VIET NAM, CHINA SEEK EXPLORATION

Viet Nam and China are updating oil and gas licensing and production sharing terms to attract more participation by foreign companies. Among recent developments: Officials of Petrovietnam, Viet Nam's state oil company, at a meeting in Houston reviewed major terms and conditions of production sharing contracts (PSCs). Mao Zefeng, director of the contracts and legal department of China National Oil & Gas Exploration & Development Corp. (Cnodc), Beijing, said regulations covering licensing and

May 31, 1993

7 min read

Viet Nam and China are updating oil and gas licensing and production sharing terms to attract more participation by foreign companies.

Among recent developments:

Officials of Petrovietnam, Viet Nam's state oil company, at a meeting in Houston reviewed major terms and conditions of production sharing contracts (PSCs).
Mao Zefeng, director of the contracts and legal department of China National Oil & Gas Exploration & Development Corp. (Cnodc), Beijing, said regulations covering licensing and development of onshore oil and gas are to be passed this summer by the Chinese legislature.

Viet Nam late in 1987 opened areas on its continental shelf to petroleum exploration. Foreign companies since 1988 have signed 23 PCSs, and officials said more signings are to be announced soon.

Viet Nam presently produces only Bach Ho oil field on Block 9 in the South China Sea. Bach Ho flow early in 1993 was about 120,000 b/d. Two other fields-Rong, also on Block 9, and Dai Hung on Block 5-are to be on stream by yearend 1994.

China in the past decade has become one of the world's largest oil producing countries. The country's oil output this year is expected to average about 2.86 million b/d, up 0.7% from the 1992 average of 2.94 million b/d.

Mao said China's onshore joint venture regulations will be consistent with rules covering offshore development approved Jan. 30, 1982, by the State Council (OGJ, Apr. 12, p. 36). Among other terms and conditions, the draft model PSC being used in the first Tarim basin bidding round, announced in March 1993, require foreign contractors to pay Cnodc a $1 million lump sum signature fee.

VIET NAM'S PSC TERMS

Viet Nam's standard upstream oil and gas PSC since 1987 has been styled after Indonesia's PSC, with some changes. It offers a 25 year term, including an exploration period of about 5 years.

PCS approval is granted by Viet Nam's State Committee for Cooperation and Investment.

PSC areas range in size from only a few hundred square kilometers to 10,000 sq km in the case of deepwater tracts. For deepwater areas or acreage far from shore, contract and exploration periods may be extended.

PSC exploration periods can be divided into two phases of 3 and 2 years or three phases of 3, 1, and 1 year. Twenty-five percent to 35% of the original contract area must be relinquished at the end of each exploration phase.

Each PSC includes minimum work and financial commitments. Production sharing contractors provide all financial and technical assistance needed to conduct petroleum operations and assume sole risk of operational costs. As long as they fulfill work commitments, contractors have no obligation at the end of each phase to pay Petrovietnam whatever part of financial commitments are unspent.

The production sharing contractor or its subcontractors may import or export freely without duties all materials, machinery, or equipment needed for petroleum operations. AR assets used in operations by the contractor become the property of Petrovietnam after costs are fully recovered by the contractor.

Signature bonuses, bonuses for commercial discoveries or production, purchases of data from Petrovietnam, taxes, or contributions to PSC training funds are not considered recoverable expenses.

PSC PROFIT OIL

Once commercial production is established, Viet Nam allows contractors to recover in kind nondepreciable operating costs including outlays for exploration, appraisal, development, installation, maintenance, and production. Thirty-five percent to 38% of net oil production is set aside each fiscal quarter of the PSC's term for contractor cost recovery. The percentage of net oil set aside for cost recovery can be more than 38% on deepwater tracts.

Petrovietnam retains an option at the beginning of a PSC or at first commercial development to participate with at least 15% working interest.

Petrovietnam and the contractor share as profit oil whatever volume of net oil remains after deductions for cost recovery. Profit oil is shared on a sliding scale based on production volumes in a total PSC area. Petrovietnam's share of profit oil typically ranges from 71% in a field producing as much as 15,000 b/d to 85% in fields producing more than 100,000 b/d.

The PSC contractor receives title to his share of profit oil at the point of delivery and is allowed to freely export that share. Oil and light hydrocarbons are valued at international market prices - calculated quarterly - or based on the market price of a basket of five Southeast Asian crude oils.

Contractors, including all partners if the contractor is a group of foreign companies, must pay royalties, corporate income tax, and transfer of profit tax. Contractors' foreign employees must pay Viet Nam's personal income tax.

Petrovietnam pays contractors' fees and taxes, except for personal income tax and withholding tax on subcontractors.

PSC economic terms must be negotiated on commercial gas discoveries. Gas may be used in production, to maintain field pressure, treated, valued as commercial, or flared. Petrovietnam retains the right to dispose of gas intended for flaring.

CHINA'S ONSHORE TERMS

Mao said Sino-foreign petroleum cooperation is one of China's most important economic development strategies.

Rules covering offshore oil and gas agreements between China and foreign companies are to apply to onshore projects until onshore rules are approved.

Under policies being developed for China's evolving "socialist market economy," China National Petroleum Corporation (CNPC) is responsible for overall management of onshore petroleum cooperation with foreign companies. Cnodc, a CNPC subsidiary, handles details related to invitations for bids and contract negotiations, signings, and implementation.

Negotiated petroleum contracts are reviewed by CNPC and the Petroleum Industry Administration (PIA), the latter being formed by the State Council.

PSCs come into force after approval by China's Ministry of Foreign Trade and Economic Cooperation. Onshore oil and gas development programs are to be approved by PIA.

Onshore and offshore, production sharing contractors must fund and carry out exploration operations and bear all exploration risks.

Foreign contractors and CNPC/ Cnodc are jointly responsible for providing investments needed for cooperative development. Contractors are to be responsible for development operations and production operations until CNPC/Cnodc takes over the latter.

CHINA'S FISCAL TERMS

China's imminent onshore petroleum cooperation rules are expected to allow Cnodc as much as a 51% interest in PSC areas and foreign contractors at least 49%.

Each party is to pay exploration and operating costs in proportion to its interest.

All costs incurred from petroleum operations are to be recovered in kind with cost recovery oil volumes amounting to as much as 60% of annual gross oil production. Cost recovery oil is to be used first to recover all parties' operating costs and then to recover exploration costs incurred by contractors.

In addition, 5% of annual gross production is to be allocated to pay China's consolidated industrial and commercial tax and as much as 12.5% for royalties.

Oil remaining after cost recovery, industrial and commercial tax, and royalties is to be divided into "share oil" on the Chinese side and "allocable remainder oil." Allocable remainder oil is to equal remaining oil multiplied by a percentage increasing with production volumes and assigned to each field within applicable PCS areas.

PSC terms for gas fields are to be determined separately, based on conditions affecting development, production, and marketing. CNPC/Cnodc is to buy gas gathered in and around the Tarim basin if volumes are high enough to warrant sales.

Foreign contractors are to be allowed to export their shares of production and remit abroad investments recovered, profits, and other legitimate income.

Contractors are to be required to use appropriate advanced technology and management techniques and are to be obliged to transfer the technology and experience to qualified Chinese personnel involved in the projects. Petroleum equipment and materials imported into China for cooperative projects are to be exempt from tax or given preferential tax treatment.

Assets bought or built by foreign contractors to carry out approved PCS activities, excluding items leased from a third party, are to belong to CNPC/ Cnodc after the contractors have recovered their investments.