The upcoming auction of the Erawan and Bongkot gas blocks in the Gulf of Thailand is delightful news for major energy producers following a series of extensive delays. The auction also represents the importance of energy security for Thailand going forward, as energy consumption is poised to rise while the country's oil reserves dwindle.
After the terms of reference (ToR) for the auction were announced, several exploration and production conglomerates were interested in opportunity.
Determination of the winning bidders will likely boil down to the bidders' qualifications, expertise and the shared benefit of energy resources with the state.
The Mineral Fuels Department (MFD) revealed that five companies have already collected application documents for the upcoming auction of the Erawan and Bongkot gas blocks.
The department announced the ToR for the two blocks, Erawan (G 1/61) and Bongkot (G 2/61), on April 24 to attract interested investors. Policymakers designed two production-sharing contracts, shifting away from past concession models.
The five companies are the United Arab Emirates' (UAE) Mubadala Petroleum Co; US-based Chevron Thailand Exploration & Production Ltd; Japan's Mitsui Oil Exploration Co; France's Total E&P Thailand; and Thailand's PTT Exploration and Production Plc (PTTEP).
The concessions for the Erawan and Bongkot gas blocks are due to expire in 2022 and 2023, respectively, and are operated by Chevron and PTTEP.
Erawan and Bongkot produce a combined average of 2,110 million standard cubic feet per day (MMSCFD), contributing up to 75% of the gas production from the Gulf of Thailand.
Thailand already relies on imports of both oil and natural gas to meet its demand and faces the prospect of increasing its reliance on imports. Higher imports would push up energy costs and risk undermining the country's economic competitiveness.
With falling reserves and rising domestic petroleum consumption, Thailand urgently needs to ensure energy security for future generations.
HIGH HOPES
This auction is positive news for the upstream petroleum industry in Thailand because the domestic energy sector has been marred by domestic political turmoil, along with conflicts between policymakers and environmental advocates, since 2008.
Upstream petroleum businesses, such as rig assembly, equipment supply, and petroleum fleet containers, have also experienced a slowdown because of political uncertainty, with the collapse of global oil prices in 2014 reducing the number of employees in these fields.
Capital expenditure for energy exploration and production in Thailand declined from 253 billion baht in 2014 to 208 billion in 2015 and 141.2 billion in 2016, the MFD reported. Petroleum income tax revenue also fell to 46.1 billion baht in 2016 from 116 billion and 100 billion logged in 2013 and 2014, respectively.
Proven oil reserves in Thailand are estimated at 178.3 billion barrels, while proven natural gas reserves are reckoned at 6.8 trillion cubic feet, according to the MFD. Reserve volume is down 10% from the volume registered a decade ago. (Story continues below)
Energy reserves have gradually declined, mainly because of fluctuation in global oil prices and prolonged delays of the gas block auctions.
A country assessment by the Asian Development Bank noted several threats to a competitive and stable energy supply, including rising market prices for oil and gas, scarce and dwindling domestic resources, uncertain reliability of non-domestic sources of energy, and increasing domestic demand.
For the auction of the two gas blocks, preliminary qualifiers will be shortlisted and announced by May. Each qualifier must have experience in petroleum exploration and production in the sea, as well as paid-up capital from the parent firm of at least US$4 billion for Erawan and $2 billion for Bongkot.
The MFD will allow participating bidders four months to pass preliminary qualifications by making information about the gas blocks available before auction proposals are due to be filed in late September.
The department will take about 2½ months to consider the proposals.
It is difficult to gauge which firms will emerge as winners among the early applicants for the gas blocks because at least three firms, namely PTTEP, Chevron and Mubadala, are all equipped with expertise and experience in oil and gas operations in the Gulf of Thailand.
Chevron and PTTEP are expected to separately submit their auction applications because they could not reach an agreement. They previously intended to jointly submit an application and establish joint ownership of the two gas blocks.
Chevron and PTTEP both seem to have strong intentions of securing contracts to operate and own significant energy resources in Thailand.
"We believe there is a high likelihood PTTEP will be able to win, thanks to its 30-plus years of experience and the unique geology of the gas fields in the Gulf of Thailand," said Kannika Siamwalla, head of regional oil and gas at RHB Banking Group. "Under the best-case scenario, PTTEP would be able to retain the Bongkot concession, as the company has been operating this field since 1992."
PTTEP has an in-depth understanding of the field and should be able to provide a smooth transition from the expiring contract to the new one, she said.
For PTTEP, almost 90% of the company's total sales are derived from petroleum sales in Asean, with the majority of revenue resources from Bongkot.
The company is expected to be aggressive because this gas block is its main revenue source.
PTTEP has collaborated with France's Total since 1992 on production techniques. Total holds a 33.33% stake in the Bongkot block in a joint venture with PTTEP.
Chevron operates a concession for the Erawan block (B 10-13), producing 1,240 MMSCFD, while PTTEP operates the Bongkot block (B 15-17) with Total, producing 870 MMSCFD.
A source in the energy industry who requested anonymity said the government should value the bidders' expertise and financial condition more than state benefits, as there are risks to energy security and future economic growth on the horizon.
Energy exploration and production expertise, understanding of geology in the Gulf of Thailand and the ability to manage production cost should be the essential criteria for the auction, the source said.
PTTEP, Chevron and Total are expected to have the upper hand because they have been operating in the Gulf of Thailand for decades, while Mubadala may not have an in-depth geological understanding to match these three conglomerates, the source said.
ADJACENT BLOCK
Mubadala has a petroleum production area in the Gulf of Thailand in the Jasmine/Ban Yen field in B5/27, producing more than 65 million barrels so far.
The company predicts it will reach the 70-million-barrel mark in the first half of 2018, a substantial increase from Mubadala's estimation at the time of purchase in 2004.
Mubadala's petroleum sites are adjacent to the Erawan gas block, fuelling prospects of a heated auction because the Abu Dhabi-based conglomerate may want to extend its exploration and production business in Thailand.
The underground geology of the gas blocks for Mubadala and Chevron are nearly identical, and many geologists have said Mubadala has high hopes it can win the auction for the Erawan gas block because it will understand how to operate in that field.
The company believes that if it wins, it will not be too difficult to maintain the daily contract quantity of gas that Thai policymakers are requiring as a condition of 800 MMSCFD, since Mubadala has been familiar with the Pattani Basin for more than a decade.
Musabbeh Al Kaabi, chief executive of Mubadala's petroleum and petrochemicals division, told the Bangkok Post that the UAE-based investment company is actively seeking to build up its business in Thailand, so it is certainly interested in the upcoming auction of the two gas blocks.
The company draws on an excellent track record and operating capabilities in Southeast Asia, Mr Kaabi said.
"We believe we are equipped to play a strong role in the new arrangements for these strategic gas assets," he said.
Mr Kaabi said Mubadala will also consider bidding in Round 21 once more information has been released.
As of 2017, Mubadala has invested more than $5 billion in its exploration and production business in Thailand.
"Thailand is an important country for us, lying at the heart of the growing Asian energy markets," Mr Kaabi said. "We are interested in building an upstream sector, but also exploring new opportunities for investment in the downstream sector."
NO FURTHER DELAYS
Manoon Siriwan, an energy analyst, told the Bangkok Post after reading the requirements for the upcoming auction that each condition is stricter than those for the current concession.
For example, policymakers have specified in the ToR that gas-sharing output is set at a minimum 800 MMSCFD for Erawan and 700 MMSCFD for Bongkot.
Manoon: Stricter conditions for bids
Each qualifier must have experience in petroleum exploration and production aspects at sea of at least 100 MMSCFD.
According to the ToR, winners have to offer a gas price that does not exceed the market price, and profit-sharing with the state cannot be less than 50%, including special benefits and bonuses. The average gas price for Erawan was 160 baht per million Btu and for Bongkot was 200 baht per million Btu, as of February.
Each gas block has to hire at least 80% Thai employees for the first year of operation, rising to 90% by the end of the fifth year.
Mr Manoon said each bidder has time to consider whether it will qualify for the new auction round, guaranteeing high-quality operators with exploration and production expertise.
"I think the requirements are concise enough for the country's energy security over the next decade, compared with previous concessions that were more flexible for operators," he said.
Moreover, policymakers also specified that the winning bidders have to sign production-sharing contracts, shifting from an energy concession model as in the past.
Under the current concession, the government generates a fee from petroleum fields of roughly 60 billion baht per year.
Mr Manoon said the country can generate higher annual benefits when concession winners begin their operations from 2022.
The auction marks the first time Thailand has requested production-sharing contracts, following the government's revision of the petroleum law last year.
Although the ToR for this auction has been announced with a timeline calling for contracts to be signed next February, objections from public advocates and activists could delay the process, he said.
"The auction should not be postponed, because the country will lose revenue and energy security as the current operators -- Chevron and PTTEP -- will reduce their investments in the Erawan and Bongkot gas blocks until the current concessions expire," Mr Manoon said. "Policymakers would have to come up with a Plan B to import natural gas, to be used mainly for the country's power generation."
The MFD reported that the country's petroleum development contributed 91.8 billion baht in 2016, while production and sales were worth 44.7 billion.
Any postponement of the Erawan and Bongkot licences would likely affect licence issuance for petroleum exploration in Round 21, which has been delayed for the past decade.
Round 21 consists of 23 onshore gas blocks and six offshore blocks, spanning 66.46 million square kilometres across the country.