Vietnam’s declining oil production and growing energy needs will require the nation to intensify exploration and development of its deepwater resources. Continued reform of regulations governing oil exploration is necessary to attract foreign investors, who bring with them the technology and expertise necessary to undertake complex deepwater drilling projects.
Waning Conventional Production in a Time of Growing Energy Demand
Forecasts indicate that Vietnam’s oil production will decline to only 313,000 barrels per day (bpd) by 2020.1 Oil consumption in Vietnam, however, is set to increase by 69 percent between 2011 and 2020, with annual growth of 5 percent to 7 percent.2 By 2020, Vietnam will consume about 554,000 bpd.3
Current offshore exploration activities on the continental shelf are largely limited to depths of less than 100m (about 328 feet), and cover only about 25 percent to 30 percent of the available surface.4 The remaining 70 percent to 75 percent of the continental shelf, with water depths of 100m or more, is largely unexploited and open for new bidding.5
Breaking Technological Boundaries Will Require Revision of Vietnam’s Regulatory Environment
As the shallow water reserves are depleted, attention has shifted to the unexplored deepwater fields, which evidence suggests have larger reserves and potential productivity. Among the nearly 500 new oil fields discovered in 2009, the 340 onshore fields account for only 35 percent of total discovered reserves, the 80 shallow fields account for 20 percent, while the remaining 60 deepwater fields are the source of 45 percent of total discovered reserves.6 Vietnam now ranks third in terms of proven oil reserves in the Asia-Pacific region, with 4.4 billion barrels.7 Accessing those reserves in deepwater areas will require overcoming technical and regulatory obstacles.
Access to Deepwater Drilling Technology
Deepwater exploration requires the use of complex, cutting-edge technology. Usually, deepwater drilling requires deployment of specialized drilling rigs, such as semi-submersibles, drill ships or tension leg platforms. The equipment must be able to withstand extreme pressure in the borehole, and support the weight of drilling far into the surface.
In addition to equipment, data collection is essential to efficient deepwater drilling. Seismic and well data must be collected, processed and interpreted. The data collection technology must also take geographical anomalies into account. For example, salt layers in the seabed may impact seismic imaging technology and make it difficult to visualize the physical structures that contain oil. The preferred technology for obtaining accurate images, particularly in a physically challenging environment, relies on newer, three-dimensional imaging.
Moreover, drilling techniques develop rapidly, and an approach that was optimal several years ago may no longer be the most effective or the safest method. For example, conventional deepwater drilling uses a single drilling fluid in the borehole. More advanced methods use two different kinds of drilling fluid, one designed to be used above the seabed, and the other below. This allows drilling to be calibrated to the pressures encountered at different depths, and enables the operator to respond appropriately to pressure changes.
Other necessary technological considerations are safety measures and procedures put in place to protect the environment.
The kinds of equipment required are not readily available in Vietnam. Vietnam is currently only able to build fixed platforms, which can reach depths of only 130m. Moreover, the cost of constructing and deploying advanced rigs and floating platforms is another serious obstacle. There are also insufficient numbers of trained and qualified personnel to operate the equipment and collect and interpret data.
Encouraging Foreign Investment through Regulatory Reform
Securing the necessary technology to reach its deepwater reserves requires enabling participation of foreign investors in Vietnam’s oil exploration and production projects.
The National Strategy for Energy Development through 2020 sets out the basic framework for the development of Vietnam’s energy policies.8 The National Strategy focuses on objectives that will accelerate oil and gas exploration to meet the nation’s energy needs, including accurate evaluation of petroleum reserves, and expansion of exploration and exploitation of petroleum.9 In addition, the National Strategy sets out specific development plans for the petroleum industry: “to encourage and speed up petroleum survey and exploration activities; to build a transparent and effective system for supervising and assigning contracts on exploration lots; to periodically revise financial terms so as to make petroleum exploration and development investment activities in Vietnam competitive with those in other countries.”10
Vietnam has already begun to implement these objectives. New regulations enacted in 2009 and 2010 clarified the investment and bidding regulations for petroleum exploration. The basic bidding guidelines are contained in Decree 34/2001/ND-CP (6 July 2001) (Decree 34), which was amended by Decree 115/2009/ND-CP (24 December 2009) (Decree 115). Decree 34 sets out the steps for the process of soliciting, preparing and accepting bidding dossiers. The Decree 115 amendments provide further detail on bidding norms, bidding plans and bid evaluation teams. In addition, the amendments require Vietnam Oil and Gas Group (PetroVietnam) to work out and update an annual master plan on bidding for petroleum blocks.11
Recent legislation also enhances contractual flexibility by permitting investors to extend exploration agreements past project deadlines. Decree 48/2000/ND-CP (12 September 2000) (Decree 48) provides implementing guidance for the Law on Petroleum, and regulates oil exploration and production activities. Decree 48 was also amended by Decree 115. While the original text of Decree 48 permitted extensions on a contractual period for exploration, the amendments expand the circumstances in which investors may seek an extension. In addition to extending the period for exploration, an investor may now also extend the duration of the petroleum contract itself for an additional five years.12 Moreover, Article 25a provides for a special extension in cases of national security upon approval of the Prime Minister. Although the amendments do not outline the specific kinds of national security concerns that may be used to invoke a special extension, given the emphasis of the National Strategy on securing domestic energy needs, there may be some flexibility in seeking an extension on this basis.
These changes reflect a policy-level emphasis on facilitating the development of Vietnam’s oil reserves. The cost and difficulty of exploration in deepwater areas suggest that foreign investors may wish to seek enhanced contractual rights. The current changes by themselves may not be sufficient in the long term to secure the level of foreign investment required to move into deepwater production. They do, however, demonstrate Vietnam’s commitment to revise its legislative program in that context. Continued reform will be essential to growing foreign participation in deepwater oil exploration and production.
Vietnam’s oil interests extend into the South China Sea, where territorial disputes with other Southeast Asian countries, including China, pose a potential impediment to the development of deepwater exploration.13 Vietnam has reached out to other nations in a joint effort to explore and produce oil in the contested region. For example, in October 2011, ONGC Videsh, India’s national oil company, signed an agreement to launch a joint exploration program in the South China Sea with PetroVietnam.14
Current Deepwater Projects
Vietnam has increased the frequency of international licensing rounds. The second bidding round was launched in 2007, and included several blocks in difficult exploration areas in the Song Hong and Phu Khanh Basins.15 A limited bidding round was held in 2008 for seven additional blocks. Four production-sharing contracts (PSCs) were signed after the 2008 bidding round, and an additional 19 were signed between 2009 and 2010.16 The most recent international bidding round began in late 2011, and includes blocks from Nam Con Son, Phu Quoc and Malay Tho Chu Basins.17
Phu Khanh Basin: These blocks are as much as 400m deep. India’s ONGC Videsh Ltd. was awarded a PSC in 2006 to explore these blocks of Phu Khanh Basin, but surrendered Block 127 to PetroVietnam in early 2011 after its exploration efforts did not yield any results. Recent news reports have suggested Videsh may give up its rights in block 128 as well.18
Song Hong Basin: In 2007, Vietnam opened for bidding seven deepwater blocks in Song Hong Basin where, according to PetroVietnam reports, the potential hydrocarbon reserves are more than 5 billion barrels of oil equivalent (boe).19 The oil and gas community regards this bidding round as part of Vietnam’s intensive effort to attract foreign investment in deepwater exploration and production.
Nam Con Son Basin: In April 2012, Gazprom announced that it had reached an agreement with PetroVietnam to jointly produce natural gas from blocks 5.2 and 5.3 located in Nam Con Son Basin, from which BP had withdrawn in 2009. These two blocks, with depths of up to 150m (about 492 feet), are estimated to have natural gas reserves of up to 55.6 billion m3.20
Planning for the Future
The era of easy oil extracted from readily accessible shallow water is almost over and deepwater fields represent a new opportunity for oil production. Vietnam has recognized the necessity of leveraging foreign capital and high technology to satisfy its growing energy needs to access oil at deepwater levels. Its ability to do so depends on its willingness to provide a legal environment amenable to foreign investment.
1 Business Monitor International Ltd., “Vietnam Oil & Gas Report Q4 2011.”
4 Alex Chakhmakhchev and Peter Rushworth, “Global overview of offshore oil & gas operations for 2005-2009,” http://www.offshore-mag.com/articles/print/volume-70/issue-50/international-e_p/global-overview-of.html, accessed 15 May 2012.
5 See Oil & Gas Journal (OGJ), reprinted in: Energy Information Administration, “Vietnam—Country Analysis Briefs, May 2012.”
6 Prime Minister’s Decision No. 1855/QD-TTg (27 December 2007) (the “National Strategy”).
7 National Strategy, art. 2(b).
8 National Strategy, art. 3(c).
9 Decree 34, art. 8(a).
10 Article 17 of the amended Petroleum Law, 10/2008/QH12, stipulates that a petroleum contract may be extended for up to five years.
11 Tom Wright, “Vietnam, India Stand Firm on China Row” (2011), The Wall Street Journal.
12 Rakesh Sharma, “ONGC Videsh Signs Pact With PetroVietnam” (2011), The Wall Street Journal.
13 Energy Information Administration, “Vietnam—Country Analysis Briefs, May 2012.”
16 Rakesh Sharma, “ONGC Videsh May Surrender Vietnam Block” (2012), The Wall Street Journal.
17 Jeff Moore, “Oil and Gas in the Capitals” (2008), World Oil, Vol. 299 No.1.
18 “Russian Gazprom teams up with Petro Vietnam in oil and gas exploitation” (2012), Vietnam Investment Review, http://www.vir.com.vn/news/business/russian-gazprom-teams-up-with-petro-vietnam-in-oil-and-gas-exploitation.html, accessed 15 May 2012.