The South China Sea represents a major exploration prospect for Vietnam as it seeks to satisfy rising domestic demand for oil and gas. However, competing territorial claims from other nations in this resource-rich region threaten to derail the country’s future plans. GlobalData reports.
Vietnam announced the results of its 2011 licensing round for nine oil and gas exploration blocks in January 2012. Many of the blocks offered in the round are located off the Vietnamese coast in the South China Sea, which is estimated to contain significant oil and gas reserves. However, a number of surrounding coastal countries, notably China, have staked territorial claims on the resource-rich sea, including Indonesia, Malaysia, Philippines, Taiwan and Vietnam (see Figure 1).
These disputes and the contentious status of these blocks, along with frequent political opposition to oil and gas industry developments in offshore Vietnam, could prove to be a key challenge for Vietnam’s licensing progress, and prevent it from securing its long-term oil and gas requirements.
The licensing round relates to a number of blocks located south-west of the Spratly and Paracel islands in the South China Sea, which lies to the south of China, encompasses a portion of the Pacific Ocean and stretches roughly from Singapore and the Strait of Malacca in the south-west to the Strait of Taiwan in the north-east. It contains more than 200 small islands, rocks and reefs.
The sea is estimated to hold around 213 billion barrels of oil and about 2,000 trillion cubic feet (tcf) of natural gas and has witnessed several major oil and gas discoveries in the past few years (see Table 1).
Rising oil and gas consumption in Vietnam
Vietnam’s move to hold licensing rounds for its blocks is a result of its need to up the pace of the exploration and development of promising fields with a view to increasing production levels. This is primarily driven by its rising domestic consumption of oil and gas and decreasing production as a result of aging fields, meaning the country is now on the verge of becoming a net importer of oil and gas. Its production decreased from 159MMboe in 2006 to 147MMboe in 2010, while consumption increased from 125MMboe to 159MMboe during the same time period (see Figure 2).
Besides the licensing round, Vietnam has been taking a multipronged approach to securing its oil and gas output. PetroVietnam, the country’s national oil company, is investing in domestic and overseas exploration and production activities. So far, it has signed more than 76 contracts with international petroleum groups and corporations, and is investing in 23 overseas oil and gas exploration and production projects.
Cooperation with India
One contract it has signed is with India’s ONGC Videsh (OVL). On 12 October 2011 the companies agreed to cooperate on oil and gas exploration in the South China Sea, India and other countries. During the three-year deal, the two will share information on the oil and gas industry, and exchange working visits involving industry experts and authorities. Additionally, the companies agreed to focus on new investments to expand operations in the upstream, midstream and downstream segments.
India and Vietnam have a long history of mutual cooperation related to Vietnam’s oil and gas industry, and PetroVietnam and OVL have been engaged in cooperation agreements since the 1980s. Hydrocarbon India (later renamed OVL) and PetroVietnam signed a production-sharing contract (PSC) for block 06.1 in the South China Sea in 1988. The block contributes about 50% of the gas requirement for Vietnam’s domestic sector, and is therefore of national and strategic importance. Additionally, OVL was awarded two exploration blocks, 127 and 128, in the Phu Kanh basin in Vietnam in June 2006.
However, the recent cooperation agreement reportedly drew oppostition from China as the country claims the development to be a violation of its sovereignty. Prior to the deal, it had been reported by various media outlets that some international oil companies have been advised by certain littoral states to yield their oil and gas exploration deals with Vietnam.
Investor interest in the licensing round
The ongoing uncertainties about the territorial demarcation in the South China Sea are likely to impact investors’ interest in Vietnam’s current licensing round, as the majority of the blocks offered are in that disputed area. Since the start of the licensing round on 1 August 2011, two Russian companies, TNK-BP and Lukoil, have shown interest, although that may be due to the fact that Russia supplies crude oil and liquefied natural gas (LNG) to China and is also developing major trunk pipelines to enhance supply to the country in the future. In such a scenario, Russian companies, unlike their Indian or other international counterparts, are unlikely to face opposition from China over their activities in the South China Sea.
It is noteworthy here that a number of Russian oil and gas companies, Gazprom and Zarubezhneft among them, have already established operations in Vietnam.