As Thailand takes a three-month respite from the noisy debate over oil and gas exploration, all sides involved hope that the time will be used to come up with a system that promotes energy security and is fair to the public and business alike.
Prime Minister Prayut Chan-o-cha last week postponed planned petroleum concession bids amid rising calls to amend the related laws. Energy Minister Narongchai Akrasanee said the delay would be no more than three months from the original March 16 deadline for the planned 21st round of bidding.
"There will be no further delays, I can assure you of that," Mr Narongchai told Asia Focus, responding to media reports that the delay could be indefinite.
However, he declined to speculate about the nature of the possible changes to the way exploration is governed, saying a joint panel of government representatives and civil society groups would work out the details.
Activists say the current concession system favours oil explorers and should be replaced with a production-sharing contract (PSC) regime. The latter, they say, offers better returns to the government as well as greater energy security (see sidebar).
The government earlier had been adamant that the bidding couldn't be postponed. Some existing concessions had almost expired and unless new ones were put in place, it said, exploration could be delayed and energy security threatened.
"We need to find out what we have regarding terms and conditions," said Mr Narongchai, adding that the new conditions would give clearer details about production-sharing ratios.
"[Postponing the bid] is unlikely to cause significant impacts because the delay is short, while we have quite a clear schedule for when the concessions would be launched. As we know the schedule, we can prepare measures to deal with possible impacts and find new sources of energy."
He believes the existing Petroleum Act is effective and practical but said that new amendments would assure the public that the law is in tune with modern times and needs.
So far, only one bidder has submitted a proposal and the government will return it.
REGIONAL EXCEPTION
Thailand is the exception in Asean when it comes to using concessions, as its neighbours favour the PSC approach. Concessions generally are used by countries that want to ramp up development, with ownership of the resource making investment attractive.
Thailand's concession system charges a progressive rate of royalty fees and a 50% tax on corporate income. Local policymakers say the concession system is appropriate for countries such as Thailand where exploration blocks are small or medium-sized.
Countries that want a greater say in how their resources are developed have shifted toward PSCs. Malaysia is considered a successful example, through its state oil company Petronas.
"However, certainly there is a question about transparency and Malaysia is not a member of EITI (Extractive Industries Transparency Initiative) that guarantees transparency of the members in the industry," said a Thai petroleum industry executive who spoke on condition of anonymity.
Indonesia has also identified transparency problems with PSCs and has restructured the system under a new regulator. It also has switched to concessions for smaller petroleum blocks. Myanmar uses the PSC approach and is also a member of EITI, said the executive.
"For countries where there are doubts about the legal system and laws, they apply for EITI membership in order to make them more attractive to investors. But for Thailand, investors are confident about the transparency of our legal system," he added.
NEW REGIME
Manoon Siriwan, an energy analyst and member of the National Reform Council, said Thailand definitely needed to carry out more petroleum exploration to enhance energy security.
"There might be questions about the amount of resources that are there but we will never know until we have exploration companies do this job for us," he told Asia Focus. "Once we know the existing reserves, we will able to manage the risks associated with [exploration].
"I don't see any problem for Thailand to go ahead with the bidding while legal amendments are done in parallel. We don't know for sure how many years it will take to amend the law."
Mr Manoon, a former senior executive of Bangchak Petroleum Plc, acknowledges that many of those opposing new concessions have a sincere interest in energy. "But those who jumped onto the bandwagon lately clearly have political agenda in doing so," he said.
He believes Thailand is ahead of some other countries in terms of energy reforms, pointing to actions such as floating the price of liquefied petroleum gas (LPG) and allowing diesel prices to float.
However, the reform process has to be explained better to the public, he acknowledged.
"I think what the government needs to do more is invite people from the general public to take part and give their views. So far, all of the actions have been designed and implemented by those appointed from the political side, so the public may be suspicious that the reforms are being made for the interests of certain groups," he said.
Anusorn Sangnimnuan, a former Bangchak president, agrees with Mr Manoon that the new petroleum concessions should proceed without delay.
"Reserves of natural gas, in particular, are a concern given that data from the Department of Mineral Fuels show Thailand's reserves will last for only seven more years," he said. "Gas is much more difficult than oil because once domestic supply runs out, the imports need vessels and the country does not have enough.
"So we need to get more gas from the Gulf of Thailand by opening new concessions."
Thomas Parkinson, a partner at the Lantau Group, a Hong Kong-based energy and infrastructure consultancy, says the debate over concessions versus PSCs has featured more heat than light. Both arrangements, he says, offer a split of both value and risk between the developer and the government. Either form of contract is eminently workable.
"The split of value and risk, which I would think should be the issue, is not determined by whether the contract is a concession or a PSC, but rather the specific form of whatever the arrangement is. So to me, the fuss seems entirely misplaced," he said.
NGOs are against development in any form, so the PSC-versus-concession argument is simply a convenient stalling tactic, said Mr Parkinson.
Meanwhile, new reserve additions in Thailand over the last five years have not kept pace with production, so reserve levels are dropping. The country already imports a lot of gas from the Yadana, Yetagun and Zawtika fields in Myanmar.
Myanmar has been making aggressive statements about limiting future gas exports as its own development needs grow, and may even try to renegotiate existing contracts to reduce export levels. However, the government recently declared that for this year at least, it would not increase the quota of gas for domestic use.
"This policy shift is compounded by the fact that production levels at the Yetagun and Yadana fields, particularly the former, are declining faster than expected," Mr Parkinson told Asia Focus. "The fact that Thailand relies on politically shaky and declining gas exports for a good chunk of its electricity supply must make the [Thai] military government quite nervous …hence the frequent references to 'energy security'."
In any case, the gap between domestic gas supply and imports from Myanmar and the Joint Development Area (JDA) with Malaysia must be met with LNG at international market prices.
"So it is in Thailand's interest to develop any supplies that can be developed at prices below international market prices," he said. "So I would argue that the first objective in structuring concessions or PSCs is to ensure that economic fields are developed.
The secondary objective would be to structure contracts that provide tax and royalty benefits for the Thai government and fair prices for consumers. "The danger, of course, is that attempts to maximise government and consumer benefits compromise the first objective. This is a real danger all over Southeast Asia."
In Vietnam, for example, PetroVietnam refused to contract with Chevron for a field at the price the company proposed. After almost 10 years of negotiations, Chevron exited the country.
In terms of pricing, PTT gas separation plants and the industrial sector get first call on the older, cheaper, gas from the Gulf of Thailand. The electricity sector gets the remaining gas from the Gulf as well as Myanmar, and imported LNG. All of this is sold at cost; thus there is no big reform issue in terms of prices, according to Mr Parkinson.
In Malaysia, Petronas historically sold gas to the electricity sector at subsidised prices. It is now moving gas prices toward market levels and assigning lower quotas of subsidised gas.
"So Thailand is ahead of Malaysia in terms of gas pricing to the electricity sector," said Mr Parkinson, adding that Indonesia was making wellhead gas prices more competitive to encourage production.
Banyong Pongpanich, a member of the Superboard that oversees state enterprises, noted that petroleum from concessions developed over the past 40 serves only 40% of Thailand's total energy consumption. The country spends 8% of its GDP on energy imports.
"Thailand has managed its existing limited petroleum reserves quite well as we have not experienced any major supply disruption. It's only on the demand side where the country should have done better," he said.
The previous three rounds of petroleum concession bids over nearly 20 years, he noted, resulted in production of petroleum that is enough for local consumption of only one year.
"The data make it clear, and even though I wish we were rich in energy resources, Thailand does not have very good potential in this area," he said.
Two approaches compared
Petroleum concessions originated in the 19th century when companies began exploring in developing countries. The first production sharing contract (PSC) was used in Indonesia in 1966, reflecting the country's desire to obtain more control over its resources.
CONCESSION
A concession agreement grants ownership of petroleum to a company for a fixed period (usually 3-5 years for exploration and 30-40 years for exploitation). Government revenue is derived mainly from royalties (usually between 11.5% and 14.5% based on tonnage of crude oil produced) and net income or taxes.
Pros and Cons: The government keeps the fees paid regardless of whether oil is found. The main disadvantage, for governments, is that bidders tend to be cautious. If reserves are not proven, there is no guarantee that a company's costs will be covered, so the government may not maximise its potential return.
PRODUCTION-SHARING CONTRACT
A PSC doesn't grant ownership, only the right to receive a share of production or revenues from oil and gas sales. The company can use the money from produced oil to recover its capital and operational expenditures, known as "cost oil". The remaining "profit oil" is split between the government and the producer — typically 80% for the former and 20% for the latter. Government revenue consists of its share of "profit oil" plus taxes.
Pros and cons: All risk rests with the oil company, and the government shares any potential profits without having to make an investment. A disadvantage for governments is that a PSC requires highly professional negotiators, with access to technical, environmental, financial and legal expertise if a government wants to secure the best deal.
OTHER OPTIONS
Service Contract: A private company agrees to perform certain specified services for the state in return for a fixed payment or probable profits. The difference between a service contract and a PSC is the nature of the payment: cash or crude.
Joint Venture: Joint ownership of assets and concession rights, a sharing of certain costs of operation and net revenues. The private company is always the operator, but a state entity usually participates in management, approves work programmes and budgets.
Source:
Openoil.net; Yi Junseog, Korea National Oil Corp
The Indonesian Approach
Under the provisions governing PSCs in the 2001 Oil and Gas Law in Indonesia, SKK Migas (Special Task Force for Upstream Oil and Natural Gas Business Activities) is the contracting party for the government in production-sharing contracts. The following requirements apply:
Ownership of resources is in the hands of the government up to the delivery point.
Control over operational management lies with the executing agency.
Capital and risk are wholly borne by business entities.
Proportions of shared production are specified in each contract. The maximum contract term is 30 years, with an extension of up to 20 years possible.
The exploration period is 6 years, with an extension to a maximum of 4 more years allowed.
Contractors must allocate a maximum of 25% of their portion of production to meet domestic needs.
Companies engaged in upstream activities cannot be involved in downstream activities.
The high costs and high technology required generally means that only big companies are able to enter into a PSC, says Erwin Usman, executive director of Indonesia Mining Energy Studies (IMES).
The downside, he says, is that these are usually multinationals so it creates a dependence on foreign business, and despite assurances of technology transfer to local players, it rarely happens.