Market Versus Cost for Chevron in Cambodia

Ros Sothea, VOA Khmer
Phnom Penh Tuesday, 04 May 2010

"The resources that have been identified in the offshore areas of Cambodia are much smaller and cut up with small pockets, which makes it very difficult to develop".

[Editor’s note: Eight years after Chevron found crude oil off Cambodia’s coast, the American company has yet to begin full production. In remarks in April, Prime Minister Hun Sen said he wants the oil giant to begin production by 2012 or risk losing its rights. Michael Walter, an adviser to the National Petroleum Authority, has 30 years of experience in the oil industry, including with the World Bank and Asian Development Bank. In an interview with VOA Khmer in Phnom Penh, he says things are not so simple.]

What has caused Chevron to delay offshore oil production for so long?

The question of development is always linked around commerciality. You can’t forget the fundamentals of geology and economics when you are dealing with the oil business. In Cambodia, it has been marginal, not quite enough to make it commercial, not quite enough to make it development. Contrarily, in Ghana, they discovered oil more recently and already they have put it into development of production very quickly, but it is very large—some 1,000 million barrels.

But the resources that have been identified in the offshore areas of Cambodia are much smaller and cut up with small pockets, which makes it very difficult to develop. Remember that an oil company tends to pursue big oil. If they find a big oil field, they are often prepared to throw more money at it to start production. If things don’t look so attractive, then of course the company isn’t so inclined to make production. However, it is very important for Cambodia because the economy here requires more input for development.

What is Chevron doing right now, following the government’s warning to revoke their contract?

I understand that they are going to do some more drilling in three more wells at the end of this month, which brings together 18 wells that have been drilled by the company, to try and improve the volume of recovered oil. And they plan to get production as soon as possible on a small scale development; smaller than people might think, but still significant for Cambodia, because it will provide the initial core development, and that is a starting point. I think the expectation now may meet what the prime minister said in 2012. Or maybe at the end of 2011 it can be the time for considering production.​ But there is no evaluation yet, and I don’t want to raise expectations, because it depends on the final development plan.

When will Chevron release its evaluation results, and what is the company’s next step?

Hopefully, there could be a decision later on this year, maybe the third or fourth quarter of the year. It is a decision regarding development and that leads to detailed development planning and engineering. So I think things would start at the end of this year. If the contractor finds enough oil or gas to produce it, and make a commercial development, then the petroleum contractor can apply for a development permit, and that starts a new period of rights, to start production.

Then they can work on a scheme for development. You know if you have a very big oil field you can engineer it very nicely, since you know that you will work for a profit. But if it is small, like the situation in Cambodia, you have to be very careful that you don’t let the cost get out the proportion. If the cost gets out of proportion, you can rapidly turn the economic viability for development into a nightmare, and you will lose money.

So there will be a lot of work in planning, engineering and designing, and the design has to be optimized to make sure the cost cuts down, and you have to prepare the well for extraction of oil. And of course, when you are going into production, you have to work on your operating cost. Actually, they already have done some of the planning and sent it to the government.

The challenges so far are finding resources available for commerciality, and if the oil price were to plummet, then it is possible that the development could be stalled.

Last year we saw the oil price fall to $35 a barrel after the very high price rise before. Now it is back up and stable at about $70 a barrel. If the oil price maintains at this level, that will be good for the development of oil in Cambodia.

Where will the oil be sold? Will there be an oil refinery in Cambodia?

Crude oil can be sold on the world market. Normally, if you have ship of crude oil ready, you can look for the best market and whoever pays you the most, and sometimes you sell just to traders. Whether a refinery will be available in Cambodia will depend on the market and the investment, because a refinery is very expensive. Let’s suppose you want to have a 30,000-barrel-per-day refinery; you will have to spend at least $600 million. If you’ve just got a small market, it is quite risky, because a small refinery usually makes a very high operating cost.

What is the model for revenue sharing between Cambodia and Chevron?

The model contract that Cambodia has is 12.5 percent of royalties and 30 percent of petroleum tax. But during the first three or four years, you have to allow the company to make a recovery of costs. The company is allowed to take oil for the compensation of cost, and the oil left will be spread and shared 60 percent to 40 percent, or 40 percent to 60 percent, as product-sharing. When you add all these different things together, it starts to become quite hard for the company.

What are the other 10 companies doing right now?

I don’t think there is anything on the public record about what they are doing. The only company besides Chevron that is drilling is Thai’s PTT, which brings the number of drill wells to 29 across the country. But none of them have found any oil yet.

High oil prices fuel inflation in Cambodia

PHNOM PENH, May 3, 2010 (Xinhua) -- Inflation reached almost 7 percent in March as petrol prices in Cambodia rocketed up 38.5 percent over last 12 months, local media reported on Monday, citing new statistics.

The Phnom Penh Post quoted the monthly Consumer Price Index ( CPI), released by the National Institute of Statistics on Saturday, as saying that inflation stood at 6.7 percent in March this year, compared with a year earlier.

Although this is lower than the 7.3 percent annualized inflation seen in February, the report states that the month-on- month rate increased to 0.7 percent in March from 0.2 percent in February.

"The main increase ... was due to food and non-alcoholic beverages; alcoholic beverages and tobacco; clothing and footwear; water; electricity, gas and other fuels; healthcare costs; and transport," concluded the report.

It noted that fuel price hikes were a significant inflationary factor. Petrol prices have risen by 38.5 percent since March 2009, and 5 percent month on month.

Diesel is up 33.9 percent since March 2009 and prices for fuel and oil for personal transport have risen by 37.8 percent.

On Sunday, premium and regular petrol at petrol stations in Phnom Penh were selling at 4,650 riel (1.1 U.S. dollar) per liter and 4,400 riels a liter respectively.

Sok Chheang, executive director of Cambodia Trucking Association, which represents 16 large transport companies, said Sunday that profits in his sector have declined as international oil prices have soared.

Commentators believe that the latest CPI reflects that international oil prices have had a knock-on effect on the cost of consumer goods.

DEVELOPMENT: Oil Prices May Impact MDGs - UN Report

By Marwaan Macan-Markar

BANGKOK, Oct 25 (IPS) - A new mechanism to measure the impact of rising oil prices on Asia’s poor offers a sobering forecast. There is a clear threat to the region’s gains in reducing the numbers living poverty.

Using 18 different indicators, the recently conceived Oil Price Vulnerability Index (OPVI) suggests that countries surveyed have been hit by varying degrees as the price of oil rose from around 22 US dollars per barrel in 2003 to over 80 dollars per barrel in the years since. Last week, oil fetched a record high of 90.07 dollars per barrel, leading to speculation that the 100 dollar mark was a growing possibility.

The most vulnerable countries are those that have ‘’low economic strength, low economic performance and high oil dependency,’’ states a report released Thursday by the United Nations Development Programme (UNDP), which used the OPVI to confirm its region-wide assessment of how the continent’s poor are coping with the rise in fuel prices.

In South Asia, the worst off countries are Afghanistan, Bangladesh, the Maldives, Nepal, Pakistan and Sri Lanka. In South-east Asia, the list includes Cambodia, Laos and the Philippines. In the Pacific, they range from the island nations of Fiji, Samoa, Solomon Islands to Vanuatu.

The moderately vulnerable countries, on the other hand, stretch from Bhutan and India on one end to Burma, Thailand, Vietnam, Indonesia, Papua New Guinea and Mongolia. What has saved these countries from being at the bottom of the barrel are the capacities of their respective economies to ‘’absorb oil price shocks, performing better with high or medium gross domestic product and economic growth rates,’’ states the UNDP report, ‘Overcoming Vulnerability to Rising Oil Prices’. ‘’(They also have) a low reliance on oil or being a net exporter of oil.’’

But such a distinction would pale if oil prices continue to remain high, consequently posing an unforeseen challenge to the region’s Millenium Development Goals (MDGS) described by the report as ‘’the overarching goal to eradicate extreme poverty and hunger’’.

‘’The threat to the MDGs depends on the length of oil prices continuing to rise,’’ Nandita Mongia, the lead author of the report, told IPS. ‘’If the prices continue to rise over the next three to five years, then we are in big trouble.’’

The MDGs were eight development targets that were set by the world’s leaders at a U.N. summit at the world body’s headquarters in New York in 2000. The first of them was to halve by 2015 the number of people whose income was less than one U.S. dollar a day. The Asia-Pacific region has come in for praise due to the drop in poverty rates from 32 percent of the region’s population to 17 percent. In 2004, some 641 million people were still living in extreme poverty in this region.

There is equal concern that another MDG target -- to ensure that by 2015 children everywhere, both boys and girls, will be able to complete a full course of primary education -- will take a hit. Rising transport costs can come in the way of children in rural communities gaining access to good schools, states the 149-page UNDP study.

At the time the MDG’s were conceived, however, the prospect of high oil prices posing a major hurdle appeared remote. ‘’The issue of an oil price hike was never discussed seven years ago as a possible hindrance to the MDGs,’’ says Mongia. ‘’We were living in a happy world when the price was around 25 dollars a barrel.’’

Yet the new reality that the spike in oil prices has posed to the region’s development plans is stark. ‘’The Asia-Pacific region has had to pay 400 billion dollars as an additional oil bill to what was spent in 2003,’’ Hafiz Pasha, U.N. assistant secretary-general, said during the launch of the report. ‘’This is 20 times the annual aid flow to the region.’’

This has forced a change among rural and urban communities, with many shifting to ‘’more traditional, dirtier, and more difficult to access fuels,’’ he added. ‘’It has also made their attempts to climb out of poverty more difficult.’’

Interviews conducted by the UNDP’s researchers among poor households in rural and urban China, India, Indonesia and Laos conveyed the emerging reality. ‘’Between 2002 and 2005, the households interviewed suffered some dramatic price increases, paying as a whole 74 percent more for their energy needs,’’ states the report. That included 171 percent more for cooking fuels, 120 percent more for transportation, 67 percent more for electricity and 55 percent more for lighting fuels.

The millions who have been forced ‘’to climb down the energy ladder,’’ as the UN agency describes it, have been left with limited choices, prompting many households to be forced to stay in the dark. While the urban poor ‘’tend to be worse off since they do not have the alternative of collecting fuel wood or biomass,’’ the rural poor are no better off, since they are ‘’more vulnerable to higher prices for lighting fuels, especially in unelectrified villages.’’

For least developed countries like Nepal, the pressure has had a bearing on the quality of life. ‘’There has been an increase in the disparity between the rich and the poor,’’ said Posh Raj Pandey, member of the South Asian nation’s national planning commission. ‘’This poses a critical threat to achieving our MDGs.’’

Soaring Oil Prices Hit Hard on Asia’s Poor

Petroleum sector
Energy Bangla (Bengladesh)

Bangkok, 25 October 2007 – Soaring oil prices are threatening the prospects of millions of the region’s poor and forcing them further into poverty, says a report issued here today by the UN Development Programme (UNDP). As oil prices climb, the impact on the poor may presage worse to come warns the publication, Overcoming Vulnerability to Rising Oil Prices: Options for Asia and the Pacific.

“Oil Prices have tripled over the last four years. Today the price is approaching $90 a barrel. This has meant that the Asia and Pacific region has had to pay an additional bill of almost $400 billion for imports compared to the amount spent in 2003. This is 20 times the annual aid flow to the region,” said Hafiz Pasha, UNDP Regional Director for Asia and Pacific, at the launch of the report in Bangkok . “It has become a real issue for an otherwise fast-growing region to absorb this staggeringly large bill,” said Mr. Pasha.

An alternative perspective was presented by H.E. Piyasvasti Amranand, Minister for Energy, Royal Government of Thailand at the launch. “This time around, the price of oil has gone up so much that we are seeing renewable technologies developing and materializing. These new technologies will be beneficial to everyone,” he said .

Interviews conducted for the report among poor rural and urban households in China , India , Indonesia and Lao PDR reveal that rising oil prices are starting to put a brake on human development and in some cases, shifting it into reverse. Between 2002-5, the households interviewed suffered dramatic price increases – paying on average 74 percent more for their energy needs. This included 171 percent more for cooking fuels; 120 percent more for transportation; 67 percent more for electricity; and 55 percent more for lighting fuels.

This has provoked huge public outcries – and incredible hardships for the poor - who are being literally, pushed into the dark. Millions are being forced “to climb down the energy ladder”, reverting to traditional fuels that are unhealthy and inefficient, says the report. The poor are cutting back even on bare essentials of travel and services which are increasingly beyond their reach.

The Oil Price Vulnerability Index (OPVI) developed in this report ranks countries in terms of their economic strength and performance, and the extent to which this growth depends upon imported oil. The OPVI is a composite index which brings together 18 indicators which tracks the level of dependence of economies to imported oil, and thereby, their vulnerability to fluctuations in global oil prices.

The countries that are ranked most vulnerable are Maldives , Cambodia and Sri Lanka , whose low economic strength, lower economic performance and high oil dependence, are immediately evident.

Countries that seemingly appear less vulnerable, are also not immune to the effects of these oil hikes: Malaysia and Thailand , for example, with their rapidly growing oil consumption, could become more vulnerable in the future. China and India, on the other hand, at present do not seem to be as immediately impacted, since their reliance is greater on other energy sources like coal, and their stronger performing economies and larger reserves enable them to ride through this period.

Thailand’s Minister Amranand noted at the report launch that “ Thailand has been providing a lot more incentive for renewable energy for very small power producers using various waste agriculture and raw materials. Biofuels are doing well to the extent that we will probably have enough raw material for the production of biodiesel by the end of next year, and now effort has to be spent in the production of palm oil,” he said.

But this ability of the economy to sustain economic fluctuations is not the same as the ability of the poor in those countries to cope with the impact of high prices and inflation. The report demonstrates how poor household have suffered from the increases in prices of oil-based commodities and transport costs.

From the point of view of countries that are vulnerable to the oil price fluctuations, particularly the LDCs, the report proposes a new mechanism that will enable countries to cope with sudden downturns – the Asia-Pacific Compensatory Oil Finance Facility. AP-COIL will help countries cope with their prolonged liquidity problems. At present these vulnerable countries finance their oil bill through their debt which squeezes their capacity to invest in critical economic, social and infrastructural investments. The AP-COIL will enable these countries to tide over the immediate balance of payments or fiscal deficit crunch, and secondly, to move towards a less oil-intensive future by investing in alternative forms of energy.

Cambodia's Oil Prices Still High

Veasna Mean
VOA Khmer
Phnom Penh
09/02/2007

An oil safety and development initiative appeals to Cambodian gasoline companies Friday to discuss ways to bring the country’s oil prices down.

Phan Sina, director of agricultural development has suggested an immediate resolution to the high oil prices by borrowing oil from Cambodia’s larger neighbors such as Thailand and Vietnam.

While, oil company Sokimex disagrees with the appeals, Minister of Finance Keat Chhon has no comment.