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.

Next Stop for Big Oil: Cambodia?

A Cambodian smuggler (L) rides his motorbike in Kandal province loaded with gasoline he got from neighbouring Vietnam, some 40 kms south of Phnom Penh. TANG CHHIN SOTHY/AFP/Getty Images

As Chevron and partner Mitsui Oil explore offshore, skeptics worry that Cambodia will fall prey to the "oil curse"

February 14, 2008
by Susan Postlewaite
Business Week

In the world of $90-a-barrel oil, oil companies have plenty of incentive to search in unusual places for the fossil fuel. One of the newest energy frontiers is in the clear blue waters off the coast of Cambodia. Here, where fishing sampans sail among scattered, picturesque islands in the Gulf of Thailand, U.S. oil giant Chevron (CVX) has drilled 15 exploratory wells 150 kilometers offshore from the tourist town of Sihanoukville. If all goes according to plan, Chevron will begin extracting oil and gas from these wells by 2011.

Onshore, many Cambodians are watching—some hopefully, others nervously—about what oil might mean for one of the world's poorest nations. Prime Minister Hun Sen has recently called discussion about the oil finds "premature" and "speculative," and will say little about the prospects, which Chevron initially estimated at 400 million barrels. That's not much compared to neighboring Indonesia, with 4.3 billion barrels in reserve, or Malaysia, with 3 billion. But for a poor country like Cambodia, which has precious few energy resources, it's a big deal. Quietly, the premier has been lining up undisclosed partners for a small domestic oil refinery while the Cambodia National Petroleum Authority has begun talking about setting up a national oil company.

How important is oil for Cambodia? The International Monetary Fund produced a "moderate economic scenario" last year that showed revenues to the government from oil could be $174 million when Chevron's production starts in 2011, peaking at $1.7 billion annually after 10 years. For a country with a total national budget of just $1.2 billion, such a windfall could bring such benefits as raises for public teachers now paid $80 a month, rebuilding the education and health systems destroyed during the Khmer Rouge era, or bringing electricity and clean water to the bypassed rural areas that make up almost all of the country. "There are a lot of uncertainties about the amount of oil available," says IMF Resident Director John Nelmes, who explains the $1.7 billion estimate is a conservative one based on total reserves of 500 million barrels.

Overlapping Claims With Thailand

Of course, the size of the estimated oil reserves hardly ranks Cambodia with the big leagues. But the current picture in Cambodia could change. In addition to Chevron's Block A, five other blocks licensed for exploration are so far unexplored. And in an overlapping claims area with Thailand there are huge unexplored oil fields that cover an area as much as all six existing blocks combined. Cambodia and Thailand signed a memorandum of understanding in 2001 to resolve the overlapping claims, but no progress has been made since then and diplomatic ties worsened after Cambodians burned down the Thai Embassy in Phnom Penh in 2003. Cambodia's Deputy Prime Minister Sok An says negotiations are expected to resume soon and he's willing to split the claims "on a 50-50 basis."

The question is, how should an undeveloped country like Cambodia proceed in tapping those resources? The possibility that Hun Sen's government might set up a state-owned oil company and a state-owned refinery horrifies some foreign advisors who worry that Cambodia could fall victim to what economists call the oil curse. That's the phenomenon of corruption in developing countries with state-owned companies that control abundant oil reserves. It's too easy for corrupt government officials to skim profits from state-controlled oil companies, says Warwick Browne, a former extractive industries project manager for Oxfam America in Cambodia.

Having a Phnom Penh-controlled oil and gas company would be "a very bad move," says Browne, adding that such state-owned entities "are black holes for corruption." He says a small national oil refinery would probably not be profitable and the government would have to subsidize sales to the population while forgoing the opportunity to earn needed foreign exchange by exporting to neighboring countries.

Other Obstacles

Government officials won't discuss these questions publicly. Chevron, after three years of exploration at a cost of more than $120 million, says in a public statement that the undersea reservoir has a complex design and contains "small dispersed fields, rather than one core field." Translation: It will take more technical expertise and cost more to extract. With partner Mitsui Oil Exploration (Moeco), Chevron is considering a third round of exploratory drilling in 2008 and 2009.

Another complication: a recent dispute between the joint venture and the government over the way Chevron would eventually be taxed on royalties. The two sides are expected to compromise eventually but won't discuss the matter. Even so, production will probably begin by 2011 under terms of Chevron's and Moeco's license with the government. (Chevron officials in Bangkok declined to comment.)

The licensing of the other blocks taking place is raising eyebrows. Browne says the information about the contracts is kept secret in the hands of Deputy Prime Minister Sok An, who signs the concessions, and Te Duong Tara, head of the Cambodia National Petroleum Authority. (Both declined BusinessWeek requests for interviews.) Quietly, the CNPA over the past year has handed out licenses for the five other blocks to three Chinese companies and two international partner groups.

Beefed-Up Security

One block went to a consortium including Singapore Petroleum, Malaysia's Resourceful Petroleum, and Thailand's PTTEP International. Another went to a consortium led by Indonesian company Medco Energi Internasional Tbk with partners Kuwait Energy and Sweden's Lundin Petroleum. The others went to Chinese companies, including Chinese National Offshore Oil (CNOOC) and China Petrotech Holdings.

Meanwhile offshore, the Cambodian Navy recently ordered patrols to ensure security in the Gulf surrounding the oil fields, an area where Cambodia and Thailand have had a border dispute.

Now all eyes are on Chevron. A petroleum consultant who asked to remain anonymous says the other companies are waiting to see; their contracts allow for six years of exploration before production is required. "They're gambling. Very often they sit back and wait and see if there are any hits. The strategy is to wait, watch, and then decide whether to drop out or resell their license," the consultant says.

Calls for Anti-Corruption Laws

The government is growing impatient with all the pessimists. Hun Sen, in a rare and testy public mention of oil, assured 600 people at a Nov. 7 investment conference in Phnom Penh that the country knows how to avoid the oil curse. "Cambodia is on the right path," the Prime Minister said. "I am hopeful Cambodia will be able to benefit from the sector in the near future."

Opposition party leader Sam Rainsy in December urged lawmakers to adopt an anti-corruption law before the oil begins flowing to prevent government "looting of the nation's oil wealth."

Andrew Symon, petroleum researcher with Menas Asia, a research company from Britain, says he's optimistic about the potential: "It's an exciting area and very contentious politically. If there were to be gas this would be very significant for Cambodia," But, he wryly notes, "There's no shortage of voices wanting this to be a curse. It almost makes it seem it should be left in the ground."

Whether Cambodia, with no oil expertise, will be able to, as U.S. Ambassador Joe Mussomeli put it last February, use its oil resources for "tossing off the shackles of the Pol Pot regime" remains to be seen. According to Mussomeli, oil has been a "horrific curse" in many nations, "rendering the population destitute while a small, corrupt elite siphons off revenue that should go to improving the welfare of all the people." He has called for Cambodia to sign onto a "transparent policy framework" that ensures no one misuses the revenues.

Postlewaite writes for BusinessWeek from Phnom Penh