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Offshore oil searches coming back to fashion

SINGAPORE — Surveying the ocean floor for oil and natural gas reserves is gradually emerging from a multi-year slump, everywhere apart from Asia.

That’s despite Asia being the world’s biggest consumer of oil, having by far the strongest demand growth while seeing its production fall faster than anywhere else. The reasons for Asia’s dearth in offshore exploration and production (E&P) include high costs in Australia’s promising waters, declining reserves in production hotspots Malaysia and Indonesia, as well as territorial disputes in the oil- and gas-rich waters of the South China Sea.

“We only have two 3D vessels in Asia-Pacific, since there are fewer opportunities and less activity in that region,” said Bard Stenberg, vice-president at Norwegian offshore survey company PGS, adding that most of his company’s vessels were in the Atlantic.

A 2017 and 2018 activity map by geophysical surveillance firm TGS shows the most activity in the North Atlantic.

A similar map by Bernstein Research showed the Asia-Pacific basin to have only four minor offshore developments of under 50,000 barrels per day (bpd).

That compares to five major developments (above 50,000 bpd) and 11 minor ones in the Atlantic.

Asia’s dearth comes despite the region’s huge oil deficit, resulting from booming demand and declining output.

In one of the most promising regions, Australia, the main problem is cost, in part due to a requirement for rigs to pay for Australian crew once in Australian waters.

“Once any foreign-flagged vessel is in Australian waters, the ship operator has to pick up Australian workers… They work 12 hours a day, seven days a week for four weeks, then get 4 weeks off,” said Christy Cain of the Maritime Union of Australia.

When oil prices were high, this was not a big problem, drillers said. But in times of cheaper oil and low profit margins, the added cost deters explorers, several said.

In another promising area, the South China Sea, conflicting territorial claims, especially between China and Vietnam, have hindered E&P activity.

Meanwhile, in Asia’s most established offshore oil and gas production basins of Malaysia and Indonesia, recoverable reserves are depleting.

Malaysia’s state-owned Petronas, Southeast Asia’s biggest oil producer, is increasingly focusing on downstream projects like the Pengerang Integrated Complex (PIC) in the southern state of Johor.

From 2019, PIC will refine crude oil into fuel and petrochemical products.

Significant amounts of its crude will come from Saudi Arabia.

With little E&P activity, Asia’s oil import bill — which has already more than doubled since 2000 to over $420 billion a year — will rise further, likely above $500 billion in 2017, leaving other regions to cash in on Asia’s oil thirst.

COUNTING HELICOPTERS
Gauging the health of the secretive offshore industry is difficult.

But dozens of mothballed rigs and support vessels sit idle in southern Malaysia’s Johor river delta, waiting to be used or scrapped.

Yet cautious optimism is emerging.

“Activity to support new development projects may increase slightly (between 2018 and 2020), but is unlikely to approach historical high levels (2013/14),” Petronas said in an outlook this month.

Douglas Westwood, which monitors helicopter activity to and from offshore vessels, has a similar view.

“The offshore helicopter market has finally started to recover following three years of decline,” Westwood said, although it added that average annual growth between 2018 and 2022 will still only be one percent.

“Global utilization will average 59% over the forecast,” it said, up from a paltry 54 percent in 2017.

At the root of the industry malaise lies rampant overproduction in the years running up to 2014, which crashed crude prices from over $100 per barrel in 2014 to below $30 in 2016.

E&P companies were among the first to feel the bite of aggressive industry cost slashing.

Firms in the seismic oil surveillance sector, including Polarcus, PGS, and Electromagnetic Geoservices have seen their share prices crash since 2015, in some cases by over 90%.

Only a production cut led by the Organization of the Petroleum Exporting Countries has stabilized Brent above $50 a barrel since mid-2017.

With oil demand healthy, the offshore industry hopes companies will start spending on future output again.

“We’re hoping that it’s going to pick up next year,” said Cain of the Maritime Union of Australia.

In a sign that even in Asia-Pacific there may be some more activity, the geothermal surveillance ship Polarcus Naila left Singapore in early December for a seismic mission in the Bonaparte Basin, off Australia’s northwest coast.

Speaking to Reuters during a visit to Singapore by the ship, one of the Naila’s senior crew members said he hoped things would go from “worst to bad.” — Reuters

PLDT allots ‘record’ P50-B capex for 2018

PLDT, Inc. is setting aside a record high capital expenditure budget of least P50 billion next year, as it works on improving its network amid the looming entry of a third telecommunications player.

“We will announce a historic high capex next year, north of P50 billion,” PLDT Chairman, President and CEO Manuel V. Pangilinan told reporters on Wednesday.

Next year’s capital spending is up by nearly a third from this year’s P38 billion, and will be used to finance the telecommunications giant’s network expansion and improvement of mobile and fixed-line services.

“We’ll make sure that we’ll future-proof our network,” Mr. Pangilinan said.

PLDT, he said, is “trying to get ready in case it happens as early as the first quarter,” referring to the entry of China Telecommunications Corporation (China Telecom), the third player chosen by the Chinese government to invest in the Philippines.

China Telecom’s local partner, however, has yet to be determined, since the Constitution limits foreign ownership in certain industries such as telecommunications to 40%.

President Rodrigo R. Duterte has said he wants a third telecommunications provider to start operating by the first quarter, which would challenge the duopoly of PLDT and Globe Telecom, Inc. in the country.

Reuters reported that China Telecom is still studying the plan to invest in the Philippines.

“China Telecom is currently having a preliminary study on the investment opportunity in the Philippines and no concrete plan has been determined yet,” a company spokeswoman was quoted by Reuters as saying.

FUNDING
Mr. Pangilinan said PLDT’s capex for 2018 will be funded through the sale of assets.

“Well, the normal level of around P40-ish billion, the EBITDA (earnings before interest, taxes, depreciation and amortization) can handle that. The incremental capex of around P10 billion, we’ll fund through the sale of assets. We still have receivables from MPIC from the sale of Beacon, so we might sell some of that,” he said.

PLDT has remaining receivables worth P15 billion from parent Metro Pacific Investments Corp. with respect to shares of Beacon Electric Asset Holdings, Inc. and a 6.1% stake in German startup Rocket Internet SE valued at P12 billion.

Mr. Pangilinan last November said PLDT upgraded its recurring core profit guidance to P22 billion from the original P21.5 billion, after the nine-month tally rose 5% year on year to P17.36 billion from P16.55 billion.

PLDT has invested around P300 billion or nearly $6 billion in the last decade for its fixed and wireless network infrastructure, which now has 150,000 kilometers of fiber optic cables.

In October, PLDT said it is investing around P7 billion ($136.7 million) in a new Trans-Pacific cable system called Jupiter. The system will be built and operated by a consortium of global firms including Amazon and Facebook.

Hastings Holdings, Inc., a unit of PLDT Beneficial Trust Fund subsidiary MediaQuest Holdings, Inc., has a stake in BusinessWorld through the Philippine Star Group, which it controls. — Patrizia Paola C. Marcelo

Strong demand boosts yields on 7-day deposits

By Melissa Luz T. Lopez,
Senior Reporter

YIELDS on week-long term deposits dropped yesterday amid strong demand as the central bank decided to stop offering month-long instruments to target excess funds held by lenders.

Banks swarmed the seven-day tenor as bids reached P46.212 billion, well above the P40 billion dangled by the Bangko Sentral ng Pilipinas (BSP) on Wednesday. This also reversed the P38.92 billion in total tenders received the previous week which settled below the offering.

Wednesday’s auction marked the first time that the central bank removed the option to bid for 28-day term deposits as lenders had a smaller surplus of cash ahead of the holiday season.

The average yield dropped to 3.4004% on the back of strong appetite for these placements, down from the 3.4542% rate fetched during the Dec. 13 offering. Banks asked for returns ranging from 3.125-3.5%.

The term deposit facility (TDF) is currently the central bank’s main tool to capture excess funds in the financial system by allowing banks to park the extra cash they hold under the window, in exchange for a small return.

Through this, the BSP expects to influence market rates to log closer to the 3% benchmark rate, coming from below the 2.5% floor of the interest rate corridor.

BSP Deputy Governor Diwa C. Guinigundo said that lenders were sitting on a smaller stash of idle funds under the TDF, which merits a drastic reduction in the weekly auction volume.

“Based on our liquidity forecast, we need to mop up as much as P40 billion. Since the 28-day TDF was scrapped and the BTr (Bureau of the Treasury) rejected all bids recently, banks competed for the unchanged volume of the seven-day TDF,” Mr. Guinigundo said in a text message to reporters.

The Treasury rejected all bids for reissued five-year bonds on Tuesday for the fourth consecutive time after the government raised P255.4 billion in retail bonds in November.

Banks instead chose to use their money supply by granting more loans, buying foreign exchange, paying off debts, and acquiring additional investments, the central bank official said.

Anticipation for increased cash requirements over the Christmas season — or when families withdraw more cash to spend for celebrations and gift-giving — may have also prodded banks to hold on to more cash rather than lock them in for a month under the TDF.

For next week, the BSP again kept the auction volume at P40 billion for the week-long tenor and none under the 28-day term. This offering is the smallest since the P30-billion inaugural offering in June last year when the weekly TDF auctions started.

Mr. Guinigundo has said that the shorter tenor lends more “flexibility” for banks in managing their funds and servicing client demands.

The BSP held fire on monetary policy at its policy meeting last week as inflation remains within target and with economic growth remaining upbeat, which came despite a fresh rate hike in the United States that would trigger rising global yields.

As expected, the Monetary Board kept borrowing rates unchanged during its eighth and final policy review for 2017.

The BSP will hold its next monetary policy review on Feb. 8, 2018.

Dennis Uy snaps up H2O Ventures

DAVAO-BASED businessman Dennis A. Uy continues his acquisition spree with the purchase of shares in Philippine H2O Ventures Corp. (H2O) worth P327.75 million, in a potential backdoor listing move by his property firm. 

In a disclosure to the stock exchange late Tuesday, H2O’s parent firm Jolliville Holdings Corp. said its board of directors approved a memorandum of agreement for Mr. Uy’s Udenna Development Corp. (UDEVCO) to buy out all its shares in H2O. Jolliville and its affiliates currently own 62.006%, or 150.82 million stocks, of H2O’s total outstanding shares. 

Incorporated in 2009, H2O is a holding firm that has core interests in water supply primarily through its subsidiary Calapan Waterworks Corp. (CWWC). The company serves a total of 22 urban barangays and 13 adjoining rural barangays, for total household connections of 13,384 as of 2016. 

For the transaction, H2O will be spinning off all its existing business and assets, including all its shares and interest in CWWC. 

“H2O shall also collect all receivables, settle all its obligations, assign its contractual interests, transfer or reassign all of its employees and settle and dissolve its retirement fund,” Jolliville said in its disclosure. 

The acquisition is currently valued at P327.74 million and 62.006% of the remaining cash assets of H2O once the deal is closed. 

For its part, UDEVCO will be launching a mandatory tender offer for the H2O shares, as per the Securities Regulation Code. 

UDEVCO is the property investment arm of Mr. Uy’s holding firm, Udenna Corp. Under its helm is Lapu-Lapu Land Corp., which is currently developing a 12.5-hectare integrated resort and development estate in Mactan Island in Cebu. 

The $341-million Lapu-Lapu Leisure Mactan project will house a casino, retail complex, and hotels. The company target to complete the development of the estate by 2022, but looks to start operations as early as 2019. 

In an interview earlier this month, Udenna Director for special projects Raymond Martin M. Escalona said the group may go for listing of Lapu-Lapu Land, noting that they are still mulling the possibility of an initial public offering (IPO) or a backdoor listing. 

A backdoor listing is pursued when a privately held company cannot meet the criteria for an IPO.

Mr. Uy, a known supporter of President Rodrigo R. Duterte, has recently been ramping up the expansion of his businesses. In June this year, the businessman conducted an initial public offering for his logistics arm Chelsea Logistics Holdings Corp., where the company raised P5.84 billion.

Aside from Chelsea, Mr. Uy also owns listed companies Phoenix Petroleum Philippines, Inc. and 2GO Group, Inc. — Arra B. Francia

Mnuchin to pay up as Treasury sales double

WITH THE US about to sell the most debt in eight years, Treasury Secretary Steven Mnuchin may find himself relying on a buyer base that needs to see higher yields before loading up.

Government debt sales are set to more than double in 2018, lifting net issuance to $1.3 trillion, the most since 2010, according to JPMorgan Chase & Co. estimates. With the Federal Reserve shrinking its bond holdings and deficits poised to swell even before taking into account the tax overhaul, all signs point to higher financing costs.

The challenge for Mnuchin is that some analysts predict buying by central banks — a pillar of support this year — may fade, in part as international-reserve growth stabilizes. In the view of Credit Suisse Group AG, that will put the onus on more price-sensitive buyers, particularly a  group that the Fed classifies as including households, hedge funds, private-equity firms and trusts for wealthy individuals.

“The household sector will have to absorb a significant fraction of new supply,” said Praveen Korapaty, Credit Suisse’s head of global interest-rate strategy. “These guys are asset managers and hedge funds and even households, with a lot of them price-sensitive. They will buy at certain levels, and if yields are low they will maybe not be as interested. That argues for higher yields.”

BUYER SPOTLIGHT
The household category held $1.345 trillion of Treasuries as of September, down from $1.409 trillion at the end of last year, Fed data show. That decline came as 10-year yields fell last quarter to the lowest levels of 2017.

By Credit Suisse’s calculation, with the Fed pulling back and issuance surging, the slice of debt sales available for price-elastic buyers to absorb will rise to about 60% by the end of 2019, from 54% now. It would be their biggest share since the early 2000s.

The Treasury said last month that it expects to unveil bigger coupon auctions in February for the first time since 2009, and dealers see issuance rising for years to come. With entitlement costs heading higher, the US debt burden was already projected to increase by $10 trillion in the next decade. Now the tax overhaul could boost the deficit by $1 trillion in the period.

JPMorgan’s 2018 net issuance tally of $1.3 trillion includes $847 billion of coupon debt, ballooning from an estimated $409 billion this year amid a darkening fiscal backdrop. The federal deficit may exceed $1 trillion by fiscal 2020, from about $666 billion in 2017, according to the most dire estimates by primary dealers. Meanwhile, the Fed could roll off about $250 billion of Treasuries in 2018.

The catch is that demand from China, which with almost $1.2 trillion of US government debt is America’s biggest foreign creditor, may be about to ebb. The bulk of China’s buildup came as it boosted foreign-exchange reserves to help offset a strengthening yuan. But some forecasters see yuan stability in 2018, meaning limited need for currency intervention.

PENSION NEEDS
It’s not just the household sector that would need to step up should China back away.

Pension funds, which held about $2.3 trillion of Treasuries as of September, are set to add more in 2018 as they shift their focus from equities and corporate debt given stretched valuations, Societe Generale strategists predict.

The net purchases by pensions, along with insurance companies and state and local-government retirement funds, should rise to $110 billion in 2018, versus $90 billion this year, JPMorgan forecasts.

Private and public pensions’ holdings increased in the third quarter by $266 billion after falling in the first half of the year, Fed data show.

“The defined-benefit pension plans are going to be buying a lot more long-term Treasuries,” said Guy Haselmann, a managing director at OpenDoor Trading LLC, a Treasuries trading platform. Private pensions are trying to avoid penalties related to being underfunded, he said.

Many analysts see pensions and their quest to add duration as having  helped fuel this year’s dominant bond-market phenomenon — the relentless flattening of the yield curve. Their demand is also evident in the surging amount of notes and bonds split into principal- and interest-only securities, known as Strips.

BANKS’ RETURN
US banks, which are on pace to lighten up on Treasuries in 2017 for the first time in four years, should increase holdings next year by roughly $150 billion, Credit Suisse forecasts.

That’s partially due to the fact that the Fed’s tapering will reduce bank reserves, pushing these firms to buy more Treasuries to replenish holdings of high-quality liquid assets.

The wave of supply and the questions about demand come amid expectations for higher yields with the prospect of quicker US growth and inflation.

The Fed projects three more rate hikes in 2018, and firms including Goldman Sachs Group Inc. predict 10-year yields will rise to 3% in a year, from 2.46% now.

“There should be some overall repricing of yields higher, albeit modestly, on the back of the rising supply picture,” said Subadra Rajappa, head of US rates strategy at Societe Generale. “The amount of the supply increase will be quite large, and it’s not clear how much support is going to come from overseas.’’  Bloomberg

Peso extends climb against dollar

THE PESO extended its climb against the dollar on Wednesday as the market continued to cheer the enactment of the government’s tax reform package amid delays in the US’ own plans to amend levies.

The local currency ended the session at P50.29 versus the greenback yesterday, up ten centavos from its P50.39-per-dollar finish on Tuesday.

The peso opened the session stronger at P50.25 against the dollar, which was its best showing for the day. Yesterday’s intraday low stood at P50.34 versus the greenback.

Dollars traded, however, slid to $490.8 million from the $604.7 million that changed hands in the previous session.

Traders interviewed on Wednesday said the peso’s strength was still attributable to the signing of the tax reform program’s first tranche.

“[Yesterday], we saw the peso appreciate — this is still connected to the [passage of the] TRAIN (Tax Reform for Acceleration and Inclusion) bill,” Ruben Carlo O. Asuncion, chief economist at UnionBank of the Philippines, said over the phone.

On Tuesday, President Rodrigo R. Duterte signed the TRAIN bill, which provided tax cuts and exemptions for personal income and slapped higher levies on commodities such as fuel, sweetened beverages, among others.

Mr. Asuncion noted that while the passage of the local tax reform was the main driver of yesterday’s trading, delays in the US’ own tax plan also boosted the peso.

“The peso appreciated today amid further delays from the US House in passing the US tax reform bill,” another trader said in an e-mail on Wednesday, adding that they are expecting the Republican tax bill to be signed by US President Donald J. Trump on Sunday.

Initially, the measure received a 227-203 vote in the House early Tuesday.

Once signed, the new American tax structure will slash tax rates for corporations and reorganize individual taxes.

For today, Mr. Asuncion expects the peso to trade within the P50.10 to P50.50 level, while the trader gave a slimmer range of P50.15 and P50.45.

“The local currency might slightly weaken [today] against the dollar ahead of likely higher third quarter year-on-year US gross domestic product (GDP) growth,” the trader said.

Meanwhile, most Asian currencies were tepid on Wednesday with the baht staying under pressure ahead of the Bank of Thailand’s policy review where it is expected to keep rates near record lows. — with Reuters

Petron to start refinery expansion by next year

By Victor V. Saulon, Sub-Editor

PETRON Corp. is expanding the capacity of its petroleum refinery in Limay, Bataan, which would bring its output to 270,000 barrels daily by 2019, its president said.

Ramon S. Ang, who is also Petron chief executive officer, said the San Miguel Corp. subsidiary has already acquired land near its existing facility, which will be used for the expansion.

“We will be adding another 90,000 barrels a day, so from 180,000 barrels a day, we will be hitting 270,000 barrels a day,” he told reporters.

Petron owns and operates a petroleum refining complex in the Bataan town with its own piers and two offshore berthing facilities. It also has a power plant that serves the needs of the refinery.

The company started in 2010 the Petron Bataan Refinery Master Plan Phase 2 Upgrade (RMP 2). Completed by the end of 2014, the upgrade turned the Bataan facility into a full conversion refining complex that can convert oil production into higher value products such as gasoline, diesel, jet fuel and petrochemicals.

So far, Mr. Ang said the refinery has been performing at optimum level. For instance, he noted production on both Dec. 17 and 18 stood at 179,000 barrels, while on Dec. 16 it reached its full capacity of 180,000 barrels.

Napakaganda ng takbo [ng Petron refinery],” he said. “Pabuti nang pabuti ang takbo.

Mr. Ang said the capacity expansion project would start next year and should be completed by 2019.

The new production facility would be built on an adjacent land that Petron bought from private owners.

Aside from the refinery, Petron owns and manages an oil distribution infrastructure with 30 depots, terminals and airport installations and approximately 2,200 retail service stations in the Philippines, and 10 product terminals and more than 560 retail service stations in Malaysia.

Mr. Ang said the Petron refinery’s current performance is a far cry from its showing before the upgrade when it was producing only about 80,000 to 90,000 barrels a day.

As of September, Petron posted a consolidated net income of P11.8 billion, up 58% from the previous year’s P7.4 billion. It previously said its “impressive result” had been driven by focusing on high-value segments and sustained sales volumes from its Philippines and Malaysian operations.

Combined sales volumes hit 80.2 million barrels in the three quarters to September, slightly higher than the 79.3 million sold in the same period in 2016.

Mr. Ang said Petron is among the SMC subsidiaries that are performing well so far this year.

Lahat ng organic businesses of [SMC] nagiging more stable na,” he said, citing in particular the food business and petroleum refining. “Pinakamahina is power kasi pabagsakan ng presyo, pero maganda sa bayan.”

Shares in SMC rose 1.84% to close at P110.80 each on Wednesday.

Duterte declares truce with communist rebels

PRESIDENT Rodrigo R. Duterte has declared a suspension of military operations (SOMO) from Dec. 24, 2017 to Jan. 2, 2018.

Presidential Spokesperson Harry L. Roque, Jr., said the “unilateral cease-fire would lessen the apprehension of the public this Christmas season. We expect that the CPP-NPA-NDFP would do a similar gesture of goodwill.”

Earlier, the government had expressed adamance toward the communist rebels, in the wake of its earlier proclamations declaring the termination of peace talks (Proclamation No. 360, which Mr. Duterte issued last month) and classifying the Communist Party of the Philippines (CPP) and New People’s Army (NPA) as terrorist organizations (Proclamation No. 374, issued early this month). However, the CPP remains a legal organization, according to the repeal of the Anti-Subversion Act (Republic Act 1700) by the 9th Congress in 1992.

Sought for comment, peace consultant Randy Felix P. Malayao of the National Democratic Front of the Philippines (NDFP) said in a phone interview: “It has been a tradition for the Communist Party of the Philippines-New People’s Army to declare a unilateral cease-fire, especially on Dec. 24 until January.”

He also noted that revolutionary forces will still be on “active defense.”

“Dahil kahit na may declaration ang government ay lagi naman nilang nilalabag ito (It’s because the government usually violates its own declaration),” Mr. Malayao said.

“We still welcome peace talks kung ito ay magreresolba ng (if it will resolve) armed conflicts. We will always have that. We hope that there will be further developments kahit na sabihin natin na may (even if we say there are already Proclamation 374 and Proclamation 360),” Mr. Malayao also said.

He noted as well that “the Makabayan bloc legislators are already being targeted by the administration” using the two proclamations. — Arjay L. Balinbin

Miners expect muted growth in 2018 due to permit moratorium

THE Chamber of Mines of the Philippines (CoMP) expects growth in 2018 to be held back by the continued moratorium on permits for new projects, with major miners also suffering from rules violations being committed by small-scale operators.

CoMP Chairman Gerard H. Brimo told reporters on Tuesday after the signing of the Baguio Declaration and the Mining Association of Canada’s Towards Responsible Mining (TSM) initiative that while steps have been taken to rehabilitate the industry, issues remain.

“There is no growth until the moratorium on mining permits is lifted. There is no growth so we need to resolve a number of issues in the industry — the ban on open-pit mining, of course, which in reality should have never been implemented,” he added.

Former Environment and Natural Resources Secretary Regina Paz L. Lopez ordered a moratorium on mining permits in July 2016, along with an order to audit all operating mines.

Mr. Brimo also noted that the responsible portion of the mining industry suffers from violations committed by small-scale and illegal miners.

Environment Secretary Roy A. Cimatu himself remarked on irresponsible practices in the Cordillera region by small-scale and illegal miners.

“The Secretary himself pointed it out that if there are accidents or cave-ins that happen close by these illegal activities, most people lump mining together whether it’s small-scale or large-scale — we all get lumped in together,” he added.

“Any accidents caused by them affect our image and that’s really a problem and that’s really the time for the government to try and figure out (which of the operators is mining illegally).” — Anna Gabriela A. Mogato

How a secretive police squad racked up kills in govt’s anti-drug campaign

QUEZON CITY — The police who burst into Kathrina Polo’s house on a rainy night in August 2016, then shot her husband in the head and heart, spoke a language she recognized but didn’t understand: Visayan.

It’s a common language in the southern Philippines. But in Ms. Polo’s poor neighborhood in Quezon City, hundreds of miles to the north, Visayan is rarely heard. “The police kept talking in Visayan because they knew I didn’t understand,” she recalled. Their use of Visayan was a clue to the identity of her husband’s killers.

The officers belonged to what would become the deadliest police station in Quezon City Police District. Called Station 6, or Batasan Station, it is on a violent front line in President Rodrigo Duterte’s war on drugs.

Of the 12 police stations in Quezon City, which is part of Metro Manila, Station 6 was by far the most lethal. Its officers killed 108 people in anti-drug operations from July 2016 through June 2017, the campaign’s first year, accounting for 39% of the city’s body count, according to Quezon City Police District crime reports reviewed and analyzed by Reuters.

Almost all of these killings were carried out by Station 6’s anti-drug unit, the reports show. The officers who formed the core of that unit hailed from or near Davao, the southern hometown of President Rodrigo R. Duterte. They called themselves the “Davao Boys” — and spoke in the region’s language, Visayan.

There were 10 of them, their boss, Lito Patay, told Reuters. He took command of Station 6 in July 2016, shortly after the start of Mr. Duterte’s drug war. Mr. Patay is also from Davao, where he once led a paramilitary police unit. Asked about Station 6’s high death toll under his command, he said his officers only killed armed suspects who fought back.

“I don’t feel bad because we are just defending ourselves,” Mr. Patay said in November. “We always follow the rule of law.”

He said the men previously served under him in Davao, but declined to identify them. But eight of the Davao Boys’ names appear on a police transfer order which one of them posted on Facebook. Those names matched the Quezon City crime reports reviewed by Reuters. The reports showed that this small group of men was involved in more than half of Station 6’s drug-related killings, 62 out of 108 deaths, including the three operations with the highest body count.

Only one of the officers, Charles Owen Molinos, agreed to be interviewed by Reuters. When asked what was so special about Davao cops, he smiled and said: “Special kill skills.”

Reuters spent four months retracing the Davao Boys’ deadly path through Quezon City, speaking to scores of police officers and bereaved families and analyzing thousands of police crime reports covering the first year of the drug war. These reports don’t specify which officers pulled the trigger but usually name officers who took part in an operation. After arriving in Quezon City, the Davao Boys were quickly involved in dozens of kills in what police described as legitimate drug busts, but relatives, human rights monitors and lawyers say were often executions.

What emerges is an intimate portrait of how a secretive anti-drug unit mobilized and killed — then vanished to await new orders.

The story of the Davao Boys also highlights a larger dynamic: Many of the drug war’s key police officers hail from or served in Mr. Duterte’s hometown, where the campaign’s brutal methods originated during his time as mayor.

A Davao-based human rights group, the Coalition Against Summary Execution, blamed death squads in the city for 1,424 murders there between 1998 and 2015, mostly of petty criminals and drug users.

Mr. Duterte, who was mayor for much of that period, denied any involvement.

At the time of publication, Mr. Duterte’s office and the Philippine National Police had not replied to questions from Reuters.

The most prominent police officer from Davao is Ronald M. dela Rosa. When Mr. Duterte became president in June 2016, he appointed Mr. dela Rosa as his Philippine National Police (PNP) chief and gave him free rein to roll out Davao’s crime-fighting model across the Philippines. “He is leaving everything up to me,” Mr. Dela Rosa told Reuters at the time.

Since then, police say they have killed almost 4,000 drug suspects, all of them in self-defense. Human rights activists blame police for thousands more killings attributed to vigilantes, but police deny any involvement in those deaths.

Mr. Dela Rosa was helped by officers he knew and trusted from Davao — among them, Mr. Patay, whom Mr. Dela Rosa handpicked to run Station 6 in Quezon City, according to Mr. Dela Rosa’s brother Ruel in an interview with Reuters.

Messrs. Dela Rosa and Patay are champion marksmen who first got to know each other at shooting contests, Ruel and Mr. Patay said.

FIGHTING REBELS AND DRUGS
Like Mr. Dela Rosa, Mr. Patay has a reputation among police as an officer who loves action — he was shot in the arm in 2008 while fighting communist rebels — and hates drugs. “We are very angry about people involved in drugs,” Mr. Patay told Reuters, raising his voice and spitting out the words for emphasis. “We want to crush them. That’s our indoctrination.”

Local officials in Quezon City point out that Mr. Patay’s surname sounds like the Filipino word for “death.” Get involved in drugs, they joke, and “patay ka kay Patay”: you’re dead to Patay. One official who knows him well said Mr. Patay also joked about his name, and set his cellphone ringtone to a melody commonly used by Philippine hearses.

In August, PNP chief Mr. Dela Rosa commended Station 6 for its “highest accomplishment” during the drug war. The following month, Mr. Patay was promoted and transferred to an elite police unit called the Criminal Investigation and Detection Group.

Station 6 presides over six large barangays, or districts, that include government complexes, a giant garbage dump and some of the country’s roughest neighborhoods. The area has pockets of prosperity — mainly gated communities untouched by the drug war. The poorer areas have felt the full fury of Mr. Duterte’s campaign, and of Station 6’s drug squad.

Mr. Patay’s arrival at the station in July 2016 coincided with a dramatic purge. Quezon City Police District relieved the entire Station 6 anti-drugs unit — 53 officers, according to local media reports — on suspicion of involvement in drugs, extortion and other crimes. The purge gave Mr. Patay the freedom to assemble a new drug squad, with his handpicked Davao Boys at its core.

The Davao boys had all served under him on previous police assignments, Mr. Patay told Reuters. “So they know me,” he said. “They know my integrity and they know that once I’ve told them this is a thing to do, then they have to follow.” He added: “They have to obey.”

One of them was Mr. Molinos. According to the police crime reports reviewed by Reuters, Mr. Molinos has taken part in 29 operations that killed 56 people. He was one of six Davao Boys who took part in the operation that killed Kathrina Polo’s husband, Cherwen, that rainy evening in August 2016.

At least five Davao Boys have public Facebook accounts that provide many personal details — although some of them, in an apparent attempt to obscure their identities, spell their names backwards. Charles Molinos, for example, confirmed that he is Selrahc Sonilom.

On 5 July 2016, eight police officers were reassigned from Police Regional Office 11 — that is, the Davao Region — to Metro Manila, which includes Quezon City, “by command of Police Director Dela Rosa,” according to a photo of the transfer order that Mr. Molinos posted on Facebook.

Mr. Molinos’ comment next to the photo reads, “Change is coming” — Mr. Duterte’s campaign slogan. The police officer also posted a photo of a boarding pass for a July 4 flight to Manila. “Bye Davao see you soon,” he wrote.

‘EVEN GENERALS ARE CORRUPT’
With the transfer from Davao to Quezon City, on the main Philippine island Luzon, Mr. Patay spoke and acted as if he and his men were entering enemy territory. Davao cops don’t take drug money, Mr. Patay told Reuters, but in Luzon “even (police) generals are corrupt.” He did not elaborate.

Before the transfer, Mr. Patay said he gave his team a pep talk. “We will be going to Manila. We are a team,” he told them. “We should not be corrupted there.…We will pray to God that we can resist temptations.” In Manila, Mr. Patay housed the Davao Boys in a makeshift barracks on the top floor of Station 6 and made sure they only fraternized with other officers, not with members of the public.

Ronnick de Ocampo, a member of Station 6’s drug squad — but not a Davao Boy — said Mr. Patay’s men were in their late thirties or early forties and called each other “bro” or its Filipino equivalent, “tol.” Mr. De Ocampo wouldn’t tell Reuters their names, and became agitated and changed the subject when pressed further about them.

Mr. Patay’s men were a breed apart. They wore bulletproof vests even when they went out to buy cigarettes, said Reynaldo Esteban, an officer with the station’s community relations team. Mr. Esteban said part of Mr. Patay’s morning routine was doing dry-fire practice — that is, shooting with an unloaded gun — on the rooftop. “He loves his .45 caliber gun,” he said.

The Davao Boys remained aloof, but their purpose and resolve to wage the drug war were clear to Mr. Esteban, who works on drug-awareness campaigns. He said of Mr. Patay’s men: “We are the prevention. They are the cure.”

He added nervously: “Joke!”

The crime data analyzed by Reuters contains the names of 78 officers associated with drug war killings at Station 6, including Mr. Patay and the Davao Boys. Some of these officers may not have been directly involved in killing suspects. They might have guarded perimeters, or posed as drug buyers during undercover operations known as “buy-busts,” police officers told Reuters. At least one-third of the reports do not include a full list of officers involved in the operation.

Mr. Patay said he ordered his Davao team to lead the buy-bust raids, but also mobilized all Station 6 officers to help secure the perimeter during operations in “very dangerous” areas. “We are not super cops,” he said.

Officer De Ocampo said the drug squad had 30 operatives, including the undercover cops who posed as buyers and the heavily armed officers — such as the Davao Boys — who backed them up. The squad was usually assembled by text messages or through Facebook messenger, he said, and its members were expected to be able to report to the station in 15 to 20 minutes.

A Philippine police commander told Reuters in February that buy-busts are actually well-planned executions. Dealers can easily spot undercover cops and won’t sell drugs to them, said the commander. Instead, police operatives executed their targets, who were usually unarmed, then planted guns and drugs to justify the use of deadly force, he said.

Mr. Patay said his officers only open fire in self-defense. Before each operation, he said, he prayed with his men. They prayed for their own protection, he said, but also “for the safety of our targets, for the safety of the community.”

Metho Andres, the police chaplain at Station 6 who prayed with the officers, told Reuters that the Bible justified the killing. Quoting Romans 13, he said Mr. Duterte was a God-appointed “agent of wrath” whom police should obey without question. He blamed drug users for their own deaths.

“That’s a consequence of them disobeying,” said the pastor. “There is wrath coming for those who don’t obey.”

Also among the men transferred from Davao to Manila was Richard Timon.

At Station 6, Mr. Timon would participate in police operations in which at least 60 people were killed, the police crime reports show. Five other Davao Boys were associated with the deaths of at least 50 people: Molinos; Michael Maderable; Ronie Banggat; Jun Ralph Piñero; and Emmanuel Ibit. Two others, Renante Solomon and Dennis Pal, would be involved in operations in which at least two dozens were killed.

Mr. Patay and two of his superiors declined to let Reuters interview the Davao Boys. One Davao Boy, Dennis Pal, did agree to be interviewed but then abruptly canceled and told Reuters to contact his superiors. Messrs. Maderable, Ibit and Solomon did not reply to messages sent to them on Facebook. Reuters could not locate Messrs. Banggat, Timon and Piñero.

Mr. Molinos, who trained as a SWAT officer in Davao, has little sympathy for the drug suspects he was brought to Quezon City to combat. “They destroyed a lot of people,” he said. “So this is the time that they suffer the consequences.”

Mr. Molinos was involved in operations that claimed at least 56 lives, according to crime data analyzed by Reuters. At first, he denied killing anyone in Quezon City. Then he said he had. When asked how many, he replied: “Zero.” Asked later about the tally of 56, he did not respond.

Among the victims was Cherwen Polo.

By the time the Davao Boys entered her neighborhood just after midnight on Aug. 15, 2016, carrying assault rifles and wearing what Ms. Polo described as “full battle gear,” Station 6’s drug squad had killed eight people in six operations, according to the crime data.

That night, the squad added another five kills: Polo’s husband, Cherwen, three of his drinking companions and a neighbor. Cherwen had been celebrating his 39th birthday.

When police entered the house, said Kathrina, she was in a backroom and Cherwen was upstairs with his friends, sleeping off the booze. She heard footsteps going upstairs and then six gunshots.

She said she emerged from the backroom to find at least five police in the house. “Sir, don’t shoot because there are children here!” she begged them. An officer with a Visayan accent ordered Kathrina and her two children outside, she said. As they left, she heard more gunshots.

The operation was a legitimate buy-bust, the police said in a report on the incident. When Cherwen Polo realized he was selling drugs to an undercover officer, the report said, he and his companions drew weapons and opened fire. The officers had “no other option but to retaliate,” said Mr. Patay in a separate statement.

Police said a gun battle then erupted in which they killed the five men and injured a sixth. According to a police autopsy, bullets went through Cherwen Polo’s head, heart, and forearm. There were no reports of any police injuries. Mr. Patay and police authorities did not reply to Reuters’ questions about the incident.

The police didn’t wear masks, said Ms. Polo. Asked if she would recognize the men if she saw them again, she replied without hesitation: “Yes.”

Reuters showed her photos of the Davao Boys from Mr. Molinos’ Facebook page, and she pointed to a man she recognized: Mr. Maderable, who is listed on the police report as one of the officers who participated in the operation.

His name also appears on the July 2016 transfer order. A Facebook account with Mr. Maderable’s name and photo says he is from Tagum City, where Mr. Patay was police chief before assuming command of Station 6. According to the crime data, Mr. Maderable was involved in operations that killed at least 55 people in the first year of the drug war. Reuters could not reach him for comment. Senior officers declined to make him available.

Messrs. Molinos and Maderable were among five Davao Boys involved in Station 6’s deadliest operation — which was also the deadliest police operation in all of Quezon City in the first year of the drug war.

In September 2016, police entered the Old Balara barangay around midnight and shot seven drug suspects in what they said was self-defense. Police said that afterwards, in a bid to save lives, they rushed their victims to hospital, where they were declared dead on arrival.

A Reuters investigation in June found that police were using hospitals to hide drug war killings. Most of the seven men had been shot in the head and chest, said the doctor who declared them dead on arrival. The police deny any cover-up took place.

“Feeling proud at QCPD Police Station 6,” Mr. Molinos posted on Facebook five days later. “We’ve contributed a lot here already,” he wrote.

REBRANDED DRUG WAR
In 2017, Station 6’s kill rate began to drop, the records show. From July to December 2016, the first six months of the drug war, 87 people were killed. In the next six months, only 21 were killed. This made sense to Mr. Patay. He said his station’s “first salvo” had frightened drug suspects, making them less likely to fight back.

But there were other forces at work. In January, the country learned that drug squad officers had abducted and killed a South Korean businessman at the PNP headquarters in Manila. The killing fueled growing public opposition to the police and their brutal methods.

Mr. Duterte halted police anti-drug operations for most of February and vowed to dismantle the units. “Looks like (it means) coming home for us because all drug units were abolished,” commented Dennis Pal, one of the Davao Boys, on Facebook on Jan. 29.

But they weren’t dismantled. They were rebranded by the police. “Anti-illegal drug units” became “drug enforcement units.” The Davao Boys stayed put — and Mr. Molinos appeared on Facebook wearing a T-shirt with the new name, featuring a skull with red eyes and a grotesquely elongated jaw.

On Feb. 28, Mr. Duterte ordered police to resume operations, and the number of killings by Station 6 continued to climb. Eight Davao Boys took part in an operation that killed Bernabe Sabangan, 23, and his friend in May 2017. Police recorded it as a buy-bust.

Mariel Sabangan told Reuters that her brother had been cooking and watching television when Mr. Patay’s men burst in and handcuffed him. Mariel said she pleaded with them to let him go, but they bundled her and her husband outside. A minute later, she heard three gunshots. “I was already crying. I was going wild because I knew what that meant,” she said.

Afterwards, she said, the police stayed to play basketball outside her house for another half hour or so, before taking the bodies of her brother and his friend to a hospital where they were pronounced dead on arrival. The officers drank her dead brother’s coffee and stole jewelry, cellphones, children’s piggy banks and a motorcycle, she said.

When Reuters showed Mariel pictures from Mr. Molinos’s Facebook page, she said: “My heart beats fast.” She recognized three men, including Mr. Molinos, who she said had been dressed in “battle gear.”

Mr. Molinos and another man had Visayan accents — “same (as) the President” — and he put a gun to her husband’s neck as he shoved Bernabe outside, she said. The police crime report names Mr. Molinos as one of the officers who participated in the operation.

Mariel says she now has trouble sleeping. “It’s like I’m going out of my mind,” she said. “I feel like the police could come back anytime.”

Messrs. Patay and Molinos did not respond to Reuters’ requests for comment about the episode.

‘THEY DESERVE TO DIE’
Mr. Patay expected total obedience and transparency from his men. “All your operations I have to know, because I should always guide,” he said he told them. Mr. Patay also had orders to follow. He stressed that at Station 6 he was not implementing “my own policies” but those of the government and the police leadership.

Mr. Patay said local politicians — known as barangay captains — had too long been afraid to set foot in some areas. He told Reuters he turned the tables on them with a message: “This is not the time to be afraid of the criminals. This is the right time that the criminals will be frightened of us.”

Mr. Patay’s methods drew a conflicted response from the barangay captains. “The killings were back-to-back when Patay was chief,” recalled Crisell Beltran, the captain of Bagong Silangan district, where Bernabe Sabangan was killed.

She described this as “positive, negative.” The killings made some neighborhoods more peaceful, she said. “The negative, of course, was that people died.”

Ms. Beltran said Station 6 never informed her before launching what she called “special operations.” The barangay was only called afterwards, to ferry away dead or wounded suspects, she said.

Ms. Beltran said on Oct. 8 she couldn’t recall a single police killing in her district since Mr. Patay was transferred out in September. Mr. Patay and police authorities did not reply to a request for comment.

The captain of the neighboring Commonwealth barangay, Manuel Co, said he was always forewarned about Station 6’s operations. He said he even joined some of them, carrying the assault rifle that sat behind his desk when Reuters interviewed him.

“Those son of a bitch drug pushers shouldn’t have human rights,” said Mr. Co. “They deserve to die.” Even so, Mr. Patay was “pro-life,” Mr. Co said. “He doesn’t want anyone to die. The only reason people die is because they fight back.”

Mr. Co credited the drug war for a dramatic drop in crime in his barangay. The data tell a more ambiguous story. For all of the blood — Station 6 had a third more drug-related killings than any other station in Quezon City in the first year — there was limited impact on crime.

From July 2015 to June 2016 — the year before Mr. Duterte launched his campaign — Station 6 recorded 1,129 major crimes, including murders, rapes and robberies. In the drug war’s first year, it recorded 931 major crimes, a drop of 18%, according to crime reports.

But the proportion of major crimes committed in Station 6’s area relative to all of Quezon City increased from 12% to 15%. In other words, Station 6’s area grew more dangerous when compared with other parts of Quezon City.

Mr. Patay is now a regional commander with an elite unit that investigates high-profile crimes, the CIDG, which answers directly to PNP chief Dela Rosa.

Mr. Patay spoke to Reuters in October at the CIDG bureau in San Fernando City, about a two-hour drive north of Manila. The shelf behind his desk held trophies from recent shooting contests. He said he had used prize money to buy his men body armor.

He said he was waiting to reunite with the Davao Boys at CIDG. When they moved with him to Manila, he said, they had one request: to join him on his next posting and “not be left behind.” They were now awaiting their formal transfer, he said.

For now, the men who led Quezon City’s deadliest drug squad are in limbo. According to Mr. Molinos, the squad was living in a property in Pasong Tamo, a barangay in Quezon City. He wouldn’t say exactly where.

“A safe house,” Mr. Molinos smiled. “For Davao Boys only.” — Reuters

NLEX survives Kia scare

THE NLEX Road Warriors got their PBA Philippine Cup campaign to a good start after beating the Kia Picanto, 119-115, in their tournament debut yesterday but not after being made to sweat at the FilOil Flying V Centre in San Juan City.

Faced a hot-shooting Kia squad, NLEX rode the game-long brilliance of rookie Kiefer Ravena and big plays from its veterans down the stretch to survive the determined thrust of the Picanto and bag its first win in the season-opening Philippine Basketball Association (PBA) tournament.

NLEX got off to a strong start as it built a seven-point cushion, 12-5, in the first two and a half minutes.

But the Picanto would start finding their shot, outscoring the Road Warriors, 17-3, in the next three minutes to take a 22-15 advantage.

It was a leverage they would use to establish a 40-36 lead at the end of the opening frame.

Boosted by its showing in the first quarter, Kia maintained control of the match to begin the second canto.

Getting contributions from various sources, the Picanto created a 61-49 distance at the halfway mark.

The Road Warriors though would stop the bleeding as the quarter progressed to cut their deficit to just four points, 68-64, at the half.

The third period saw the two teams jousting to establish control.

They fought to a 76-all affair at the 7:21 mark before Kia pulled away anew with a 9-0 blast for an 85-76 lead with a little under five minutes to go.

Mr. Ravena then ignited an NLEX rally that saw it overtaking Kia, 88-87, with 1:32 remaining.

But the Picanto would still reestablish control as the quarter expired, 92-90.

Juami Tiongson gave the lead immediately back to the Road Warriors, 93-92, with a triple to open the payoff period.

The two went back and forth thereafter, holding each other to a stalemate at 99 with nine minutes left on the clock.

The count stood at 107-106 with NLEX on top at the five-minute mark of the fourth period.

Kia continued to crowd NLEX after, holding the latter to a 111-111 deadlock as the game entered the last two minutes.

Alex Mallari gave the lead back to the Road Warriors, 113-111, with 1:34 to go only to be answered back by Jay-R Reyes eight seconds later to level the count anew at 113-all.

A four-point play by veteran Larry Fonacier with 1:06 left on the clock gave NLEX more breathing space.

But Mr. Reyes cut the Road Warriors’ lead to two, 117-115, with 56 seconds remaining with a fadeaway jumper in the low block.

Kia had chances to further cut down its deficits or even take the lead but its attempts proved futile.

Two free throws by JR Quiñahan with 4.3 seconds left iced the game for the Road Warriors.

Mr. Ravena finished with a double-double of 18 points and 12 assists to go along with seven rebounds and two steals.

Kevin Alas and Mike Miranda added 14 points each while Alex Mallari had 13.

Rabeh Al-Hussaini and Messrs. Fonacier and Quiñahan scored 12 points apiece for the Road Warriors.

Eric Camson, meanwhile, top-scored for Kia with 24 points, with Rashawn McCarthy adding 14 markers.

“Kia has improved a lot with their perimeter game and offense. We struggled in this game but we will take this win,” said NLEX coach Yeng Guiao after their victory.

“Kiefer played well. And I have no doubt he can lead this team as a rookie,” added the NLEX coach as he spoke of their prized rookie Ravena, who emerged as player of the game. — Michael Angelo S. Murillo

Senate eyes passage of BBL by March

By Arjay L. Balinbin

THE SENATE will be “ready hopefully” with the proposed Bangsamoro Basic Law (BBL) by March next year, the chairman of the Senate sub-committee on BBL said at a briefing on Wednesday, Dec. 20, by the Bangsamoro Transition Commission (BTC) on the proposed measure.

“I…guarantee you that we will try to come up with a Bangsamoro Basic Law (BBL) bill that will be ready hopefully by March,” Senator Juan Miguel F. Zubiri, who heads the committee, said, adding, “We will be doing marathon hearings all the way first quarter of 2018.”

Mr. Zubiri also announced that consultations and public hearings will be held in January in provinces that are expected to be part of the Bangsamoro government.

‘BUDGET CALL’
Senator Loren B. Legarda reminded her colleagues that the budget call takes place in the first quarter of the year and that the BBL must be passed before the deadline of the budget call for it to be included in the 2019 National Expenditure Program (NEP).

She said: “I realized the importance of the BBL passage. This is definitely so urgent and important that we have to fund it. We know that the budget call is in the first quarter, if not the first semester of the year. Meaning, January to March. Hence, (first) I am concerned about the passage of this measure, second is the timeline of the passage that might overshoot the deadline for the budget call, and third, perhaps we could schedule a finance-focused hearing for us to see the budgetary implications, and so that the cabinet members in charge of agencies will help implement the BBL if and when passed.”

“If we promise something to our people, which is not funded in the 2019 NEP, remember that this is what happened to the tertiary education where we passed the law which was not fully in the NEP and we had to augment it, so the timeline here is of utmost importance and urgency,” Ms. Legarda added.

Responding to Ms. Legarda, Mr. Zubiri said his committee “will try to pass (BBL) in the first quarter.”

“So by March, hopefully we will be able to finish the debates and procedures for second reading,” he said.

When sessions resume on Jan. 15, Mr. Zubiri said he will “ask the Majority Leader to make the Senate committee on finance headed by Senator Legarda as the secondary committee.”

“That (will have) benefits for all sides because we have a funding on this,” he said.

For his part, Senate President Aquilino L. Pimentel III told fellow lawmakers: “The passage (of the BBL) is no longer in debate. I think we all want this, but we all want to pass a constitutional version because lawmakers are not expected to pass an unconstitutional measure.”

And Senator Juan Edgardo M. Angara, chairman of the Senate committee on local government, said: “It must be within bounds of the Constitution, and a product of national debate and consultations. We urge our colleagues to hear all concerns and balance the interests of various groups in the region to ensure a more inclusive BBL.”