VIET NAM FINDS SUCCESS IN PROGRAM AIMED AT BUILDING OIL AND GAS CAPACITY

Nov. 28, 1994
Viet Nam's efforts to build its oil and gas productive capacity are paying off. from having no hydrocarbon production just a few years ago, Viet Nam is emerging as one of the Asia-Pacific region's significant crude exporters. A second major oil field just started production off Viet Nam's southern coast, and a string of recent discoveries bodes well for further oil production increases. At the same time, the country's nascent gas industry is suddenly sizzling on the heels of

Viet Nam's efforts to build its oil and gas productive capacity are paying off.

from having no hydrocarbon production just a few years ago, Viet Nam is emerging as one of the Asia-Pacific region's significant crude exporters. A second major oil field just started production off Viet Nam's southern coast, and a string of recent discoveries bodes well for further oil production increases.

At the same time, the country's nascent gas industry is suddenly sizzling on the heels of some major discoveries and plans for projects to market that gas.

All of this upstream activity is spurring plans for a downstream oil and gas infrastructure, with projects including world class grassroots refineries and natural gas exports. In short, Viet Nam by 2000 will have created the foundation of a thriving petroleum industry starting from a zero base just a few years ago.

The scope of reserves discovered to date and the number of underexplored or unexplored basins are sufficient to warrant further foreign investment in Viet Nam's upstream and downstream oil and gas sectors, industry officials say.

Since Hanoi first allowed production sharing contracts (PSCs) in 1988, foreign petroleum industry investment has totaled $1.18 billion. The pace of investment in Viet Nam's petroleum sector is quickening. In all of 1993, foreign petroleum investment totaled $397 million. For the first 9 months of 1994, foreign petroleum investment totaled about $400 million.

Meanwhile, to help ease environmental concerns raised by increased industrial development in Vietnam, the government plans to implement a national master gas plan.

Not all is rosy for Viet Nam's petroleum outlook. Competition for hydrocarbon potential in the South China Sea has long embroiled Viet Nam and neighbor China in a territorial dispute that has flared again with exploration on a block China awarded to U.S. independent Crestone Energy Corp. (OGJ, Apr. 25, p. 30).

ECONOMIC CONCERNS

Of the $20 billion Viet Nam says it needs in the way of total direct foreign investment the rest of this decade, $8 billion is earmarked for the oil ind gas sector.

Hanoi has laid out a priority wish list for foreign investors that includes refineries, gas pipelines, and hydrocarbon fueled power plants. Specifically, that covers targets of producing 400,000 b/d of crude, having a major refinery on line by 2000, and establishing an electric power grid.

Since Hanoi opened its economy to foreign investment in 1988, it has attracted almost $11 billion in investment commitments covering 1,200 projects.

There are some concerns over foreign exchange, however, that have officials concerned about growing corruption and bribery problems. Foreign direct investment accounted for more than one fourth of total capital investment in the country in 1993.

Vietnamese economist Nguyen Van Quy told an Asian Development Bank workshop in Manila late last month all trade and investment indicators have been healthy since President Clinton lifted the U.S. trade embargo on Viet Nam in February. Nguyen predicted Viet Nam's economy will grow by 8.8% this year, 9.5% in 1995, and 10% in 1996.

Citing a need for more foreign investment, Nguyen said, "Viet Nam is in a transitional stage of moving to a market oriented economy and is implementing the development objectives at an accelerated pace."

However, the influx of foreign capital has to some extent helped destabilize Viet Nam's currency, the dong. As of Oct. 1, Hanoi extended controls over foreign currency transactions, but the dong's instability has kept a heavy reliance on dollar transactions.

If trust in the dong does not improve, said Nguyen, secret and informal settlements will proliferate in an effort to dodge government foreign exchange mechanisms.

"Corruption and bribery plagues will abet these secret activities," he warned.

With that in mind, Hanoi nevertheless will have to step up its international borrowing if there is no increase in domestic investment. In forecasting needed investment of 42 trillion dong ($3.8 billion) this year, Viet Nam's central State Bank estimates it will need to mobilize $1.5 billion more in capital this year than last year, with about one third of that increase coming from foreign sources.

The remainder was to be generated in Viet Nam, but only $463 million was raised in first half 1994. Another $272 million was put together as long term credit for capital projects.

If this situation persists, long term borrowing from foreign countries will have to increase, the State Bank said. That would be a tough route for Viet Nam, encumbered by its commitments to the International Monetary Fund to limit commercial debt.

One partial solution for domestic capital formation lies in establishment of a stock market. Creation of a stock market is expected to get under way next year, beginning with trade in government bonds, but Hanoi has not specified plans beyond that. To date, there hasn't been enough economic reform to set up an infrastructure in support of stock buying and selling.

ECONOMIC REFORMS

Viet Nam's economic reform campaign got a big boost late last month when the International Development Association extended Hanoi a $150 million credit to support the economy as it enters a more demanding phase in its transition to a market economy.

To date, Viet Nam has enacted economic stabilization and price reforms that include liberalizing prices, devaluing and unifying the dong, dismantling collectivized farming, and sweeping monetary and fiscal reforms.

World Bank News noted tougher reforms to come cover many aspects of economic management, from budget preparation and reform of the banking sector to trade liberalization and restructuring of state enterprises, as well as continuing efforts to overhaul trade regulations and investment rules. More legal reforms are on tap to sustain a push to create a solid foundation for commercial and civil transactions.

All of this has occurred while Viet Nam has maintained a strong economic growth rate and kept inflation in check.

Despite Hanoi's impressive achievements, poverty remains widespread and major structural reforms still must be undertaken, World Bank said.

World Bank News said the government intends to:

  • Hold the budget deficit to a manageable level. Hanoi cut the deficit to 2.7% of gross domestic product in 1994 from 6.2% of GDP in 1993. The deficit is expected to rise to 3.3% of GDP in 1995.

  • Improve efficiency of public outlays so essential services can expand.

  • Strengthen incentives for private savings, investment, and production. Weak infrastructure and an inefficient financial system are the major bottlenecks to investment. Providing export incentives in the context of broad trade reform also will spur savings and investment.

PETROLEUM LAW REFORMS

Along with economic reforms, Hanoi recently implemented reforms to petroleum law to attract more investment by international companies.

A new petroleum law was ratified july 6, 1993, by Viet Nam's National Assembly. Under the law, Petrovietnam, founded in 1977, serves as a state owned enterprise to carry out upstream and downstream petroleum operations. Currently, Petrovietnam reports directly to the prime minister.

The law empowers Petrovietnam to select contractors to be assigned acreage for oil and gas exploration and development. Selection of contractors is to be based on results of competitive bidding rounds or in other ways to be announced by the government. Agreements can take the form of PSCS, joint ventures, or other contractual forms.

Tax liabilities for companies conducting oil and gas operations in Viet Nam generally include a corporate income tax, export and import taxes, rental for use of land or real estate tax that also applies to sea surface, and other taxes as stipulated by Vietnamese law.

In some cases, Petrovietnam pays certain royalties and taxes on behalf of the contractor or joint venture.

Royalties are 6-25% on crude oil production and 0-10% on natural gas production. Corporate income tax generally is 50% of taxable income, with Hanoi offering an exemption or reduction of the tax case by case.

In addition, Hanoi levies a profit repatriation tax (PRT) as follows: 5% that applies to projects with more than $10 million in invested capital, 7% that applies to projects with more than $5 million in invested capital, or 10% for all other projects.

PETROLEUM BACKGROUND

Nguyen Dang Lieu, director of science, technology, and environment for Petrovietnam, detailed Viet Nam's petroleum status at a Price Waterhouse international conference in Houston Nov. 8.

Nguyen said 1988 marked the beginning of a very active period of investment by foreign oil companies in Vietnam.

The first PSC signed in this period was with India's state owned Oil & Natural Gas Commission (ONGC) in 1988. So far, Petrovietnam has signed 27 PSCs with international oil companies, of which 26 are offshore and one onshore.

During 1989-93, PSC contractors:

  • Collected more than 100,000 line km of 2D seismic data and several thousand square kilometers of 3D data.

  • Drilled more than 40 wildcats on 30 prospects with more than 100,000 m of hole drilled.

  • Reported six oil discoveries and six gas discoveries.

OIL PRODUCTION

Until last month, Bach Ho (White Tiger) oil field, which went on stream in 1986, accounted for all of Viet Nam's commercial crude oil production.

It was joined by Dai Hung (Big Bear) last month (OGJ, Oct. 24, p. 37).

A group led by BHP Petroleum Pty. Ltd. is developing Dai Hung oil field on Block 05-1, where field reserves are pegged at 100-500 million bbl. Prior to start-up, initial flow rate was forecast at 25,000-35,000 b/d under an initial development phase.

BHP expects to complete an assessment of the field's performance by second quarter 1995, then submit a plan for full development to Hanoi. BHP partners in the development are Petrovietnam, Malaysia's state owned Petronas Caligari, France's Total, and a Japanese group led by Sumitomo Corp.

Petrovietnam expects oil production to start from a third field, Rong, by yearend. If official forecasts are borne out, Rong could produce about 24,000 b/d.

Bach Ho and Rong are on Block 16, which is operated by Vietsovpetro, a joint venture of Petrovietnam and a Russian state company.

Bach Ho earlier was expected to produce an average 134,000 b/d in 1994, up from an average 126,000 b/d in 1993. However, during the first 9 months of the year, Bach Ho produced an average 138,700 b/d, up 15% from the same period in 1993.

Along with production from Rong and Dai Hung, total Vietnamese crude oil production now is projected to average 142,000 b/d for all of 1994.

Petrovietnam is targeting production of 220,000 b/d of crude and 144 MMcfd of gas by yearend 1995 and 400,000 b/d of crude and 288 MMcfd of gas by 2000. Average production of 160,000-170,000 b/d of crude is projected for all of 1995.

BACH HO UPDATE

Viet Nam in 1995 intends to start using associated gas currently being flared in Bach Ho field. The volume of associated gas produced at Bach Ho has increased from 6.4 MMcfd in 1987 to more than 95 MMcfd in 1993.

Petrovietnam is laying a 16 in., 125 km pipeline from Bach Ho to Ba Ria, near the coastal resort town of Vung Tau. About 107 km of the line is offshore. Pipelaying is to be complete this month, with the gas sold domestically.

Meantime, Petrovietnam and its foreign partners British Gas plc and Mitsui Corp. have begun studying the feasibility of setting up a joint venture company to increase and market Bach Ho gas production.

The proposed expansion plan involves installing a compressor platform in Bach Ho field and shipping the added production via the pipeline. The $400 million project calls for laying a pipeline from Ba Ria to Ho Chi Minh City to transport treated Bach Ho dry gas to a gas fired electric power plant and construct onshore gas processing facilities.

Included are plans to export any liquefied petroleum gas stripped from the production stream through LPG storage and export facilities to be built at Vung Tau. Overall project completion is targeted for yearend 1996, with first gas coming ashore in 1995. Bach Ho marketed gas production is expected to average 95-144 MMcfd.

Meantime, plans call for a waterflood to start in Bach Ho next year. Sembawang Engineering Pvt. Ltd., Singapore, is building a $65.8 million water injection platform there that is expected to be complete in first half 1995.

BP GAS STRIKES

Perhaps the most significant recent E&P action off Viet Nam involves a pair of major gas field strikes drilled by BP Exploration Operating Co. Ltd. in the Nam Con Son basin off southern Viet Nam (OGJ, Sept. 26, p. 40). BP's partners are ONGC and Norway's state owned Den norske stats oljeselskap AS. Reserves initially are pegged at a combined 2 tcf.

BP's discoveries confirmed at Lan Tay (West Orchid) and Lan Do (Red Orchid) have sparked Hanoi's interest in committing itself to development of a natural gas industry in Viet Nam, for domestic as well as possible export markets.

BP wants to deliver the gas via a proposed pipeline whose route lies near Bach Ho and Dai Hung. The latter also contains significant gas reserves.

BP wants to ship the gas to Ho Chi Minh City, where the company says the fields' gas could support the city's current power requirements of 1.2 million kw for more than 25 years.

BP and General Electric this year disclosed plans to build an $810 millon gas fired power plant and related 600,000 metric ton/year urea fertilizer plant along the Thi Vai River near Ho Chi Minh City that would be fed by offshore gas.

Lan Do/Lan Tay development costs are estimated at $1 billion. BP also is targeting gas in the adjoining Blocks 05-2 and 05-3 under a separate exploration program.

DISCOVERIES

Operators have logged a string of oil and gas strikes off Viet Nam in 1994.

Among the successes, a wildcat drilled by Royal Dutch/Shell Group and a group of South Korean petroleum companies led by state owned Petroleum Development Co. (Pedco) flowed 3,419 b/d of oil and 22 MMcfd of gas on Block 11-2, which adjoins BP acreage. The South Korean companies gave a preliminary estimate of oil reserves at about 70 million bbl. Two appraisal wells are planned to assess the structure, described as complex.

Lasmo plc's first well on Block 4-2 off Viet Nam found gas and condensate in lower Miocene sands at 3,96791 m. Its 1 Flying Horse flowed 2 MMcfd of gas and 40 b/d of 52 gravity condensate. Plans call for more wells to be drilled on the block in 1995. Union Texas Petroleum Holdings Inc. recently acquired a 25% interest in the block, half from Lasmo and half from Cieco Con Son Inc.

Petronas 1 Ruby last August flowed 1,750 b/d of 40 gravity oil on a test of one zone near granitic basement and 880 b/d of 38 gravity oil and 7.2 MMcfd of gas on a test of a lower clastic reservoir. Further tests of upper clastic reservoirs and 3D seismic surveys are planned to determine commerciality. The find is on Block 01 in the Mekong basin.

Japan Vietnam Petroleum Co. (JPV) last July gauged 4,043 b/d of oil from a second, shallower pay zone in its Block 15-2 Rang Dong wildcat in the Cuu Long basin. An earlier test flowed 10,346 b/d from the deeper Bangdong formation at a depth of more than 3,000 m. JPV interests are Mitsubishi Corp. 51% and Japan National Oil Corp. 49%. Two more wells are planned to delineate the discovery, whose crude quality and reserves potential are described as comparable to Bach Ho's.

OTHER EXPLORATION

The pace of exploration has picked up sharply off Viet Nam this year.

In the most recent action, Canadian Occidental Petroleum Ltd. signed a PSC covering the 2,287 sq km Block 12W in the South Con Son basin. CanOxy has a 100% interest in the block. The PSC has a 5 year exploration term. The first phase calls for evaluation of the block's potential during an initial 18 months.

Mobil Corp. and partners signed a PSC with Petrovietnam covering exploration and development of the prized Thanh Long (Blue Dragon) prospect on Block 05-lb, which Mobil identified along with Dai Hung in 1975 (OGJ, Apr. 25, p. 30). Mobil spudded an appraisal well on Thanh Long in August.

Mobil also acquired an interest in Block 05-3 from Japan's AOC Energy Development Co. Ltd.

Drilling was to get under way last summer by a joint venture of APN Petroleum Ltd. 55% and operator Occidental Petroleum Corp. 45% to test the Ung Trang structure on Block 04-3 in the South China Sea.

British Gas and ARCO planned to spud this past summer a wildcat on Block 04-1 in the Con Son basin.

A group of Kerr-McGee Corp., Cairn Energy plc, and Secab Ltd. earlier this year disclosed plans to drill a wildcat on Block 22 in 170 ft of water in the South Con Son basin by yearend.

Unocal Vietnam Ltd. is negotiating a PSC for Block B, called out of several other blocks off Southwest Viet Nam, near gas fields affiliate Unocal Thailand operates in the Gulf of Thailand. It also is looking at other prospective onshore and offshore acreage in Viet Nam.

Amoco Production Co. expects to place bids by yearend for oil exploration and production rights off Viet Nam. The company may form one or more partnerships for bidding on some of the blocks and is considering farmouts on others.

Dusty Mac Oil & Gas Ltd. Vancouver, B.C., signed a letter of understanding with Petrovietnam to conduct geologic and geophysical surveys of a northern Viet Nam offshore basin, where more than 4,000 km of seismic surveys have identified shallow to medium depth prospects. Additional surveys are planned for onshore and coastal areas.

Viet Nam plans to offer more offshore acreage to foreign oil and gas companies. Six companies or groups are bidding for Block 15-1, which lies 20 miles east of Vung Tau in the Cuu Long basin, just north of the Mitsubishi group discovery. And Hanoi will seek bids for two other blocks, near Bach Ho, formerly held by Vietsovpetro.

REFINING PROSPECTS

Vietnam hopes to be refining its own petroleum products by 2000.

The country's consumption of petroleum products is small but growing. In 1992, Vietnam consumed less than 60,000 b/d of petroleum products, 16.3% more than in 1991. Petroleum consumption in 1993 was 22.5% greater than in 1992.

Petrovietnam awarded a feasibility study of Viet Nam's first refinery to a group of companies led by Total. The study is to be complete by February 1995.

Plans call for capacity of 130,000 b/d and a location in Central Viet Nam. Construction would require about 3 years, with first products available by 2000. It is not expected to meet the country's refined products demand projected for 2000.

Petrovietnam has asked for bids to begin studies for a second refinery, likely to be located in the northern part of the country.

GAS EXPORT PROSPECTS

Viet Nam also is studying the possibility of exporting gas via pipeline to Thailand or as liquefied natural gas to regional markets.

Hanoi figures it needs to establish 19 tcf of natural gas reserves off its southern coast to support that scope of gas exports. East-West Center, Honolulu, recently estimated Viet Nam's potential gas reserves at 12-35 tcf.

Thailand, with its soaring demand for natural gas, is the most likely near term market. Hanoi estimates it could export 105 bcf/year to Thailand through a 700-806 km offshore pipeline to be laid from southern offshore fields to tie into Thailand's transmission network in the Gulf of Thailand.

That would call for establishing 3-4 tcf of gas reserves in addition to Viet Nam's current requirements of 5-7 tcf.

Another 6-8 tcf of gas reserves would be required to justify an LNG export complex, with supplies going to Japan, South Korea, and Taiwan.

Copyright 1994 Oil & Gas Journal. All Rights Reserved.