Investors needed in Cambodia and Vietnam
Both countries need investment to arrest declining domestic output and plug an impending supply gap—opportunities for China and LNG
China looks like dominating foreign investment in Cambodia's fledgling oil and gas industry as the capital-hungry Southeast Asian nation sets out to develop its own offshore industry over the next few years. Most recently, Great Wall International Engineering, a division of state-owned China National Petroleum Corporation, signed a contract in May to build the first phase of a $1.6bn refinery in Kampot and Preah Sihanouk provinces that is slated to process 7m tonnes a year, or 140,000 barrels per day, of crude by 2022. Its joint venture partner will be another Chinese company, Sinomach.
Much of the raw material will probably come from Block A in the Gulf of Thailand, which is crucial to Cambodia's long-term upstream plans. According to general consensus, a producing Block A could even turn the country into a net exporter of crude.
However, the development of Block A has run into trouble. Singapore's struggling KrisEnergy has been trying to finalise a revenue-sharing agreement with the government that would allow work to start, bringing the field on stream within two years. But the oil and gas explorer is reportedly in dire financial straits. According to its full-year financial results, KrisEnergy posted a net loss of $237m in 2016 on top of a further $48.6m in red ink in 2015. Although the company blames its financial situation on the rout in oil prices, it all casts a shadow over one of Cambodia's most vital oil assets.
To redeem its financial position, earlier this year KrisEnergy was trying to relinquish upstream assets in Indonesia and Vietnam so it could focus on development and production activities in the Gulf of Thailand, which it considers a plum asset. In the company's latest statement, KrisEnergy said it was considering farming out some of its stake in Block A.
In the bigger picture, the apparent agreement on the first draft of a code of conduct covering the South China Sea will come as some comfort for potential investors in Vietnam and Cambodia as well as elsewhere in the region. There have been tensions between Vietnam in particular and China over the latter's sweeping claims of territorial rights in the region, exacerbated by the unilateral appropriation of islands and other strategic assets in the disputed waters. Particular bones of contention are the Paracel Islands and the Spratly Islands that lie in oil-and gas-rich waters. In one of several flare-ups, in 2014 China's Cnooc started drilling near the Paracel Islands, provoking a standoff between the Vietnamese and Chinese navies.
However, according to Chinese foreign minister Wang Yi, all ten members of the Association of Southeast Asian Nations have made "clear progress" towards an agreement on activities in the South China Sea and, he added, "they feel satisfied with this".
Meanwhile, Vietnam continues to book the lion's share of foreign investment in the industry. Earlier this year India's Tata Power finalised plans for a $1.8bn, 1.3 gigawatt coal-fired plant in the Soc Thang district. The project is expected to take up to three and half years to complete.
With 4.4bn barrels of crude oil, the second-largest reserves in East Asia, behind only China, Vietnam's oil and gas industry is the country's biggest procurer of offshore technology and investment as well as its biggest industry, contributing about 30% of GDP. According to the Ministry of Industry and Trade, oil production is growing by double figures every year. (According to BP's annual statistical bulletin, oil production dropped from 360,000 b/d to 330,000 b/d last year.)
Vietnam's gas industry will likely require heavy foreign investment in the foreseeable future, particularly for the exploration of potential fields in places like the Cuu Long Basin, to address a long-term shortfall in supply. With roughly 90% of total gas production being used for power generation, Vietnam Oil and Gas (PVN) is concerned about declining production from 2020 onwards as fields mature. As the state-owned company's deputy head of petrol production, Vu Dao Minh, told a conference last December, the development of new fields will probably face serious difficulties such as high levels of contaminants. Also, they will be located further offshore, in deeper water.
PVN estimates the long-term shortfall—that is, between 2017 and 2035—at around 80bn cubic meters. In that time, total gas supply will be over 268 bn cm while demand is estimated at 344 bn cm. Imports of liquefied natural gas will be required to plug the gap, probably beginning from 2020. According to PVN's calculations, from just one region alone, imports will have to rise from 5m tonnes a year in 2025 to 13.9m t/y in 2035.