Vietnam increasingly focused on unexplored oil and gas fields

Exploitation of shallow-water resources over the last 30 years has allowed Vietnam to become an oil exporter while meeting domestic gas demand. With the third-largest proven oil reserves in East Asia, at 4.4bn barrels, and the fourth-largest offshore gas reserves in the region, estimated at 600bn cu metres in 2015, it has the potential to meet growing demand for years to come. However, declining hydrocarbons production at maturing fields means the country needs to intensify exploration and development if it is to avoid becoming a net oil and gas importer.

As shallow-water reserves are depleted, attention is shifting to unexplored deepwater fields thought to hold substantial reserves. Accessing these is complex and costly, and requires foreign investment, technology and expertise. Exploration and production (E&P) in the untapped offshore basins of Song Hong, Hoang Sa, Phu Khanh and Malay-Tho Chu are complicated by complex geology and a high carbon dioxide content, which will require the use of enhanced oil recovery technology. This and the need to build the associated infrastructure will come at a price that is significantly higher than existing production in the southern basins of Cuu Long and Nam Con Son, and above what Vietnam has been willing to pay to date.

Troubled Waters

Moreover, current local and global market conditions are not ideal. The collapse in global oil prices since mid-2014 has seen oil and gas companies cut back expenditure on exploration in high-risk areas. Low domestic energy prices, meanwhile, have seen numerous projects delayed and some international oil companies withdraw from the market, as a result of being unable to negotiate suitably remunerative offtake agreements, or to focus on more attractive prospects elsewhere.

In March 2015 Italy’s Eni pulled out of Block 105-110/4 in the Gulf of Tonkin, one of six it was exploring. The company had earlier announced that it would cut capital expenditure in light of lower oil prices, and focus on near-field and appraisal activities, while reducing investments in frontier exploration areas. In recent years BP, Chevron and ConocoPhillips have all departed, leaving ExxonMobil as the sole major still active in Vietnamese waters. This has left the door open to several national oil and gas companies, most notably from Russia, as well as India’s ONGC, Malaysia’s Petronas, Korea’s KNPC and Japan’s JX Nippon.

Ties With Russia

Vietnam’s oldest and most enduring E&P partner is Russia, through joint ventures (JVs) with Zarubezhneft, Rosneft and Gazprom. The relationship dates back to 1981 and the formation of the Vietsovpetro JV between PetroVietnam (PVN) and Zarubezhneft, which led to first oil production at the flagship Bach Ho field in 1986. Since then further JVs have been formed with the Russian state oil (Rosneft) and gas (Gazprom) giants to develop Vietnam’s offshore fields, while in return PVN has been granted access to projects in Siberia.

The significance of the relationship was underlined in May 2016 by the visit to Moscow of Vietnam’s new prime minister, Nguyen Xuan Phuc, in his first foreign trip since taking office in April. Five agreements were signed by PVN during the visit – a cooperation agreement with Rosneft, two memoranda of understanding (MoUs) with Gazprom and a new production-sharing agreement (PSA) with Vietsovpetro.

The agreement with Rosneft foresees expanding E&P collaboration in Vietnam, Russia and third countries, while Zarubezhneft, as part of Vietsovpetro, signed a 30-year PSA for Block 16-1/15 in the Cuu Long Basin with PVN’s E&P subsidiary PVEP (29%), Bitexco (10%) and Sovico (10%). The estimated $50m project foresees two development phases, including seismic data interpretation and the drilling of two exploration wells in phase one in the first three years, and sampling exploration and a survey well drilling in the second phase in the following two years. Gazprom, meanwhile, signed an MoU to explore the possibility of using gas from joint offshore projects for power generation in Vietnam.

The agreements highlight the active role Russian companies will continue to play in developing Vietnam’s hydrocarbons resources. In August 2015 Vietgazprom, a JV between Gazprom International and PVN, began the first deepwater exploration project with the construction of the first of two scheduled wells in the Nam Con Son Basin. The VGP-131-TB-1X well in the Than Bien field of Block 131 and VGP-130-TB-1X in the Than Dat structure in Block 130 will be drilled in depths of over 1600 metres, with work set to take a year. The two blocks are among four (Blocks 129-132) being developed by Vietgazprom under a PSA signed in 2008, and are estimated to hold 1433bn cu metres of gas and 1155m tonnes of oil.

In March 2016 Rosneft announced exploration drilling at Block 06.1 in the Nam Con Son Basin, under a PSA with PVN for gas and condensate production, and geological exploration. The well, which is to be drilled to a design depth of around 1380 metres, in sea depths of 162 metres, is being undertaken using the Hakuryu-5 drilling rig owned and operated by Japan Drilling Company, reflecting increasing cooperation between Rosneft and Asian partners, in the light of ongoing sanctions against Russian companies, which restrict the role of Western majors and equipment in certain types of E&P activity.

Rosneft said recoverable reserves in the structure where the new well is to be drilled are estimated at 12.6bn cu metres of natural gas and 0.6m tonnes of gas condensate, which can be developed by subsea completion and tied back to the existing Lan Tay platform, one of two fields operated by Rosneft in Block 6.1. Rosneft said it will drill another exploration well in the neighbouring Block 05.3/11, to create economies of scale and reduce the time for implementation. It also plans to shoot broadband 3D seismic of its existing Block 6.1 operatorship in 2017 to enhance production recovery and explore potential in deeper prospects. In mid-2015 ONGC Videsh, the overseas arm of India’s state-owned exploration and production company ONGC, received a one-year extension for the deep-sea Block 128 in the Phu Khanh Basin, despite not having struck hydrocarbons to date.

Tariffs

The issue of low domestic gas and power tariffs, meanwhile, is proving an impediment to the development of several prospective gas fields, notably Ca Voi Xanh in the Phu Khanh Basin by ExxonMobil, and Block B in the Malay-Tho Chu Basin by a consortium now led by PVN, with Japan’s Mitsui Oil Exploration and Thailand’s PTTEP. Both are designed to fuel major power generation projects, but the developers have to date been unable to agree on an offtake price to pave the way for production. This resulted in Chevron selling its stake in Block B in May 2015.

Marginal Fields

Meanwhile, Vietnam is focusing on the development of marginal fields in the Cuu Long Basin, its core oil production area, to sustain crude output. While production is falling at most of the basin’s key fields, such as Bach Ho, PVEP believes that the basin still holds significant oil resources in smaller prospects. While development of these marginal fields is not economic on a standalone basis, falling production is leaving spare crude processing and transmission capacity available, allowing them to be tied into existing infrastructure and reducing costs. PVEP disclosed in October 2015 that PVN had approved a study it had conducted over four years to develop all oilfields in the Cuu Long Basin until 2030, with a focus on marginal fields, to maximise existing processing and transport systems.

PVN and its JV partners have already tied in some marginal fields with existing facilities in the basin, such as the Hai Su Den and Hai Su Trang structures, which were connected to the Te Giac Trang system in 2013. Vietsovpetro has also tied in operations of some small fields with the existing larger systems in Block 09.1 in the basin, and is seeking to work with operators of other nearby fields.

Many of Vietsovpetro’s marginal fields have reserves of 7.33m-29.32m barrels of crude oil, according to Vietsovpetro. PVEP is also willing to cooperate with foreign investors in marginal fields.

Tax Relief

To make investment in exploration and production in deepwater areas more attractive, Vietnam is also working on modifications to its Petroleum Law, according to Duc Anh Nguyen, general director of the Vietnam Petroleum Institute, the research and development arm of PVN. “PVN has sent a proposal to the government to this effect,” Duc told OBG in March. “I think the natural resource tax can be reduced as well as the current income tax rate for petroleum production. We propose also that the maximum deduction rate in petroleum contracts be increased,” he said. “In the current low-price environment, we have to consider our investment climate to make it more attractive. We need to ensure that investors have the potential to find good oil and gas resources with lower risk and higher rates of return.”

 

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The Report: Vietnam 2017

Energy chapter from The Report: Vietnam 2017

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