Cambodia Dreams of an Oil Gushing Nation

cambodia dreams of an oil gushing nation Cambodia Dreams of an Oil Gushing Nation Cambodia KrisEnergy Oil KrisEnergy 822x493

A mid electricity cuts, parched hydropower dams and millions of dollars of blackout-related economic losses, a bright spot could be emerging on Cambodia’s energy front.

After nearly two decades of false starts, Cambodia has announced it will begin to extract oil for the first time later this year, representing a potential rich new source of energy and revenue.

Extraction is expected to begin by the end of this year from the so-called “Apsara” oil field, situated in a 5,000 square kilometer area of the Gulf of Thailand known as Block A.

Cambodia’s extraction plans have been hobbled for years due to a maritime territorial dispute with neighboring Thailand but Block A is safely within Cambodia’s solely claimed area.

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The area contains an estimated 30 million barrels of oil, according to the Ministry of Economy and Finance. Currently, Cambodia is a net fuel-importing nation.

US energy giant Chevron, which took a controlling stake in Block A in 2012, had earlier estimated it held 700 million barrels of oil but that figure has since been revised down substantially.

Two years later, Chevron backed out of the venture, selling its stake to Singapore’s KrisEnergy for US$65 million, roughly a third of what the US company had spent on exploration in the area over the years.

KrisEnergy first entered the joint venture in 2010. The fact that one of the world’s most experienced energy companies abandoned the field at a loss led many analysts to assume that it was commercially unviable.

Chevron’s decision coincided with a slump in global oil prices: the price of a single barrel of oil dropped from around $115 in 2014 to just $35 in 2016.

In 2017, KrisEnergy signed an agreement with the Cambodian government over the oil field’s ownership. The Singaporean firm holds a 95% stake in the contract area while the government maintains a 5% share.

The company predicts the oil field will produce somewhere near 8,000 barrels per day of crude, with the first oil expected to be produced in October this year and transported by barge. It says 27 wells have been drilled in Block 1A, 13 of which have reportedly struck oil and gas.

In Phases 1B and 1C, which haven’t yet been assigned start dates, nine more extraction platforms are expected to be built in the maritime area.

The Ministry of Economy estimates that Block A has about 30 million barrels of oil and that complete extraction of the fuel could take as long as nine years.

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KrisEnergy Chief Operating Officer Kelvin Tang (L) shakes hands with Cambodia’s Minister of Mines and Energy Suy Sem during a signing ceremony in Phnom Penh, August 23, 2017. Photo: AFP/Tang Chhin Sothy

So far there are few reliable estimates on how much the enterprise would be worth to Cambodia. A previous sticking point with Chevron involved revenue-sharing, with the government requesting as much as 70%-80% during negotiations.

The revenue-sharing arrangement with KrisEnergy isn’t immediately clear.

Much, of course, depends on whether the global price of petroleum stabilizes near its $65 per barrel historical moving average after recent years of wild up-and-down fluctuations.

A recent report by Oxfam and the Cambodian For Resources Revenue Transparency, a nongovernmental organization, estimates that the first six-year phase could earn the government between $90-$120 million.

If the government’s estimate of roughly 30 million barrels of oil holds, and if the fuel is also sold at today’s prices of around $65 per barrel, then the extraction could be worth as much as $1.9 billion.

Ancillary benefits could be derived from foreign investment in the fledgling sector. The Ministry of Mines and Energy stated last year that foreign direct investment (FDI) in extractive industries, including oil exploration as well as mining, was worth $1.3 billion last year.

“Future opening up of the resources sector offer huge potential for investors. The infrastructure sector is in the need of investments as well. The local refinery production facilities are not able to handle large-scale exploitation operations,” reads a recent Asean Briefing by Dezan Shira & Associates, an Asian consultancy firm.

In February the Ministry of Mines and Energy announced that a Canadian firm, Angkor Gold, is also diversifying into oil and gas, and has applied for exploration permits.

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A KrisEnergy platform type that will be used at Block A in the Gulf of Thailand. Photo: KrisEnergy/Facebook

The company has not publicly disclosed where it aims to explore; its website says the company is negotiating with the government for permits to as much as 7,000 square kilometers, with a particular interest in the Kampong Som basin, an area southwest of Phnom Penh where thermal conditions indicate a possibility of oil or dry gas.

The company is also reportedly the only company exploring any of Cambodia’s 19 onshore blocks.

In March, a report by the Indonesian news agency Antara said that “Indonesian companies and [state enterprises] need to explore minerals [in Cambodia], as there is still a lot of space, for instance, in gold and oil which has not been well-explored there.”

Initially, it was thought that Block A’s extracted oil would first be sold only in the Cambodian market, according to past statements by Cheap Sour, director-general of the General Department of Petroleum at the Ministry of Mines and Energy.

However the ministry now says, at least in the initial phases of extraction, that the crude oil will be exported because Cambodia lacks the infrastructure to process and refine the raw fuel.

To be sure, crude oil exports will bring in needed revenue for the government, though some already caution a sudden surge in foreign currency dominated capital inflows could also ramp up inflation if mismanaged.

Inflation is “manageable” at the moment, according to a National Bank of Cambodia statement in January, and is projected to grow about 2.6% this year, though the price of food is set to increase at a higher rate.

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A fuel vendor prepares to fill a motorbike with petrol along a street in Phnom Penh in a file photo. Photo: AFP/Tang Chhin Sothy

If Cambodia can move to quickly develop the necessary infrastructure so that processing can be done domestically – meaning some of the produced oil enters the local market – it could boost the economy on various fronts and potentially alleviate future power crises.

That would potentially include money saved on the high amount currently spent on subsidizing the local petroleum market as well as on fuel imports.

In March 2016, a cross-ministerial directive established a mechanism for limiting the price domestic petroleum distributors are allowed to charge customers. This price is updated every ten days and gas stations can be fined if they flout the rules.

When global oil prices rose in early 2018, the government spent $83 million to stabilize domestic fuel prices for consumers in the first five months of the year, Sim Vireak, a strategic adviser to the Asian Vision Institute, a local think tank, recently noted.

To soften the blow for petroleum distributors and to forestall another rise in gas prices, last June the government drastically cut tax rates, costing the state about $30 million in revenue.

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An electricity utility worker checks power lines in Phnom Penh. Photo: Twitter

While the sums aren’t vast, the steep rise in the price of oil and gas over the last four months has no doubt added to the government’s financial burden, notably at a time of politically challenging rolling electricity blackouts.

But the promise of domestically produced oil, including reductions in how much Cambodia imports and potentially lower fuel costs, would be a boon to domestic distributors and narrow the need for expensive state subsidies.

Yet all of this “depends on the price of oil and the cost of extraction. If it costs too much, and the price is too low, extraction does not make sense,” says Sophal Ear, associate professor of diplomacy and world affairs at Occidental College at Los Angeles.

Credit: Asia Times

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