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Vietnam battles for IOCs as China turns up the heat

China is intensifying its pressure on Hanoi to halt IOCs’ offshore drilling activities. Some have already withdrawn and others may follow

Vietnam is facing the prospect of losing heavyweight IOCs from its offshore, as China amplifies pressure to rein in E&P activity that it views as challenging its maritime interests along the so-called Nine Dash Line in the South China Sea.

Chinese pressure has this year forced Russia’s Rosneft to shelve a planned drilling campaign, while both Repsol and the UAE’s Mubadala, partners on the Ca Rong Do field, have relinquished offshore stakes to state-owned PetroVietnam—in return for what is understood to have been a compensation package worth around $1bn.

Spain’s Repsol announced on 12 June that it would relinquish its 51.75pc stake in block 07/03 and blocks 135-136 in Vietnam. The IOC disclosed that the sale of its assets would not have a material impact on its finances, suggesting a generous compensation package was offered.

7-9tn ft3 – Ken Bau gas reserves estimate

Repsol’s departure will nonetheless come as a serious blow to Vietnam, despite hopes that the company’s extensive presence in its offshore—and lack of presence in China—would have insulated it from such threats. The first inkling of trouble came in 2017, when PetroVietnam ordered Repsol to halt planned exploration drilling in blocks 135-136/03, while in March 2018 it was ordered to cancel another drilling block at Ca Rong Do—reportedly under heavy political pressure.

Analysts see a step change in Chinese behaviour. “Before, China was forcing companies to consider whether the commercial discoveries were worth the risk rather than directly challenging them. It was left to the companies to make the commercial decisions,” says Bill Hayton, an associate fellow in the Asia-Pacific programme at Chatham House.

“Now it is directly threatening the Vietnamese government, backing this up with naval ships deployed in areas near the drill sites. This has forced Vietnam’s government to order the companies to pull out, which is why they are obliged to pay large amounts of compensation.”

China’s game plan

The Chinese game plan—making it difficult for IOCs to operate in areas viewed as close to strategic resources—appears to be working. Even Rosneft, considered bolder than Western companies, is feeling the heat.

Rosneft is engaged in gas and condensate production at two offshore Vietnam blocks, block 06.1 and block 05.3/11. In July, China was reported to have asked the Hanoi government to terminate its offshore development with Rosneft, since the company’s Lan Do project in block 06.1 lay within China’s Nine Dash Line. The irony is that Rosneft was preparing to drill on the same seabed it has been drilling for 18 years, though in a deeper part of the reservoir.  

This could yet impinge on the largest remaining IOC in Vietnam’s offshore, ExxonMobil. In 2011 it discovered commercially significant gas deposits in Vietnam’s block 118, the Blue Whale field where the US company holds a 64pc stake.

“Before it was left to companies to take commercial decisions. Now China is directly threatening the Vietnamese government” Hayton, Chatham House

In June, Vietnam’s government indicated ExxonMobil was ready to invest in gas-to-power plants, an indication of how desperate it is for the US company to stay onboard. Hanoi’s confidence may be imbued by a more favourable geographic position at Blue Whale relative to other IOCs’ acreage. The gas fields lie marginally outside of the Nine Dash Line, lifting them out of Beijing’s immediate crosshairs.

Commerce, rather than geopolitics, may be holding back development on Blue Whale. The field was set to supply an integrated power and petrochemicals complex. “While there are positive noises coming out of Vietnam in terms of the downstream development, the upstream part of the project does not appear to be moving forward quickly,” says Andrew Harwood, research director at Wood Mackenzie. 

Down the list

ExxonMobil has been negotiating for years with the Vietnamese over the sales price of Blue Whale gas. Shareholder pressure to sell the asset is still strong. “The reality is that relative to ExxonMobil’s global portfolio, Vietnam ranks quite far down the list as to where it is going to deploy its capital,” says Harwood.

Having shelled out a reported $1bn in compensation and termination fees to the Repsol- Mubadala partnership, Vietnam may have to dig deep again and offer generous terms to keep ExxonMobil. “If ExxonMobil leaves, that would look bad for the Vietnamese and that may force them to give them the best deal possible in the circumstances,” says Hayton.

Faced with IOCs rushing to the exit, the Vietnamese authorities’ mood will have been lightened by Eni’s confirmation on 27 July of a large gas field in block 114 in the offshore Song Hong basin, known as Ken Bau. Preliminary estimates suggest 7-9tn ft3 of raw gas in place with 400–500mn bl of condensates. 

The find is in an area of Vietnam’s offshore territory that is not subject to any claims from other countries, says Harwood,

Vietnam’s gas demand is set to almost double over the next decade, driven primarily by the power sector, Wood Mackenzie estimates. That leaves the likes of Blue Whale and Ken Bau well positioned to meet domestic requirements.  

“Vietnam needs new upstream investment, and so will want to try and keep existing investors on side as much as possible. They want to keep the companies that are already there happy and reduce the level of uncertainty if something unforeseen happens,” says Harwood.

The challenge for Hanoi is that the unforeseen is the new normal in the South China Sea. It will have to devise new means of tapping IOC interest while fending off the close attention of China—a tough balancing act to carry off at the best of times.

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