Slow burn
Vietnam's energy plans stall at the negotiating table
The first few years of Vietnam's oil rush were good for Hanoi: Foreign companies were willing to spend millions of their own money to search the country's seas for liquid gold. They agreed
to share what they found with the national oil company, PetroVietnam--and pay it a bonus for
the privilege.
Today, it's a very different story. The South China Sea has turned quiet, with just one exploration rig at work where there were more than 10 two years ago. Only two wells are
producing oil. Many companies that couldn't find reserves worth tapping have relinquished their blocks; some have left altogether.
For those that remain, the action has shifted to the negotiating table--where it seems to have
stalled. Official dithering has stalled exploration of what may be the last patch of Vietnam's waters with real oil promise. Similar problems have snagged natural gas, too. Years of
haggling have yet to yield deals that would bring offshore-gas discoveries to the market.
Energy experts say stalling is the last thing Vietnam can afford, especially on gas deals. The
country desperately needs gas to feed its burgeoning appetite for electricity. Failure to
quickly conclude agreements with foreign consortiums--and set in motion integrated
projects to produce gas, pipe it to the mainland and build gas-fired power plants--could
constrain industrial growth, the experts say.
The potential electricity shortfall has much to do with Vietnam's growth spurt, which began in
the early 1990s. "The growth in energy demand in Vietnam has exceeded all expectations," says Anil Malhotra, the World Bank's regional energy adviser, based in Hanoi. Earlier World Bank projections of 12% annual growth in electricity demand have been revised to 15%, with pockets like Ho Chi Minh City, the country's commercial and industrial hub, racking up 20%.
Now, some fear Vietnam could begin to resemble the Philippines in its dark, power-starved days of the early 1990s. If Hanoi can't get moving on gas projects, it "will have a crisis in 1999,"
says one industry expert.
At the moment, however, the government doesn't seem in a hurry. The hold-up in negotiations
hinges on several issues, chiefly money. "They see their mission in life as cutting down your
margin," says a foreign oil executive, referring to PetroVietnam's negotiators. Officials of
PetroVietnam and a government steering committee formed earlier this year to oversee the industry declined requests for interviews. The foreign companies involved are tight-lipped about the terms being discussed.
More qualitative issues further complicate the negotiating process. First, consider the sheer
complexity of what's on the table. At stake are three separate but integrated projects (gas
production, the building of a pipeline and the construction of gas-fired power plants),
different foreign consortiums negotiating each part, and several ministries and companies
involved on the Vietnamese side.
According to one observer, the formation of the steering committee, headed by the pro-reform
minister of planning and investment, Tran Suan Gia, has yet to streamline matters.
Second, the two sides bring divergent negotiating styles to the table. The foreigners
comprise a multitude of nationalities--including Japanese, Korean, American, European and
Indian--which itself complicates the negotiations. The Vietnamese prefer salami tactics, giving little by little, while the foreigners tend to follow a tougher, more confrontational approach.
"You have both sides posturing at extremes," says the industry expert. "Oil companies are
afraid of giving in too early and too much." The same goes for the Vietnamese side, which must
consider social and political objectives in addition to commercial ones. That means trying to keep the cost of energy to the consumer as low as possible. Current subsidized rates to
consumers stand at 5 U.S. cents per kilowatt hour, though the government has said it will
raise that to 7 cents in 1999.
But even that would not be enough to cover production costs, experts say. "It makes the
financing of power projects a very challenging process for foreign investors," says a report
from brokerage ING Barings.
Foreigners complain that their Vietnamese counterparts don't have the experience or the
knowledge to work steadily through negotiations. it's difficult to develop continuity and
relationships because the team members on the opposite side of the table keep changing, they
contend. "If the Vietnamese don't want to decide something, they just throw people at people,"
complains a Western executive. "It's no different from wartime."
The group negotiating on gas production includes Britain's BP, Norway's Statoil and India's ONGC. A BP-Statoil partnership discovered commercially viable quantities of gas in early 1993. Reserves are estimated at about 57 billion cubic metres. The discovery encouraged Vietnam to see gas-based power generation as the solution to its energy needs. Hydropower currently accounts for 62% of its supply, but this year's unusually dry summer brought frequent power outages.
Before the foreigners start producing from the gas field, however, they want to make sure
there's a market available for their product.That means installing a pipeline and building
power plants. America's Mobil is involved with BP-Statoil in pipeline discussions and other
firms are negotiating build-operate-transfer terms for several gas-fired plants at the southern Phu My complex. Vietnam's energy master plan envisions six plants up and running by 2003, roughly doubling the country's current power output.
But if these projects don't get off the ground soon, the country may have to resort to diesel
power, as did Indonesia and the Philippines when they faced a similar crunch. The World Bank estimates the cost of that at 10 cents a kilowatt hour--double the current tariffs.
On the oil front, meanwhile, there's another set of headaches for foreign investors. Three years after the first bids were submitted, a four-company consortium is still trying to work
out a pact with PetroVietnam to explore what's known as Block 15-1. Because it's located near
two blocks currently producing oil (one by Vietnamese-Russian firm Vietsovpetro, another by
Malaysia's Petronas), many suspect it holds equal promise. Perhaps for that reason, PetroVietnam wants to be in from the beginning and is negotiating a joint-venture arrangement
with foreign companies as opposed to the kind of production-sharing contract that governed
previous block awards.
Under a joint venture, the Vietnamese company would share the costs--and more of the
benefit--of exploration. Production-sharing contracts called for the foreign firm to shoulder the exploration costs, which could be recovered in a revenue split with PetroVietnam
once production started.
The four foreign companies hail from three countries: They include America's Conoco, South
Korea's Pedco and Yukong and France's Geopetrol.They reached an agreement among themselves in June, but are still trying to come to terms with PetroVietnam, which wants a 50% share of the venture.
No one dares to predict when the deals may be finalized--for either the oil block or the
integrated gas projects. "There's no sense of opportunity cost here," says a foreign oil
executive. "If you do it this week or this month or this year or 10 years from now, it's all the
same to the Vietnamese. They've waited a long time before and they can wait some more."
By Faith Keenan in Ho Chi Minh City and Hanoi (Far Eastern Economic Review)
November 27, 1997
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