The Republic of the Philippines Education

SystemFig. 1-1-5 Distribution of population by age group Table 1-1-3 Special Economic Zones in the Republic of the

PhilippinesFig. 1-1-6 Growth in GDP for the republic of the

PhilippinesTable 1-1-4 Forecast of demand-supply situation of primary

energies in the Republic of the PhilippinesFig. 1-1-7 Comparative GDP in each industry sector for

the Republic of the PhilippinesTable 1-1-5 Comparison of environmental standard values

for atmosphere in the Philippines and JapanFig. 1-1-8 Investments in Special Economic Zones

classified by industry (1995-2000)Table 1-1-6 Emission standards for prevention of air

pollutionFig. 1-1-9 Investments in Special Economic Zones

classified by country of originTable 1-1-7 Comparison of water quality standards in the

Philippines and JapanFig. 1-1-10 Shift in number of workers employed in

Special Economic ZonesTable 1-1-8 Comparison of waster water standards in the

Philippines and JapanFig. 1-1-11 Shift in value of exports manufactured in the

Special Economic ZonesTable 1-2-1 Comparison of efficiency of various kinds of

power generation systemFig. 1-1-12 Changes of oil consumption and self-supply

ratioFig. 1-1-13 Changes of coal consumptionFig. 1-1-14 Changes of capacity of power generation

system by power sources in the Republic of the Philippines

Fig. 1-1-15 Comparison of power generation systemsFig. 1-1-16 Changes of demand-supply balance of electric

power (Generating end)Fig. 1-1-17 Amount of use of electric power by fields in

the Republic of the PhilippinesFig. 1-1-18 Changes of quantity of registered automobiles

in the Republic of the PhilippinesFig. 1-1-19 Changes of sold quantity of automobiles in the

Republic of the PhilippinesFig. 1-2-1 Conceptual chart of various kinds of heat

engineFig. 1-2-2 Comparison of power generation efficiency by

motorsFig. 1-2-3 Comparison of power generation efficiency at

partial loadFig. 1-2-4 Influences of ambient temperature on engine

output and power generation efficiencyFig. 1-2-5 Heat balance of DEG systemFig. 1-2-6 Heat balance of BTG systemFig. 1-2-7 Heat balance of GTG systemFig. 1-2-8 Heat balance of GTCC systemFig. 1-2-9 Pinch chart of DEG, GTG, GTCCFig. 1-2-10 Relation between heat-electricity ratio and

efficiencyFig. 1-3-1 Changes of total demand for petroleum

products in the PhilippinesFig. 1-3-2 Changes of demand by petroleum products in

the PhilippinesFig. 1-3-3 Changes of proportions of demand by

petroleum products in the PhilippinesFig. 1-3-4 Situation of export & import of petroleum

products in the PhilippinesFig. 1-3-5 Trend of demand by gasoline productsFig. 1-3-6 Proportion of fuel oil in the total demand for

petroleum products in the Philippines

Chapter 2Fig. 2-1-1 Map of Bataan Province and surrounding areas Table 2-2-1 Power generation system of Bataan RefineryFig. 2-1-2 Conception of Limay ethylene complex Table 2-2-2 Boiler system of Bataan RefineryFig. 2-2-1 Process block flow diagram of Bataan Oil

Refinery of Petron CorporationTable 2-2-3 Efficiency of steam turbines (without taking

account of boiler efficiency)Fig. 2-2-2 Flow of steam turbine TG-1001 Table 2-2-4 Overall efficiency in the case where boiler

efficiency is taken into accountFig. 2-2-3 Flow of steam turbine TG-1002 Table 2-2-5 Amount of increase of demand for electricity

and steamFig. 2-2-4 Flow of steam turbine TG-1003 Table 2-2-6 Oil companies in the Republic of the PhilippinesFig. 2-2-5 Flow of steam turbine TG-1004 Table 2-2-7 Calculation of project cost (see Chapter 2,

paragraph 2.4)Fig. 2-2-6 Flow of steam turbine TG-1005 Table 2-2-8 Proposed project implementation scheduleFig. 2-2-7 Organization of Bataan Oil Refinery of Petron

CorporationTable 2-2-9 Detailed progress schedule

Fig. 2-2-8 Management situation of Petron Corporation Table 2-2-10 Delivery pattern of diesel engineFig. 2-2-9 Management system of Petron CorporationFig. 2-2-10 System flow of current power plantFig. 2-2-11 System flow after addition of power plant

proposed this timeFig. 2-2-12 Layout of dual-purpose electricity and steam

generation system by diesel engine (DEG)Fig. 2-2-13 Equipment layout drawing (1/2)Fig. 2-2-14 Equipment layout drawing (2/2)Fig. 2-2-15 Drawing of power generation setFig. 2-2-16 Drawing of foundations for equipment and

power generation setFig. 2-2-17 Flow of fuel oil, lubricating oil and drain linesFig. 2-2-18 Flow of water, air and steam linesFig. 2-2-19 Flow of desulfurizerFig. 2-2-20 Sectional view of a diesel engineFig. 2-2-21 Flow of manufacture of diesel engineFig. 2-3-1 Correlational chart of related organizations in

the case of application of buyer's creditFig. 2-4-1 Changes of trade in emission rights of S02 in

the United States

Chapter 3 Chapter 6Fig. 3-1-1 Current balance of electricity and steam Table 6-1-1 Technological development level and major dry

type exhaust gas denitrification technologies in Japan and abroad

Fig. 3-1-2 Balance of electricity and steam in the future (existing facilities)

Fig. 3-1-3 Balance of electricity and steam in the future (newly introduced system)

Attachment:

2. List of persons in charge of the feasibility study

- Attachment 2-1 -

List of persons in charge of the feasibility study

Role for Investigation Name of staffs Belonging and charge

Integration forF/S

Shinichi TatebeMitsui Engineering & Shipbuilding Co., Ltd.Diesel power systems sales departmentIntegration for feasibility study

Project manager Kimihiko SugiuraMitsui Engineering & Shipbuilding Co., Ltd.Diesel design departmentProject manager

staff Makoto SakuraiMitsui Engineering & Shipbuilding Co., Ltd.Diesel power systems sales departmentTransportation & Cost estimation at on-shore portion

staff Makoto KamishimaMitsui Engineering & Shipbuilding Co., Ltd.Diesel power systems sales departmentPlanning, Cost estimation & Economical evaluation

staff Suguru KataokaMitsui Engineering & Shipbuilding Co., Ltd.Diesel power systems sales departmentEconomical evaluation

staff Masatoshi HayashiMitsui Engineering & Shipbuilding Co., Ltd.Diesel design departmentDesign and Cost estimation

staff Tetsuo KomodaMitsui Engineering & Shipbuilding Co., Ltd.Technology support departmentTechnical evaluation and verification

staff Atsushi SakaneMitsui Engineering & Shipbuilding Co., Ltd.Technology support departmentTechnical evaluation and verification

- Attachment 2-2 -

Attachment:

3. Related data

3-1 Records on site visits and various meetings held in Japan

- Attachment 3-1 -

Record of site visits (Petron Bataan Refinery) MBS

1. 1st site visit (2000-10-23 ~ 2000-10-27)

Name PurposeK.Sugiura Explanation for F/S investigation and General investigation for energy balance in refineryM.Sakurai Investigation for Energy condition in Philippines and Energy balance in refinery

Date Stay1st Oct. 23 Departure from Japan Manila Manila2nd Oct. 24 Site investigation Petron Bataan refinery Manila3rd Oct. 25 Site investigation Petron Bataan refinery and Limay Manila4th Oct. 26 Site investigation Limav Manila5th Oct. 27 Arrival at Japan Arrival at Japan

2. 2nd site visit (2000-11-13 ~ 2000-11-18)

Name PurposeK.Sugiura To obtain detailed data. Confirmation of content for investigation and final reportM.Sakurai Information collection for Power plant, Construction work, Transportation, etc.

Date Stay1st Nov. 13 Departure from Japan Manila Manila2nd Nov. 14 Pre-meeting Mitsui & Co., Ltd. Manila branch Manila3rd Nov. 15 Site investigation Petron Bataan refinery and Limay Manila4th Nov. 16 Site investigation Petron Bataan refinery Manila5th Nov. 17 Information collection Manila Manila6th Nov. 18 Arrival at Japan Arrival at Japan

3. 3rd site visit (2001-03-11 ~ 2001-03-17)

Name PurposeK.Sugiura Explanation of final report submitted to NEDO and Acceptance of report contentM.Sakurai Answer for question from refinery and Confirmation for inland transportation in refinery

Date Stay1 st Mar. 11 Departure from Japan Arrival at Manila Manila2nd Mar. 12 Pre-meeting Mitsui & Co., Ltd. Manila branch Manila3rd Mar. 13 Site investigation Petron Bataan refinery Manila4th Mar. 14 Internal meeting Mitsui & Co., Ltd. Manila branch Manila5th Mar. 15 Internal meeting Mitsui & Co., Ltd. Manila branch Manila6th Mar. 16 Site investigation Petron Bataan refinery Manila7th Mar. 17 Arrival at Japan Arrival at Japan

Record of Internal meeting in Japan MBS

1.1st internal meeting (200Q-Q9-06)Place Mitsui & Co., Ltd.Attendance MBS M. Sakurai, M. Kamishima, S. Kataoka * Confirmation of F/S purpose

* Confirmation of F/S outline* Confirmation of contract item* Adjustment of F/S schedule

OEC T. KyozukaCEC N. Ono, H. Noda

2. 2nd internal meeting (2000-10-11)Mitsui & Co., Ltd.Place

3. 3rd internal meeting (2000-11 —09)Place Mitsui & Co., Ltd.Attendance

T. KyozukaM. Sakurai, S. Kataoka, K. Sugiura

N. Ono, H. Noda

* 1 st site visit report* Check for required data* 2nd site visit check item* 2nd site visit preparation

Attendance MBS S, Tatebe, M. Sakurai. M. Kamishima, S. Kataoka, K. Sugii * 1st site visit check item* Confirmation of required data* Condition of refineryN. Ono, H. Noda

4. 4th internal meeting (2000-12-21)Place Mitsui & Co., Ltd.Attendance MBS S. Tatebe, M. Kamishima, S. Kataoka, K. Sugiura * 2nd site visit report

* Check for required data* Discussion of proposed system* Confirmation & adjustment of report

OEC T. KyozukaCEC N. Ono, H. Noda

5. 5th internal meeting (2001-02-02)Place MBSAttendance MBS S. Tatebe, M. Sakurai, M. Kamishima, S. Kataoka, K. Sugii * Additional data analysis

OEC T. Kyozuka * Basic spec, for proposed systemCEC N. Ono, H. Noda * Schedule adjustment for report

6. 6th internal meeting (2001-02-20)Place MBSAttendance MBS S. Tatebe, M. Sakurai, M. Kamishima, S. Kataoka, K. Sugii * 3rd site visit check item

OEC T. Kyozuka * Confirmation & adjustment of reportCEC N. Ono, H. Noda

7. 7th internal meeting (2001-03-22)Place CECAttendance MBS M. Kamishima, S. Kataoka, K. Sugiura * 3rd site visit report

OEC T. Kyozuka * Confirmation of final report contentCEC N. Ono, H. Noda

Note) MBS: Mitsui Engineering & Shipbuilding Co., Ltd. OEC: Owner’s Engineers Corporation CEC: Cosmo Engineering Co., Ltd.

Attachment:

3. Related data

3-2 Photographs shot around refinery

- Attachment 3- 2 -

Attachment:

3. Related data

3-3 Presentation materials on site visit (1)

General explanation on the purpose of the site visit

and power generation facilities

- Attachment 3- 3 -

Attachment:

3. Related data

3-4 Presentation materials on site visit (2)

- Energy conservation in refinery

- Attachment 3- 4 -

Energy conservation in refinery

November,2000

i

1. History2. COPS3. Cosmo’s organization4. Cosmo’s object5. Energy conservation law of Japan6. Energy consumption7. Measures

History

1) 1970‘s: Oil CrisesRise of the energy cost —Investment for energy saving

ex. Heat recovery2) 1980’s: Fall of the energy cost

Decrease of the return on investment for energy saving —Operation improvement

ex. Installation of Advanced Process Control3) 1990’s: Progress of technology

Installation of new technology —Direct cost down

ex. Installation of co-generation system4) Recently: Global warming problem

COPS -1 (The 3rd Conference of the Parties to the Climate Change Convention)

■Period: December of 1997 "Place: Kyoto,Japan ■Background:

Global warming has become a big problem, disrupts temperature balance and global ecosystem caused by excess release of C02 and other greenhouse gases

Kyoto ProtocolEmissions to be reduced

level :6%(Japan) as compared to 1990 by when: 2008-2012

C0P3 -2

MITI comments after COP3 (extracts)

1. Measures for emission reduction should be taken A.S.A.P.2. C02 is main greenhouse gas.

About 90% of C02 is generated from Energy.—> Measures on Energy, are important.

3. Main measures■ Revision of Energy Conservation Law

— to boost to achieve efficient energy usage in factories— to encourage to develop new technology for energy saving

PAJ(Petroleum Association of Japan):Voluntary action program to protect global environment

Oil Company:Action program for global environment

I Global environment committee| (Chairman:President, Established:June of ‘96)

Oil Company’s organization -1________

sub-committeesEnergy conservation Technology transfer

Technology development Petrol stationRecycling Transportation

Philanthropy Environmental protection

T

Oil Company’s organization -2

Sub-committee for Energy conservation indicate object

study and do measures Task team for Energy conservation

Secretariat: Refining & Tech. Dept. Members: Technical Affairs Sect,

of 4 refineries

To reduce compensated unit energy consumed

Level: 10% by 2010 as compared to 1990

Oil Company’s object_____

Compensated unit energy consumed[L/KL]

= Total energy consumed equivalent to CrudeX (Charge qty to each unit x unit complexity factor)

Energy: Fuel oil + Electricity + Steam

policiesFundamental Measures for

tax reductionMeasures for factories

Obligation of factories(7items) of energy manager

Government license

Obligation of energy consumer's efforts

judgement

Announcement of standard value for

Energy conservation law of Japan -1

Assignment of energy managerPeriodical report of energy consumedInstruction

10

Energy conservation law of Japan -2

Obligation of factories

1. Rationalization of fuel combustion2. Rationalization of heating, cooling and heat transfer3. Prevention of heat loss by radiation, conduction, etc.4. Recovery of waste heat5. Rationalization of heat conversion into power, etc.6. Prevention of electricity loss by resistance, etc.7. Rationalization of conversion of electricity into power, heat, etc.

11

Energy conservation law of Japan -3

Standard value for judgement (example)Standard value (for control) Target value (for effort)

1 . Excess air number Fuel Fuelfor Boiler and Heater Liquid Gas Liquid Gas

cuEvaporation 3 0+ ton/h 1 . 10-1. 2 5 1 . 10-1. 2 0 1 . 0 5 — 1. 15 1 . 0 5-1. 15

oon Evaporation 10 — 30 ton/h 1 . 2 0-1. 3 0 1 . 20-1 . 30 1 . 2 0-1 . 2 5 1 . 2 0-1. 2 5

Heater 1 . 2 5 1 . 2 5

2. Temp, of outer wal1 Top Side Bottom Top Side BottomTemp, of Heater (or Boiler) inside 1, 3 0 0+° C 1 4 0 1 2 0 1 8 0 1 2 0 1 1 0 1 6 0

1, 1 00'C-1, 3 0 0° C 1 2 5 1 1 0 1 4 5 1 1 0 1 0 0 1 3 5

3. Temp, of Boiler exhaust gas Fuel FuelLiquid Gas Liquid Gas

Evaporation 3 0+ ton/h 2 0 0 1 7 0 1 6 0 1 5 0Evaporation 10 — 3 0 ton/h 2 0 0 1 7 0 1 6 0 1 5 0

12

Energy consumption -l

All Japan

Year Crude 2 (CF*Charge)/a a*b Energy Unit Energy d/aa b c d e (d/c) f

l.OOOKL 1.000KL KL-COE L-COE/KL %

1990 205,612 6.143 1,263,171 12,866,269 10.19 6.31991 216,813 6.162 1,336,092 13,773,377 10.31 6.41992 229,257 6.213 1,424,281 14,353,750 10.08 6.31993 234,573 6.465 1,516,517 15,012,022 9.90 6.41994 246,414 6.508 1,603,663 15,604,913 9.73 6.31995 247,394 6.590 1,630,335 15,800,986 9.69 6.41996 242,918 6.956 1,689,752 16,154,199 9.56 6.71997 250,984 7.251 1,819,874 17,075,934 9.38 6.8

1998 243,404 7.354 1,789,993 16,725,000 9.34 6.91999 241,099 7.672 1,849,712 16,765,000 9.06 7.0

13

Energy consumption -2

T rend of Unit Energy

R 9.6

[Year]

14

Energy consumption -3

Factors of energy consumption increasing

•Heavy oil up-grading- Cracking

"Severe quality specification- Low sulfur diesel- Low benzene gasoline

"Extension of continuous operation period -2years to 4years

Measures -1

PAJ’s voluntary planExpected effect [%]

1. Advanced energy control 3 ~4- Investigate the room for saving- Control finely,using computer control,etc

2. Steam reduction 2 ~3- Check pressure, balance,etc

3. Waste-heat recovery 2~3- Investigate the possibility of waste-heat utilization

4. New technology 1 ~2-Low temp, waste-heat utilization -New catalyst-Advanced heaters and heat exchangers -Advanced separation of gas/liquid

Measures -2

Room for savingfPAJ’s study Vi1.Heaters/BoilersTarget Flue gas

00%(Excess air No.) Temp. [ ClHeaters 4.2 (1.25) 150Boilers 1.9 (1.10) 150

L

:example-HeatersAPH WHB No.of unit Flue gas ave.data Expected effect

[kl-COE/year]02[%] Temp.[C] 02 Temp.

0 0 25 3.1 171 5,000 16,0000 X 162 3.3 178 15,000 87,000X 0 157 3.0 229 19,000 158,000X X 191 3.4 310 18,000 166,000

Total 535 3.2 223 57,000/^- 427,00016.000

Expected effect fkl-COE/year]o2 Tsmpr-—

Heaters 16,000 * 166,000Boilers 14,000 20,000Total 216,000

17

Measures -3

Room for savingfPAJ’s studyV2

2.Run-down coolersInlet temp. [C]

No. of unit

ave. R/D [kl/hl

Expected effect [kl-COE/year]

~ 50 101 33.4 —

50 ~ 100 289 71.5 —

100 ~ 150 301 74.2 —

150 ~ 200 152 51.9 203,000200 ~ 45 50.6 88,000Total 888 63.7 291,000 <=> 95.000 ~

145.0003.Total expected effect

310,000 ~ 360,000 kl-COE =2.0 ~2.3%

Measures -4

Examples of measures carried out

• Pinch Technology■ Co-generation■ Computer control; DCS,AFC■ High efficiency & Small pressure drop heat exchanger■ Capacity-up & Rearrangement of heat exchangers■ Direct charge■ 02% Reduction of heaters■ Low pressure operation of distillation■ FCC gas expander■ H2 recovery by membrane

Attachment:

3. Related data

3-5 Presentation materials on site visit (3)

- Flue gas desulfurization system

- Attachment 3- 5 -

Presentation and Discussion

Flue Gas Desulfurization SystemTo: Petron Corporation

March 2001

Cosmo Engineering Co., Ltd.

Environmental Pollution

Human activity occurs- Global Warming- Thinning of Ozone Layer- Soil and Water Pollution- Marine Pollution

Acid RainDefoliation SOx Causes These Problems

SOx Emission Regulation(Japanese Case)

■ Government Regulation- For each emission equipment- Total emission volume from factory

■ Additional Regulation by local government- Total emission volume from factory

Flue Gas Desulfurization System

■ Magnesium Hydroxide Process■ Plant Scale : 5,000 to 500,000 Nm3/hr■ Application : FCC, RFCC

■ Limestone-Gypsum Process■ Plant Scale : 100,000 to 3,000,000 Nm3/hr■ Application : Power Plant

■ Caustic Soda Process■ Plant Scale : to 150,000 Nm3/hr■ Application : Recently, no construction

Cost Comparison

■ Installation CostMagnesium Process « Limestone Process

■ Absorbent CostMg(OH)s > CaCOa Ex) SO2: lkgmol Reaction

Mg(OH)2 58.3kg => $14.8

CaCOa 100.1kg => $12.7

■ By-Product MeritMgS04: Nothing

CaS04 2H20 172.2kg=> $5.8

Typical Composition of Sea Water

Composition NaCl MgC12 MgS04

Concentration(Wt%) 2.669 0.328 0.210

Composition CaS04 KC1 MgBr2

Concentration(Wt%) 0.138 0.072 0.008

Process Comparison Table

Process Magnesium Limestone-Gypsum

CausticSoda

Absorbent Mg(OH)2 CaC03 NaOH

AbsorbentCost o © A

By-Product MgS04(Discharge)

CaS04(Recovery)

Na2S03(Recovery)

InstallationCost © A o

By-ProductMerit A O ©

Application Small~Medium Large Small

Conclusion

■ We propose Magnesium Hydroxide Process at this time.

■ Limestone-Gypsum Process is also comparable to that at Japanese case.

■ Market information and cost of chemical goods are required that detail investigation

Attachment:

3. Related data

3-6 Acceptance criteria for residual oil

- Attachment 3-6 -

Criterion for residual fuel

The decision of whether it is able to adopt as fuel of the low-speed diesel engine is based on the criterion shown at the following.However, if fuels exceeding the following reference values, it is individually investigated case by case.

Item Unit Reference value (Limit)1 Specific gravity

(15‘C/4'C)Restriction is not established.Usual < 1.05

2 Kinematic viscosity(at loot)

cSt < 10,OOOcSt (equivalent to 20cSt at 250°C)

3 Flash point °C Flash point > Temp, at 1, OOOcSt + 10°C4 Ash wt% < 0.25 Carbon residue (CCR) wt% < 306 Asphalten wt% < 207 Sulphur wt% < 5.58 Vanadium mg/kg(ppm) < 6009 Sodium mg/kg (ppm) < 100

10 C/H Restriction is not established.Usual 8~9

11 Particle Tri-chloromethane (CHC13) insoluble < 0.01 wt%Particle larger than 2 microns in diameter is to be removed in pretreatment stage. However, in case of carbonaceous particle, particle smaller than 4 microns in diameter can be used.

12 Compatibility (1:1) Fuel switching is done between fuel with No. 3 or less compatibility. However, in case of frequent fuel switching such as DSS operation, it is recommended to be done between fuel with No.2 or less compatibility.

13 Thermal stability Residual oil produced by thermal decomposition like Visbreaker residue is generally said to be that of thermal instability. Therefore, the detailed investigation is to be done before using this kind of thermal decomposition residual oil as fuel in the power plant. However, the vacuum residue (VR) is not being decomposed thermal ly, there is no problem even if it is heated up to 250°C and the thermal stability is kept to this temperature.

Attachment:

3. Related data

3-7 List of references

- Attachment 3- 7 -

List of referencesPage Reference Materials

1 1-4 CIA World Factbook 19992 1-6 Rika Nenpyo (Historical Scientific Data Book), National Astronomical Observatory of Japan

3 1-7 Philippines Statistical Year Book4 1-11 Minutes of World Bank symposium

5 1-13,16 UNESCO 1999 Phillipines Statistical Yearbook6 1-16 Federation of Asian Chemical Society symposium material

7 1-17 87-'98 National Statistical Information Center official figures

8 1-17 '99-'00 National Statistical Information Center information

9 1-18 National Statistical Information Center information for 199710 1-19 Special Economic Zone Act of 199511 1-19,20,21,22 Philippines Economic Zone Authority (PEZA) Home page12 1-23 National Statistical Coordination Board homepage, 2000

13 1-24 Ministry of Foreign Affairs Homepage, "Various countries/regions and their relations with Japan"

14 1-25,26, 31 Philippine Energy Plan (PEP)15 1-27,28 EIA Philippine Country Analysis Brief16 1-28,29,30,32 Department of Energy (DOE)17 1-28 Oil and Gas Journal18 1-29,30,31 USA EIA report19 1-30 "Electric industry in overseas countries", edited by Japan Electric Power Information Center,

Inc.20 1-32 OECD Energy Balancel996-199721 1-39, 40 Philippine Clean Air Act 1999 Air pollution handbook edited by Air Pollution Research

Association22 1-42 DENR Administrative Order No.34 "Current situation and problems of environments in

Asia, " edited by Economic Cooperation Department, Policy Bureau, Ministry of International Trade and Industry

23 1-44 "Jamagazine" of Japan Automobile Manufacturers' Association24 1-44,45 1999 issue of Asian Automobile Industry Magazine25 1-45 Information from National Statistical Coordination Board26 1-51 "Planning and Designing Manual for Natural Gas Cogeneration: 2000", edited by The Japan

Institute of Energy27 1-67,68,69 Economic Indicator28 1-67,68,69 Philippine Energy Plan29 1-70 Energy Economy, 2000 Autumn issue30 2-2 article in E-Z Map 2001 Bataan31 2-25 Petron Corporation's homepage32 2-27 "Rapidly changing Asian oil market", Edited by Agency of Natural Resources and Energy33 2-27,28 Petron Corporation's statement of accounts (1998 edition)34 2-61 Earth Environments Strategy Research Organization: Outline of discussions on designing of

a system for domestic trade in emission rights in countries in which introduction of the system is expected version 5

35 2-61 Data publicized by the Environmental Protection Agency (EPA)36 3-11,12,13 IPCC Guidelines for National Greenhouse Gas Inventories: Reference Manual 1.4.1

Approaches for Estimating C02 Emission37 4-2,5 "Business Guide Philippines" by JETRO

Any part or a whole of the report shall not be disclosed without prior consent of International Cooperation Center, NEDO.

Phone 03 (3987) 9466Fax 03 (3987) 5103