Thailand must examine the real issues surrounding energy exploration

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ANALYSIS
Thailand must examine the real issues surrounding energy exploration
Pichaya Changsorn
The Nation

Is the existing petroleum exploration and production regime the real culprit? asks The Nation's Pichaya Changsorn.

BANGKOK: -- At a time when world oil prices are falling off a cliff and this country is on the verge of an energy crisis - at least in the minds of state energy officials - we are quarrelling over the terms and conditions of the 21st bidding round on petroleum exploration and production concessions.

Last Tuesday, the government decided to postpone the round for another three months after hearing supporters and opponents of the bidding scheme debated on a government-sponsored session that was televised live on February 20.

A joint committee is being set up, with members from both sides of the debate, to work out details of how to proceed with changes to relevant laws before setting new bidding conditions and a fiscal regime. These amendments would define how much control the government has over energy companies' exploration and production activities and its take from bid winners' oil or gas discoveries.

It remains to be seen if the government can eventually find a consensus and bring in a new formula that satisfies every party and if the bidding can really be carried out within the tenure of this interim military government, which is expected to end by early next year.

To set the stage, I suggest some frameworks for their discussions.

1. Determine objectives and priorities. Both parties must first agree on the objective of granting petroleum rights, whether it is to maximise state revenues or to secure more oil and gas reserves for the country, or for what other purposes.

2. Both parties must be ready to discuss facts, not their beliefs or imagination. For example, they must consider whether the Customs Department's import-export figures that show the country is importing more than Bt1 trillion worth of energy annually is trustworthy. Can they trust petroleum-reserve figures as determined by state and international auditors? Can they believe the statements by Shell, ExxonMobil, BP and many other major oil firms that have pulled out or sold most of their stakes in Thailand's petroleum exploration and production activities years ago that they did so because of the marginal sizes of the country's oil and gas fields?

In other words, are we really so rich (as widely claimed by the opponent group) or so severely short of petroleum resources (as suggested by energy officials)?

3. Determine whether the primary objective is to ensure energy security. This means taxation and other conditions must support the continuity of exploration and production of oil and gas. Certainly, the state should get a fair share, but the fiscal regime must be flexible enough to attract capable hands to come in to explore and extract oil and gas, amid plunging oil prices and a worldwide oversupply. At the same time, the state must have the ability to secure the discovered resources through measures such as issuing an export ban or other safeguards at a time of a looming energy crisis.

4. Both parties must first agree on the true potential of our resources, before they can design the fiscal regime for oil or gas contracts. There is no such thing as the best petroleum regime in the world, but each must be suited to the needs of a particular country at a particular time. The nature of the reserves, whether they are mostly oil or mostly gas, also makes a difference, since gas is less transportable and less tradable than oil. An oil-rich country can design its petroleum regime to maximise state revenue, or for other purposes such as to encourage technology transfers. For an energy-hungry country, the objective should be increasing the indigenous fuel supply.

Since oil is a global commodity that can be easily transported or traded, pricing should follow market mechanisms. In the case of natural gas, it should also follow the trend of world prices but at the same time should offer some "discounts" or more stability in pricing for the benefits of the local economy. Despite lower discovery rates and marginal sizes of our gas fields, the availability of a gas market and pipeline infrastructure has made Thailand more attractive to petroleum bidders, since energy firms can immediately sell their gas once it is discovered. This enhances our bargaining power to sweeten the terms we make with them.

5. How urgent is our situation? Proponents of the current petroleum-bidding regime suggest it is a matter of urgency that we rush to open the 21st round, since at our current rate of consumption, our proven gas reserves will be depleted in six or seven years. On the basis of probable reserves (50-per-cent chance of discovery), that figure can be extended to 13 years. Given the dwindling chance of equalling the discoveries made in the last three rounds organised over the past 15 years (which contributed only 4 per cent of the total amount of oil and gas the country pumps out today), Energy Minister Narongchai Akrasanee has stressed the need to open a new round to confirm how many energy resources the country has, so as to devise a plan and infrastructure to import more liquefied natural gas in case we don't find enough.

6. The opponents of the existing concession regime should explicitly spell out their goals. Then the government can pick the reasonable ones and consider whether these can be met by amending the existing laws and regulations. During the February 20 debate, the leaders of both parties agreed it did not matter if the current concession regime or a production-sharing regime were used, as each can be tailored to meet agreed objectives.

7. What role should the state take? Energy activists have long alleged a lack of transparency and conflicts of interest in PTT and the Energy Ministry. Thus would it be wise to increase the state's involvement in energy affairs? Rosana Tositrakul, a leader of the proponent group, has suggested that Thailand set up a new energy body to govern a production-sharing regime and negotiate the terms with oil and gas companies. That sounds good in theory, but if PTT and the ministry can't be trusted, what is the guarantee that this new body would be any better? Would it not be easier to corrupt under the proposed production-sharing system than under the current concession system, where petroleum fields are auctioned out to firms that make the best offers?

A proposal for the state to take care of exploration and granting the right to produce petroleum later to the private sector is not the worldwide norm. Petroleum exploration is a highly skill-, technology- and capital-intensive industry where success rates vary among companies and according to geography. It is the bread and butter of most oil companies, not because they can always ensure a huge profit, but because successful firms can make a difference with their cutting-edge technologies, expertise and resources. Considering the very low discovery rates in the previous decades in Thailand, the estimated Bt5 billion that the opponents suggested the government could spend to explore for oil and gas on its own is likely to be wasted if the Department of Mineral Fuels is going to be the explorer or the one hiring a third party to do so.

Conclusion

We should step back and determine what the faults of the existing petroleum regime really have been in the past and how a new system, if any, would deliver improvements.

Logic needs to be applied when considering all allegations. For example, if the present system has failed to delivery energy security, have we ever had an energy shortage in the past 40 years? If there was corruption, is that the fault of a system that should be thrown out altogether, or could the opponents point out concrete evidence and put anyone in jail?

Like democracy, in which you can always find faults, the concession regime is not perfect, but going into a new regime could be even worse.

Public discontent with Thailand's energy system has stemmed from what people have seen (until the recent plunge in world oil prices) as stubborn rises in energy prices and rising profits of PTT, which went in the opposite direction to the people's hardships (although PTT has cited its global ambition to be among the Fortune 500 companies, and insists its profitability ratio is not high).

It is strange to see the government's energy reforms instead bringing in more profit to PTT (such as ending the liquefied-petroleum-gas subsidy and reducing the subsidy on natural gas for vehicles, although these are the right moves) rather than squeezing them. And while energy security is an urgent matter, the government is delaying the scheme that would allow companies to explore and extract more oil and gas for the country.

Source: http://www.nationmultimedia.com/business/Thailand-must-examine-the-real-issues-surrounding--30255111.html

-- The Nation 2015-03-02