rY OF FOREIGN TRADE
Trang 2
HANOI UNIVERSITY OF FOREIGN TRADE FACULTY OF BUSINESS ENGLISH
FOREIGN DIRECT INVESTMENT (FDI) IN VIETNAM UPSTREAM PETROLEUM
SECTOR
SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF
BACHELOR OF ART IN BUSSINESS ENGLISH
Student’s name: Vu Thi Hong Hanh Class: A2 K40 -BBE
Trang 3
ACKNOWLEDGEME
1 am deeply indebted to many people who have unceasingly assisted me in completing this thesis
1 would like to acknowledge my deep gratitude to Ms Phuong To Tam
(M.A), lecturer at the Foreign Trade University for her invaluable instruction corrections, comments, criticism, suggestions, and assistance during the
development of the thesis
In carrying out this thesis I have spent many times working closely with
many people in British Petroleum Pipeline of the Company Ltd, and staff in
World Bank who provide me with useful information, especially special thanks to Mr Hoang Tran Thong, a commercial analyst of BP who have led me to a plentiful source of information
J also wish to extend my thanks to teachers in English Faculty and Foreign
Trade Faculty, who impart me with basic knowledge on foreign direct investment
in English
IT would like to convey my thanks to my Potential group in A2K40BBE for their friendship and support
Trang 4ABSTRACT
Gas industry has been playing an important role in the national economic
development Foreign direct investment (FDI) contributed to this success and is regarded as the most important factor of the development of the gas industry in the future FDI in Vietnam’s upstream Petroleum sector is a strategy to boost the gas
industry The analysis of the gas industry will be identified systematically
The thesis helps readers have better understanding of the overall of
Trang 5TABLE OF CONTENTS
INTRODUCTION
1 Rationale of the study
2 Objective of the study 3 Research Questions 4 Scope and focus of the study 5 Methodology
6 Structure of the thesis ad
CHAPTER 1: OVERVIEW OF THE VIETNAM GAS INDUSTRY AND FDI IN UPSTREAM PETROLEUM SECTOR
1.1 The introduction to FDI in Vietnam’s upstream Petroleum sector 4
1.1.1 Introduction of FDI in Vietnam Gas market -‹ we 4
1,1.2.The environment for foreign investment
1.2 Overview of Vietnam Gas Industry
1.2.1 The Gas industry
1.2.2 The competition for Gas
1.2.3 Petro Vietnam’s organisation and the monopoly roles in
petroleum industry eel 1.2.4 The position and structure of gas industry within the overall
petroleum industry “22 CHAPTER 2: FDI IN VIETNAM’S UPSTREAM PETROLEUM SECTOR
Trang 62.2 Operational issues and challenges in the oil and gas secfor 33
2.2.1 Legal framework
2.2.2 Bureaucracy (Process in adimistration)
2.2.3 Protection of investment return
2.2.4 Existing legal contracts
2.2.5 Communication of information .sccseceeeeeeenenees 2.3 Gas market and opportunities for development 2.3.1 The development of the gas market 2.3.2 Gas value chain
2.3.3 Opportunities for development 2.3.4 Exploring options for the Petroleum market CHAPTER 3: RECOMMENDATIONS
3.1 Recommendations to Vietnamese government 60
3.1.1 Improving regulations and legal framework, and administrative
system 60
3.1.2 Consolidating and rationalizing the gas industry structure, and
govermental management won OL
3.2 Recommendations to Vietnam gas industry
3.2.1 Increasing exploration and development of oil and gas resources
Trang 7LISTS OF FIGURES AND TABLES
FIGURES
Figure 1: The Spectrum of Industry Structure
Figure 2: Oil and Gas Value Chain
Figure 3: The natural Gas Chain
Figure 4: Forecast structure of gas demand for 2010
Figure 5: The development of gas market in the Southest of Vietnam
Figure 6: Industry Structure: Gas
Figure 7: Some cases of netback values for gas competing with diesel
Figure 8: The current gas Value Chain
TABLES
Table 1: Mechanism for pricing Gas in some neibouring countries of Vietnam Table 2: Petroleum product prices
Table 3: Current usage of gas in the South
Trang 8LIST OF ABBREVIATIONS
AG Associated gas Bbl Barrel
BCC Business Cooperation Contract
Bem, or bem Billion cubic meters, or billion m3 (109)
B.O.E Barrels of oil equivalent
CCGT Combined cycle gas turbines
CIEM The Central Institute of Economic Management
CL Cuu Long
CNG Compressed natural gas
Downstream Business utilizing oil & gas products
EIA Energy Information Administration
E&P Exploration and Production
EVN Electricity of Vietnam
FDI Foreign Dire ct Investment
GDP Gross Domestic Product
GGU Government Guarantee Undertaking
GT Gas Turbine
HCMC Ho Chi Minh City HN Hanoi City
HSFO High Sulfur Fuel Oil IRR Internal rate of return IT Information Technology IPP Independent Power Plant
Joc Joint Operating Company
Trang 9LPG Midstream MMBtu, or mmBtu MMCMD MOF MOI MPI MW MOI NCS NPV OoG PSC PV R&D SOE T&D Tef Toe UNCTAD UNDP Upstream USD or US$ VAT VND VPI
Liquefied petroleum gas
Oil & gas transportation and storage business Million British thermal units
Million Cubic Meters per Day Ministry of Finance Ministry of Industry Ministry of Planning and Investment Megawatt Ministry of Industry Nam Con Son
Net present value
Office of Government
Product Sharing Contract
PetroVietnam, or Vietnam Oil and Gas Corporation
Research and Development
State Owned Enterprises
Transmission and Distribution
Trillion cubic feet (1012) Tons of oil equivalent
United Nations Conference on Trade and Development
United Nations Development Programme
Oil & gas exploration and production business
United States Dollar Value Added Tax
Vietnamese Dong
Trang 10INTRODUCTION
1 Rationale of the study
Vietnam’s oil and gas industry, although young, has made remarkable achievements in its exploration and production operations, of which the gas industry has been playing an important role in the national economic development Foreign direct investment has been one of the key factors contributing to this
success, and is seen to be crucial in the future development of the oil and gas
industry, as it provides a significant source of finance, technology, and
management skills The flow of FDI into this sector, however, is declining and at
present does not exhibit any signs of changing, despite the general optimistic view
of the business environment that is characterized by a stable political system, amid a growing economy, and enhanced by the potential for further oil and gas
discoveries
This dissertation seeks to develop a strategic framework that describes the
possible directions and measures to help stimulate foreign direct investment in the
Vietnam gas industry
A thorough analysis of Vietnam’s gas industry was carried out, focusing on four areas of the applicable regulation and policies, the existing industry structure,
the gas value chain and the market structure Throughout the analysis, existing
Operational problems and challenges faced by foreign investors, and limitations with the current policies and legislation, were highlighted Obstacles and adverse impacts caused by the existing oil and gas industry structure, as well as the weak links along the gas value chain, were identified that could both hinder or
discourage foreign investors Opportunities for developing a strong gas market
were identified and discussed toward formulating a strategy for the industry
Trang 11sound and clear policy and an appropriate strategy are developed and implemented Recommendation was made for a strategy that should if implemented, help to create confidence and comfort for foreign investors, thus
stimulating the FDI to develop the gas industry in Vietnam
2 Objective of the study
The main objective is to develop a strategic framework that describes the
possible directions and measures to help increase foreign direct investment in the Vietnam gas industry To arrive at this, FDI history and trends in Vietnam’s oil and gas exploration and production sector was reviewed and J also identify the key elements of the current gas industry development in relation to the overall] oil and gas industry
And the very important objective of this thesis is to offer recommendations
to develop the gas industry in Vietnam especially upstream petroleum sector
= Research Questions
The following key questions is addressed in the research:
i) What is the current investment climate in Vietnam for the petroleum
sector and what are the operational problems and challenges that foreign investment are facing in this sector ?
ii) What are the limitations in government policy and how do they affect FDI in Vietnam ?
iii) | What are the possibilities available for building up an attractive market for the gas industry?
4 Scope and focus of the study
The thesis is to analyze current situation of foreign direct investment in
Vietnam upstream Petroleum sector, which means that some highly important
factors related to FDI will be studied Opinions and strategic approaches
Trang 12expressed by senior people in the industry and government officials were obtained so as to provide a practical basis for the study
Moreover, the study provides basic knowledge and also profound knowledge of the gas industry, some certain expressions and some surprising data
and figures In addition, some figures will be compared with those of other gas
developed countries in the world Thus, the purpose is to help readers to have
better understanding of the gas industry
5 Methodology
The study relies mainly on relevant articles, books, statisics, reports of the British Petroleum Exploration Company Ltd., analytical and comparative methods
to deal with research questions The study has utilized both primary and secondary data:
° Primary data, opinions and strategic approaches written in articles which are collected from National Library, Foreign Trade University Library, as well as Internet, much depending on reports of British Petroleum Exploration Company Ltd
: Secondary data was gathered from books, journals, and newspapers and
published reports available locally and on the Internet Studies and reports from
authoritative sources such as World Bank, UNDP, and governmental offices
including The Central Institute of Economic Management (CIEM), MPI, and
PetroVietnam’s Information Center, were also used
Trang 13CHAPTER 1: OVERVIEW OF THE VIETNAM GAS INDUSTRY AND FDI IN UPSTREAM PETROLEUM SECTOR
1.1 The introduction to FDI in Vietnam’s upstream Petroleum sector 1.1.1 Introduction of FDI in Vietnam Gas market
Economic reform in Vietnam was launched in 1986 followed by the
enactment of the Law on Foreign Investment one year later Since then the
significant role of FDI has emerged in Vietnam’s economic development In 2001, FDI companies contributed 13.3% to GDP, 35% to industrial output, 23% to
export and 25% to total state budget revenues The oil and gas sector alone has
significantly contributed to state revenue In 2002, oil export value was US$ 3.27 billion, accounting for 19.6% of the total export revenue for the country This has
brought about a growth in workshops and research focusing on the importance of FDI and how to make Vietnam more attractive for FDI Oil and gas exploration
was identified as a priority area both from the Government’s and foreign
investors’ perspectives for the attracting of FDI
Oil and gas potential reserves in Vietnam is said to be significantly high,
with an estimate of 3.75 billion barrel of oi] equivalent (B.O.E), of which gas
accounts for more than 50% However, Vietnam is facing an uphill struggle to discover oil reserves big to replace the expected decline in the current output from the old production fields Foreign investors say oil is not only hard to find off
Vietnam's shores, but the geology is difficult and service costs are high, making the government's fiscal terms for exploration and production seem all the less
Trang 14still very young and the full development of the country’s gas resources will
largely depend upon the ability of the government and foreign investors to move
existing gas development projects forward To accomplish this a large amount of
foreign investment is needed; and it has not yet arrived Vietnam, in its Strategy for
Social - Economic Development, adopted by the Ninth National Congress of the
Communist Party in April 2001, indicated that the country needs to invest US$ 60
billion over the period 2000-2005 to sustain an average growth rate of GDP of
7.5% per annum With a realization rate of 40% this means Vietnam will have to attract US$ 30 -35 billion during the period 2000-2005 FDI is expected to contribute US$ 12 billion to the implemented investment (Le Dang Doanh, 2002) In the oil and gas sector, annual production output is targeted at 22 -24 million tons in oil equivalent for the year 2005, and 27-30 million tons for year 2010 This will require an increased exploration output and increase the average reserve to about 50 million tons annually, which equates to an investment in the range of US$ 150-200 million per year This is a challenging goal but achievable if the country is prepared to continue reforms, improve its investment climate and become more competitive with other regional economies
1.1.2 The environment for foreign investment
1.1.2.1 Political and legal
Since the implementation of the renovation policy in 1988 market liberalization is allowed in general with Governmental intention to encourage
foreign investments However, the key economic sectors such as petroleum and
energy industries are still regulated by the Government which presents significant
political influence for any oil and gas development projects
PetroVietnam (PV) is assigned a state management role to supervise all foreign operators’ activities and advise the Government on petroleum regulatory issues At the same time, they can also participate as a partner in any oil and gas
Trang 15will be a headache and a key factor preventing PV from achieving the highest efficiency in their operations In addition, gas producers will not sell their product
directly to any end user, but have a gas sale contract signed with PV who will then
further trade it to the ultimate gas users i.e power plants 1.1.2.2 Economic
Following the financial crisis in Southeast Asia, Vietnam’s economy has
recovered and recorded a GDP growth of about 7% for the three year period 2000- 2002 The Customer Price Index (CPI) increased by 4% in 2002 compared with
2001 after remaining unchanged for the previous three years (The Central Institute
of Economic Management, March 2003) High profit tax rate (average 50%) for
petroleum production and revenue from crude oil export (about 15-17 million tones/year for the last decade) contributed a major portion to the country’s income
and especially hard currency A large portion of energy generation is much
dependent on the seasons for hydro and coal resources for thermo - electricity
Whilst energy demand is seen as growing an average 12% a year for the next ten years, especially in the South where more economic and industrial operations are taking place
1.1.2.3 Social and cultural
An open market economy and industrialization activities has resulted in a trend of people migrating into industrial towns and cities looking for new jobs and
exploring opportunities for higher income An awareness of, and responsibility toward, the environment and society evelopment has been enhanced among the population, although a notable difference can still be observed between cities and
countryside areas 1.1.2.4 Technological
The overall low level of technology and productivity might be a result of
the lack of investment for R&D and inherent use of the old Russian and East-
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management in the past also hindered the pace of technological change in the
country
1.1.2.5 Environmental
Specific requirements for environmental management and impact
assessment process and system for most development projects are set by law and related legislation A regulation on the use of lead -free fuel was also put into
effect from October 2001
While limitations are set to require more caution and investment for the
energy and petroleum industries, opportunities are opened for the gas industry which could offer a low cost and clean, environmentally friendly alternative for power generation in Vietnam
1.2 Overview of Vietnam Gas Industry
1.2.1, The Gas industry
1.2.1.1 The overall of oil and gas industry structure
According to Grant, the underlying theory of how industry structure drives
competitive behavior and determines industry profitability is provided by industrial organisation economics (Grant, 1998, p.54) He has identified four types of industry structures as shown in Figure 1
Trang 17One extreme of this spectrum is presented by the theory of monopoly the existence of which is explained by Mills et al as due to
@
(ii)
Government legislating for a monopoly supplier,
or one firm establishing a dominant position in a market to such an extent that the competition is forced out According to the structural
features in Figure 1 Vietnam oil and gas industry would appear to be approaching the monopoly type The Vietnamese government
controls both the upstream and downstream oil and gas industries
The Vietnam Oil and Gas Corporation (PetroVietnam) a government-owned company is the only firm authorised to conduct
all upstream activities and is under the direct control of the Prime
Minister’s office Any petroleum exploration and production activities by foreign investors must be conducted in cooperation with PetroVietnam
PV has only one joint venture in upstream oil exploration and exploitation This is the VietsovPetro joint venture with Zarubezhneft, the overseas oil company
of the former Soviet Union, which began operating the Bach Ho field in 1986 Except for one very recently licensed Joint Operating Company (JOC), all other
relations with foreign oil companies in upstream development have been via
Product Sharing Contract’s Under these terms, PV acts somewhat like a landlord
while the foreign oil company takes on the risk and cost of exploitation and
exploitation It then receives a share of the oil lifted As with natural gas, PV is
currently the only company with the right to buy gas from the PSC operators at the wellhead then sell it to users such as Electricity of Vietnam (EVN) for power
generation, after it has been transported to shore with tariff being charged for the
gas transportation services
Trang 181.2.1.2 The value chain
a The oil and gas value chain in general
Value chain analysis has been widely adopted as a method of achieving an
understanding of how the activities of the organisation underpin its competitive
advantage Also, the linkages in the value chain, which show relationship between the activities, are very important As pointed out by Johnson and Scholes (the
author of a book), one of the key features of most industries is that very rarely
does a single organisation undertake all the value activities from the product
design through to distribution to the final consumer There is usually specialization of roles and any one organisation is part of the wider value system which creates a product or service Much of the value creation will occur in the supply and distribution chains, and this whole process needs to be analysed and understood
The overall value chain for the oil and gas industry is illustrated in Figure 2 which
shows all the related activities from upstream through downstream to the final customers
Trang 19Figure 2: Oil and Gas Value Chain Downstream
-Geophysical -Crude oil & Refining of -Pipeline -Inventory -Marketing Evaluation & Gas production Crude Transportation Management -Demand Forece Design -Gathering & -Product Barge & -Product Blending -Pricing Setting
-Field development Processing Blending Vessel -Truck Dispatch -Customer Servi -Drilling Operation -Transportation ‘Transportation -Demand fulfillr
& Storage
cross functional & Support Process Areas ‹
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b The relationship between oil and gas project
Since natural gas exploration and production are closely linked to oil exploration and production, major oil companies are involved in the natural gas
sector (UNCTAD, 2003)
As seen from the overall oil and gas value chain, oil and gas projects share some basic features, such as separation into upstream and downstream components in which the upstream consists of exploration and production and the
downstream of transportation, distribution, and consumption Moreover, the two
fuels are often in direct competition: upstream, gas competes with oil for
investment, and downstream, gas competes with oil products for customers (UNDP and World Bank, Jan 2000) However, the two sub-sectors exhibit the
following distinctive differences:
* Gas has substantially higher costs than oil between production and
market; because of its much lower specific energy content per volume, natural gas has much higher transportation costs Gas must be transported in pipelines under
pressure, and even under high pressure (i.e 100 bar), gas has a specific energy
content per volume of only about a tenth that of oil The same vessel or pipeline
thus handles at most about a tenth of the energy content in gas compared with oil
+ Gas has higher storage costs; because of its low energy density and its volatility, gas needs to be stored in sealed containment and needs much higher
volumes for the same amount of energy compared with oil
+ The economics of gas projects are highly sensitive to geographic factors: limitations of gas transport and storage make gas projects economically very sensitive to geographic factors such as distance between the production site and
the main consumption areas and concentration of demand It may be economic to
serve a given market with oil products but clearly uneconomic to serve the same
market with gas (UNDP and World Bank, Jan 2000, p.3)
Trang 21Research, 1999) There is a significant propostion of all technically recoverable gas resources contained in the Nam Con Son (NCS) basin which is some 400 km
from the southern Vietnam market This means that infrastructure is essential in
order to develop the gas fields It was recognised that, unlike the exploitation of oil, the full development of Vietnam’s gas resources will largely depend upon the
ability of the government and foreign investors to move existing gas development projects forward (Mekong Research, 1999)
c The natural gas chain
The natural gas chain is illustrated in Figure 3
Trang 22Figure 3 shows that, the key elements of the industry are gas production gas
transportation and consumption Again, it should be emphasized that:
+ unlike oil development, where the different participants are loosely linked,
gas operations link the participants in the gas chain rather tightly In oil, all those involved may choose their role, shape that role as they like, and test it out In the
gas chain, in contrast, the roles of the participants should be coordinated, at least
in an emerging gas industry;
+ unlike oil, where sales are single acts by nature, gas is characterised by
longterm cooperation (UNDP and World Bank, Jan 2000, p.67)
Therefore, to make it work, the main challenge is to ensure the stability of the chain from the production point to the end user (UNDP and World Bank, Jan
2000, p.50)
In Vietnam, although still very young, the gas industry is expected to play
an important role in promoting the overall development of the oil and gas industry
as well as the future national economy The industry itself has been sufficiently
built up with the main elements of the gas chain as follows:
+ Production: there are three fields currently producing Except for the small
Tien Hai field in the North with capacity of 20 million m3/year since 1981, other major gas producers are in the South These are the White Tiger associated-gas
field operating since 1995, with peak capacity of 2 billion m3/year, and the Lan Tay- Lan Do field, operating since 2002, with peak capacity expected to be 2.7
billion m3/year in 2005 The future potential producers for the period 2005-2010
will include Rong Doi- Rong Doi Tay, Hai Thach in NCS Basin, Emerald, Hai Au
in Cuu Long Basin, and Bunga-Kekwa and Cai Nuoc in the Southwest Continental Shelf
+ Transportation: the two pipeline systems currently in operation are the 142 km White Tiger associated gas pipeline with maximum capacity of 2 billion
m3/year, and the 400 km two phase Nam Con Son pipeline with peak capacity of 7
Trang 23pipeline of 2 billion m3/year (as a continuation from NCS pipeline) and a low pressure distribution pipeline of 0.7 billion m3/year in the Southeast, and a 332 km
pipeline of 2 billion m3/year in the Southwestern region
+ Consumption: power generation will remain the biggest gas consumer in Vietnam At present, except for the minor usage of gas from the Tien Hai field for the local ceramics manufacturing, power plants are the unique customers in the
gas chain Future end - users up to 2010 are expected to be chemical - urea
production plants, and other industrial users
At this stage, the development of gas industry in Vietnam is linked completely with the power industry, as gas-fired power plants are the ideal
customers which can consume large volumes of gas with a long-term commitment
and at a relatively high price Thus the current gas chain for Vietnam could be presented as in Figure 4 that also integrates the elements of the power chain into
the chain: gas production-transport-distribution-power generation-transport of
power-distribution of power-final use of power 1.2.1.3 The gas market structure
a Pricing — the key element to shape the gas market
While in developed gas markets with perfect competition, such as the US and Canada, the price of gas is determined by the balance between supply and
demand, or gas prices reflect the ability of supply to meet demand at any one time
Trang 24Table 1: Mechanism for pricing gas in some neighbouring countries of Vietnam
Brunei Indonesia Malaysia Taiwan Thailand
Mech The State |The State quotes | Price of gas | Government | Prices of gas
anism | controls | prices of gas for | for prices gas are set on the
of important industrial | commercial basis of gas
pricin and small customer; | and residential production
g gas For other consumer, | sectors are and transport price is determined | quoted by costs These
through the | Malaysia prices also
negotiation State Oil need to be Company approved by with the the approval of Government the Government.P
rice for gas for other users
are set
through the
negotiation
Prices 1-1.5USD/mmBtu | 4.3USD/mmB | 7.§2USD/mm No
of gas tu Btu information
for
indust rial
sector
Price | 0.2USD/mm | 1.3-1.7USD/mmBtu | 6.4USD/mmB | 5.4USD/mm No
of gas Btu tu Btu information
for
comm
ercial
sector
Price | 0.2USD/mm | 1.3-1.7USD/mmBtu | 6.0USD/mmB | 7.86USD/mm No
of gas Btu tu Btu information
for reside
ntial
sector
Price | 0.3USD/mm 2.4-3USD/mmBtu | 3.4USD/mmB | 6.57USD/mm | 2.8USD/mm
Trang 25In Vietnam, given the low level of development of the natural gas industry
pricing remains a new and uncertain issue At present, as most of the national gas
production is used for power generation, and this will be the case for the next
decade, the only existing prices are referenced to gas used for power generation: + transfer price of the associated Bach Ho gas sold to power generation (as of 1996) is approximately USD2.30 /mmBtu However this cannot be regarded as a market price as this is purely an internal Vietnamese government transaction and
is not conducted on a commercial basis
* The gas price of Lan Tay and Lan Do fields is around USD1.88/mmBtu at
the wellhead, with a transportation tariff of USD 0.88/mmBtu
As such, gas prices in Vietnam are still low compared with that in neighbouring countries, and not as high compared with other countries in the
world (Pham Ngoc Gian & Nguyen Tuan Phuong, Vietnam Petroleum Institute,
2003)
In general, there are two different approaches to pricing gas:
* Gas production cost: the price is calculated by accumulating all costs that the investors have to pay for the production and transportation of gas For the investors, gas must be priced so that they can obtain reasonable IRRs for every stage
* Real value of gas for the customer: the price of gas is calculated by the netback method, starting from the gas using benefit in the e nergy market
According to the economic point of view, the price of gas varies between these
two accumulated and the netback costs (Nguyen Minh Due and Tran Ngoc Toan,
2000)
As speculated by Wood Mackenzie, in Vietnam any future agreement on
gas price is likely to be related to the netback value of competing fuels at the
Vietnamese beach The most important competing fuel in Vietnam at present is
hydropower, but it is clearly difficult to determine a netback value given the
Trang 26investment with no long-run fuel costs Gas would, however, be expected to
command a premium over hydro because it can be used as a swing fuel, as opposed to hydro which, in Vietnam, is highly seasonal Thus, gas price will be
linked to the price of High Sulfur Fuel Oil (HSFO) and a nominated consumer
price index
When assessing the main elements affecting the gas price in Vietnam, it was pointed out that :
* Gas production costs: as most of the gas reserves and reserve potential in
Vietnam are located in difficult and remote areas, production cost per unit of gas in Vietnam will be higher than that of its neighbouring countries and other places in the world
* Reliability of supply: due to insufficient source of appraisal data, and
because the gas industry is still very young, the level of reliability or the confidence in the gas supply in Vietnam is not yet as high as desirable However,
the confidence in the gas reserves in the Southern region is considered sufficient and acceptable for investment
* Confidence of market: as the gas market is not yet established in Vietnam, it could be seen as a potential for future markets, but can also be seen as a lack of
confidence in the market
+ Infrastructure: except for the two existing Bach Ho and Nam Con Son
pipelines, and a upcoming pipeline in Block B, the onshore distribution pipeline
system is very limited, thus making gas production difficult and contributing to a higher gas price
+ Financial policies: policies on financing the infrastructure and facilitating gas consumption are not yet in place, but are being developed
+ Policy for alternative products: this is not yet in place
* Other incentives on tax, investment, labor, and payment are to be
improved
Trang 27
At present, these elements are more of negative than positive impacts on gas prices and therefore put the gas industry at a disadvantage
b The gas demand
Due to the distribution of oil and gas resources, the South is, and will be,
the biggest gas consumer in Vietnam Total gas demand of power consumers occupies up to 80% of the whole market Non-power markets consist of fertilizers,
goods and foodstuff processing, construction materials and metallurgy units,
transportation etc.(Vietnam Petroleum Institute VPI, June 2002) However, the actual consumption of the non-power sector will be much dependent on the availability and price of gas and other competitive fuel alternatives, as well as the technical expertise and costs associated with their converting from existing traditional fuels to natural gas The structure of gas demand anticipated in Vietnam by 2010 is shown in Figure 4
Figure 4: Forecast structure of gas demand for 2010
Source: Nguyen Xuan Dinh et al 2003
The demand of the power generation will make up for the largest, 82% of the total,
Trang 28The largest gas market has been formed in the Southeast area with the Phu My power complex that has been expanded to Ho Chi Minh City and the neighboring areas (VPI, June 2002)
Figure 5: The development plan of gas market in the Southest of Vietnam
(2005-2015)
Others (Ceramizs, glasses, NCV)
(Ca Mau Feliz (80,000 onnesyear COGT Co Mau 3 4(720MW) CCGT Ca Ma 1210MW) CCGT Unocal (E0MW) GT Omon 182 (500 MW) GT Tra Mon 183 MAW) Millon Cubie Meter mmN ng n8 m8
Source: Vietnam Petroleum Institute, June 2002
The demand for gas market may reach more than 1000 million Cubic Meter and this number will be much higher reaching 4500 Million Cubic Meter
€ The gas supply
Gas reserves in Vietnam occur mainly in the following areas
+ Song Hong Basin: this has large potential in gas but has not been
sufficiently invested
+ Cuu Long Basin: here most of the discoveries were oil, with associated
Trang 29+ Malay- Tho Chu Basin: the natural gas reserve is approximately 123 bem
Production capacity could be about 4 — 6.5 bem/year in 2009 -1012
With regard to gas transportation, in the near future there will be two main
pipeline grids in South Vietnam
+ The Southeast grid consists of Bach Ho and the NCS gas pipeline systems
with a total capacity of up to 9 bem/year The pipeline Phu My — Ho Chi Minh City is under construction to meet the gas consumption and market expansion in
the Southeastern region
* The Southwest grid with PM3-Ca Mau pipelines, with a designed
capacity of 2 billons cubic meters/year, is planned to come into operation in 2005- 2006 Additionally the shoreward pipeline from Block B with capacity of 2-3.7
bem/year is under investigation
+ Recently, PetroVietnam started considering the inter-connection of the
Southwest and Southeast pipeline systems
1.2.2 The competition for Gas
According to Porter (1980) the profitability of an industry is determined by the five forces: the rivalry amongst existing firms in the industry, the threat of
substitute products and services, the threat of new entrants, the bargaining power of suppliers, and the bargaining power of buyers For the gas industry in Vietnam,
the following situation is recognised:
+ Barriers to entry: in addition to the high costs inherently associated with gas production ((UNDP and World Bank, June 2000), foreign operators who set up operations in Vietnam fall under a different, and more expensive, regulatory regime compared to other non-petroleum investors
Also, given the unproven substantial reserves, Vietnam becomes an expensive
place to operate in (Mekong Research, 1999)
+ Threat of substitutes: Three substitutes for gas are coal, hydropower, and
Trang 30+ Strength of suppliers: because PV has a monopoly of the upstream oil and
gas industry, any supply agreement at present must be carried out through negotiation with them in Hanoi In addition, the current supply/demand imbalance
and the formation of the Ca Mau Power- Fertilizer Complex have introduced
competition into gas pricing in Vietnam This situation requires gas suppliers to come up with more flexible policies and appropriate solutions to stimulate gas consumption and to further expand the gas market (VPI, June 2002)
+ Strength of buyers: PV is the only company with the right to buy gas from
the operators (Mekong Research, 1999)
+ Existing rivalries: the current players are PV, BP, KNOC, Conoco Philips in the South east basins and Unocal, Fina in the Southwest basins
1.2.3 Petro Vietnam’s organisation and the monopoly roles in petroleum industry
PV is a state - owned enterprise (SOE) established in 1990 after the elimination of the oil and gas ministry In 1995, it was established as a state
company under the legal purview of the Law of State Enterprises and the Law of Organisation of the Government It is structured as a holding company and currently includes twenty-one state enterprises and institutions PV supervises and
manages the operations of its subsidiaries and institutions through a comprehensive system of approvals and controls (PetroVietnam, 2001) Unlike
most other SOEs, PV does not report to a Ministry but remains firmly under the
control of the Prime Minister’s office, or the Office of Government The
organisation chart, including details of the headquarters and subsidiaries of PV
According to the Petroleum Law, the State Management Authority is responsible
for regulating the petroleum industry, including the gas sector The government,
however, is leaning heavily on PV to perform functions reserved for the authority The law grants PV a preferred operational position in the upstream market requiring that it be a signatory to contracts that it later administers As such, there
Trang 31exists a potential conflict of interests in the industry International oil companies
would be more comfortable dealing with a government agency than a state
company (World Bank, 1998)
In fact, there were strong reactions by foreign investors during the interviews about the existing roles assumed by PV One director (A1) said “I think
PV should not be left a monopoly It should not play a double role It cannot be a
profit making corporation and also act on behalf of the government, because the industry wants a separate role One of the constraints of the industry is the
compromise that PV is their partner, compulsorily, and also plays the role of supervising on behalf of the government”
In theory, PV does not have the right to make regulations, own oil and gas, develop government policy, or fix prices In the absence of other institutions, however, the government has asked PV for help on these matters Even PV finds this a hard task to carry out, as expressed by a general manager (A11) “in fact this
causes a difficulty for PV as it is too big a task It sometimes really puts PV into a
difficult and embarrassing position, wearing two hats, one is commercial and one is regulatory”
PV has been active in establishing itself along the entire value chain of the
petroleum industry It is empowered with a monopoly on all the upstream
activities of both the oil and gas sectors, being the only Vietnamese company
responsible for carrying out all Product Sharing Contract negotiations with foreign investors
The downstream of the oil sector, although remaining government- controlled and highly regulated, and being almost restricted to foreign participants, has a more diverse range of domestic participants These companies are all owned
by either the central or local government, including Petrolimex, Petechim, Petec,
Saigon Petro and Unapco, which undertake activities on import and supply of petroleum products, as well as gasoline distribution and retailing operations
Trang 32only area in which market entry has been deregulated and opened to private and
foreign participants
In the downstream of the gas industry, PV has also been made the
monopoly gas trader, as well as investor in, and supervisor of, gas transmission
pipelines, and gas processing and distribution operations No legal basis yet exists
for regulating gas pipelines or gas processing and distribution operations As such, the general view of foreign investors suggests that the current oil and gas industry
structure does exhibit constraints to foreign investment that is in conflict with Vietnam’s need and desire to attract more foreign funds to develop the entire industry Two foreign directors (A2 and A3) pointed out that Vietnam should look
at an option to free up this downstream industry and allow broad participation in
this area For the gas sector, it was argued by director Al that “what they’ve done in Liquefied Petroleum Gas LPG, why shouldn’t it be in the gas?”
The power sector has achieved a better and more rapid progress in the
institutional reforms, compared with PV, in which the monopoly distribution
function Electricity of Vietnam (EVN) is being equitized through diversified
ownership of assets, and its double role (like PV's) is being separated The
international consultant (A6), on comparing these two SOEs, commented that “the government has managed to separate the two things in the case of the power sector, but has not managed to do that in the oil sector, and has not managed to do
that in the gas sector”
1.2.4, The position and structure of gas industry within the overall petroleum industry
The Vietnam’s oil and gas industry commenced in 1981 with production
from the small Tien Hai C gas field (with a reserve estimate of 1.3 bem) in the
Northern province of Thai Binh The gas was used to serve the local industries
such as ceramics, white cement, and high quality glass However, the idea of industry-scale gas utilization has only been formulated since the beginning of the
Trang 33nineties when the associated gas production of Bach Ho (White Tiger) field
became significant (over 1 bem per year) and was wastefully flared (PetroVietnam, 2001)
This Bach Ho associated gas utilization project, that commenced operation
in 1995, was followed by the Nam Con Son natural gas project, which was regarded as the backbone of the gas industry in Vietnam The first gas was achieved at the end of 2002
The gas industry, although new, is recognised as having a very important
and special role in national economic development The general manager in charge
of the Gas and Power sectors in PV (A10) was very enthusiastic when talking about the role played by this very young industry He gave a very simple comparison with the oil industry to highlight the main contributions of each
* Oil has been produced since 1986 from the Bach Ho Field As it is
offshore, floating production and storage facilities were used and oil is sold internationally from offshore There is no doubt that oil production has been, and will be, a very key source for hard currency and revenue to the state budget
Nevertheless, despite the long term planning for refinery and petrochemical
projects, Vietnam to date has no refinery plant, and needs to import petroleum
products i.e gasoline, fuel oil ete for domestic consumption
+ Gas, despite requiring a large capital investment and being dependent on availability of infrastructure and market, when brought to shore it is drawing along
with it many other industries that use gas, and “forces” their development It creates and facilitates a wide range of industries, including power generation, LPG and condensate processing and utilization, ceramics, building materials, urea
production etc Besides contributing a significant portion to the state budget, it has
helped reduce the need for importing LPG and to some extent petroleum product
such as gasoline as a result of new condensate processing capacity
The contribution by the gas sector to the state budget increased
significantly recently Revenue from the gas sector last year, as disclosed by a
Trang 34commercial manager (A12), was estimated to be about 24% of the total revenue generated by the whole petroleum industry In addition, she said “it helped
generate new jobs and thus positively dealt with the big social issue of
employment”
The gas industry is faced with the big constraint of financing The only two sources of funds that the gas industry currently depends on are foreign investment, and revenue from oil production As revealed by the Gas Vice -president (A8),
most of the finance loans for gas projects, such as the PM3 Ca Mau pipeline and the B-Omon pipeline, are guaranteed through oil revenue In addition, associated
gas production from Bach Ho and Rang Dong in Cuu Long basin could be stopped
anytime if oil production stops With regard to the industry structure, PV and its subsidiary PetroVietnam Gas Company (PVGC) have been designated the stewards of gas sector development, as well as the monopoly gas trader PV, being
a fully operational holding company, has to pass its internal cash flows to
government and operates on budgets reassigned from the state every year Thus it
relies on the state subventions for capital investments, or requires approvals of OoG/MPI/MoF on any project financing While awaiting the Southwest gas master plan and the regional link to be executed, the existing gas industry structure
Trang 35Figure 6 : Industry Structure : Gas
Offshore Cuu Long Production
Private Sector And PV-JV
Processing
PV/Private JV Gas Processing
Ba Ria Power Plant Consumption Power (EVN/IPP) | Fertilizer (Private) Phu My 1-4 Consumption: Power industries
Source: WB Report No.19037-VN Dec 2001
Nam Con Son
Gas distribution Center Gas Processing
HCMC
Other
From the foreign investors’ point of view, in order to remove the barriers for
existing and potential industry participants to pursue development in the gas
sector, there needs to be “a clear vision and desire as to how the gas industry structure will look like in the future”, set by the government prior to establishing
and implementing the appropriate measures for improvement
The Vietnam gas master plan developed in March 1996 also indicated that
clarifying the role and function of PV will allow a more straightforward assessment of the options of the industry structure, both offshore and onshore
Trang 36* Monopoly state gas trader/transporter, which is unregulated/self regulated
Gas sales are made to all consumers (including large users such as power stations
and process plant) by negotiated price or against set tariffs as appropriate
+ Monopoly state gas trader, including to large consumers A separate onshore transmission and distribution business would be controlled by a separate entity, possibly but not necessarily state-owned There would be separate published tariffs for transportation; gas sales would be handled as above External
regulation of the transportation business would be required (as it is a natural monopoly) unless it is state owned
+ Producers contract directly with consumers Onshore transmission and
distribution system would be owned by a separate entity which obtains revenues through a set of published tariffs, and is subject to regulation Within this
structure, it may be appropriate institute a state gas trading organisation to act as a
Trang 37CHAPTER 2: FDI IN VIETNAM’S UPSTREAM PETROLEUM SECTOR
2.1 The current status of FDI in Vietnam’s Upstream Petroleum Sector
2.1.1 Regulations and Policies
The legal basis for foreign paticipation in the Vietnam Petroleum industry is the Law on the Investment This was enacted on 29 December 1987 and includes guarantees against expropriation and guarantees that profits can be remitted This law was amended several times on 30 June 1990, 12 November
1996, and most recently 9, June 2000 as a result of the Government’s efforts to
make the country a more attractive business environment destination The present law allows foreign investment through business co-operation contracts, joint ventures, wholly — foreign owned enterprises, and build — operate- transfer and build — transfer — operate, and build — transfer — investment
In order to boost foreign investment, on 7 November 1998 the Prime
Minister signed Decision No 216/1998/QD-TTg on the investment incentives for
petroleum activities with one of the following characteristics:
water depths of 200 metres or more “remote waters
- areas with special geographical, geological, economic, or technical difficulties
Under this decision the incentive terms include: + tax reduced from 50% to 32%
- remittance tax on post-tax profits reduced from 10% to 5%
* export tax on royalty oil/gas removed
Trang 38The PSC duration can be extended to e nable commercialization of gas discoveries.This decision is an improvement to the 1993 Petroleum Law
contributing to the promotion of petroleum activities in Vietnam (PV, 2001)
The upstream oil and gas sector is regulated under the Petroleum Law of
July 6, 1993, and a follow-up implementation decree passed in December 1996 which covers petroleum exploration, development and production; they only cover pipelines to the point of delivery to a main transmission line The law deals only
with the upstream oil and gas industry; no mention is made of downstream
operations including gas processing, transmission and distribution, nor the retailing of petroleum products and LPG
The Petroleum Law allowed 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 production — sharing contracts, joint — ventures, or other contractual forms
A PSC doesnot establish an independent juridical entity, but rather allows the parties to “enter into a contractual business cooperation venture, with
production — sharing arrangement and other forms of business cooperation”, and
the law specifies model contract provisions The law and decree also specify rights and obligations of the contractors, as well as royalties taxes and fees The major changes between the old PSC format and the 1993 Petroleum Law are new
royalties on oil and gas production, new petroleum profit taxes, and new dividend transfer taxes Prior to 1993, the government share of profit from oil was the only government take in the contract and the contractor’s profit from its oi] share was
deemed net of tax, but in 1993 the authorities introduced a 50% corporation tax on profit from oil, thus making the terms less favorable
Winning bidders for exploration blocks sign contracts with PetroVietnam,
subject to the approval and issue of licenses by the Ministry of Planning and
Trang 39bidding, block awarding, and contract negotiation takes over administration of the
Petro contract The law assigns many tasks to PV — supervising contractors receiving operational data, making periodic reports, monitoring compliance with the work programs specified in contracts, and planning development and
production after common discoveries
The law also has some restrictive terms The length of PSC is 25 years and can be extended to 30 years; the exploration period is limited to 5 years, so 7 years
in deep seas or for natural gas, with the possibility of an extension of one year 2.1.2 Development in the demand of energy
Vietnam has one of the lowest levels of modern energy consumption in the developing world : an estimated 144 kilograms of oil equivalent per capita in
1995 This level is consistent, however, with Vietnam’s GDP per capita estimated at $262 in 1995
Nearly 65% of final energy consumption consists of traditional energy
mostly in rural areas, mainly in the form of fuel wood Wood and rice straw are used extensively for cooking In the South charcoal is also used and in the north coal briquettes are used (especially in the northeast in areas surrounding coal
mines) Kerosine is used primarily for lighting in rural areas Gasoline consumption is low but growing rapidly as more private motor vehicles are introduced
Since 1980, there have been 3 phases in the development of Vietnam’s
energy sector From 1980 to 1985, the energy system was centralized Consumption of petroleum products was essentially constant and consumption of electricity grew by about 8% a year, although supplies of both were limited From
1986 to 1990, after the start of economic reform, consumption of petroleum
products and electricity began increasing And from 1990 to 1995, all types of
energy consumption increased rapidly In recent years, consumption of petroleum
products and electricity has increased by about 13% a year, and domestic coal
Trang 40consumption has started to increase again after reaching a low in 1993 Offshore
natural gas from the Bach Ho field was brought into production for power
generation in 1994
* Electricity consumption continue to grow much faster than GDP
For purposes of forecasting the energy sector is different in each of Vietnam’s 3 main regions In particular, the central region is less economically advanced than the north and south (though it is receiving special government attention for its development) In 1995, for example, and electricity consumption in the center was 108 kilowatt hours per capita In the north, it was 154 kilowatt
hours and in the south it was 188 kilowatt hours Power consumption in Hanoi and
Ho Chi Minh City, at 550-600 kilowatt hours per capita, is much higher than elsewhere
During 1980-95 electric sales increased much faster than real GDP The
relationship over the period shows an average elasticity of electricity sales to GDP
of 1.7 - meaning that electricity sales increased 70% faster than GDP This relationship between electricity and GDP is typical among low income Asian
countries During the 1980s, only China and Myammar had elasticities below
table Thus, if Vietnam’s economy continues to develop, it is far from a stage at
which electricity demand will show relative to GDP
During 1990-95, electricity consumption grew by 12.6% a year The
highest growth rate was in agriculture, at 21.1 % per year Growth in residential
demand was second highest, at 14.7% a year Industrial demand grew much
slower until 1990 but has since picked up, to 10.2% a year The share of
residential sales in total sales has increased in recent years, reaching 36% in 1995
Electricity consumption increased significantly in all 5 distribution areas: Hanoi,
the rural north, the central region, HCM City, and the rural south In absolute terms, the greatest increase was in HCM City, where sales rose from 1.380