Cam­bo­dia’s oil boom?

Last month, Cam­bo­dia signed a deal with Sin­ga­porean firm Kris En­ergy to de­velop the King­dom’s un­tapped oil re­serves. Dis­cov­ered at the turn of the cen­tury, the fields had the po­ten­tial to flood the King­dom’s econ­omy with for­eign cap­i­tal. But af­ter a decad

Southeast Asia Globe - - Contents - By Paul Mil­lar

Deep within the wa­ters of the Gulf of Thailand, a for­tune lies wait­ing. Un­tapped for more than a decade, a re­serve of petroleum and nat­u­ral gas re­mains buried – tes­ta­ment to years of the Cam­bo­dian gov­ern­ment’s fail­ure to ac­cess re­sources po­ten­tially worth bil­lions to the de­vel­op­ing econ­omy.

Last month, though, the gov­ern­ment fi­nally put pen to pa­per, sign­ing a re­vised petroleum agree­ment with Sin­ga­porean com­pany Kris-En­ergy that could pave the way for the King­dom’s first oil ex­ports. But a look at the na­tion’s long strug­gle to reap the ben­e­fits of its oil re­serves sug­gests the risks may out­weigh the re­wards.

In 2002, Cal­i­for­nia-based petroleum ti­tan Chevron was awarded a con­trol­ling share in ‘Block A’, an area stretch­ing al­most 5,000 square kilo­me­tres in the Gulf of Thailand. Two years later, the com­pany an­nounced the Ap­sara oil dis­cov­ery, declar­ing that the site was home to lu­cra­tive oil and gas re­serves with a po­ten­tial out­put of 400 mil­lion bar­rels of crude oil. Pro­duc­tion, they said, was to be­gin within five years.

In Au­gust 2014, just two months into a global drop in oil prices that would see a sin­gle bar­rel of oil worth less than $35 by early 2016 – down from a peak of $115 two years prior – Chevron an­nounced its exit from the project. The com­pany sold its re­main­ing stake in the Block A fields for a mere $65m, arely a third of what the multi­na­tional had spent ex­plor­ing the fields just a few years prior. Not a sin­gle drop of oil had been pro­duced.

Speak­ing across the pale ex­panse of a board­room ta­ble, Stephen Hig­gins, a man­ag­ing part­ner at Phnom Penh-based in­vest­ment and ad­vi­sory firm Mekong Strate­gic Part­ners, said that Chevron’s de­ci­sion to ditch its share of the once-promis­ing fields had been a care­fully cal­cu­lated move.

“Chevron are not ama­teurs,” he said. “If they ex­ited these fields, you’d have to think that it was a well-con­sid­ered and well-thought-through strat­egy.”

From their in­cep­tion, ne­go­ti­a­tions be­tween Chevron and the Cam­bo­dian gov­ern­ment seemed com­pro­mised by a lack of trans­parency. In 1998, a royal de­cree gave birth to the Cam­bo­dian Na­tional Petroleum Au­thor­ity (CNPA), a per­ma­nent in­sti­tu­tion di­rectly an­swer­able only to Prime Min­is­ter Hun Sen. It was this body that would ne­go­ti­ate the opaque pri­vate con­tracts con­cern­ing what were be­lieved to be sig­nif­i­cant sites of un­tapped wealth.

If a Global Wit­ness re­port re­leased in 2009 can be be­lieved, the temp­ta­tion for graft took lit­tle time to take hold: Chevron – now the long­est con­tin­u­ous serv­ing mem­ber of the Extractive In­dus­tries Trans­parency Ini­tia­tive’s in­ter­na­tional board – had been forced to pay the CNPA an ex­or­bi­tant “sig­na­ture bonus” in ex­change for rights to the re­serves.

An­drew Har­wood, a se­nior re­search an­a­lyst at global en­ergy and re­new­ables con­sul­tancy Wood Mackenzie, who fo­cuses on South and South­east Asia, said that the rift be­tween Chevron and the Cam­bo­dian gov­ern­ment had formed due to a marked dif­fer­ence be­tween the tax rate out­lined in a pri­vate con­tract be­tween the two par­ties and the one found in the na­tion’s own laws.

“I be­lieve there was a model Pro­duc­tion-Shar­ing Con­tract [PSC] es­tab­lished, much the same as in Malaysia, In­done­sia and Viet­nam,” he said. “But there was a con­flict be­tween the tax rate men­tioned in the PSC and the Cam­bo­dian tax law.”

Ac­cord­ing to Sophal Ear, a Cam­bo­dian pol­icy an­a­lyst and co-au­thor of Aid De­pen­dence in Cam­bo­dia: How For­eign As­sis­tance Un­der­mines Democ­racy, it was pos­si­ble that Cam­bo­dia’s gov­ern­ment had botched ne­go­ti­a­tions with the ex­pe­ri­enced en­ergy com­pany by de­mand­ing too high a price for the de­vel­op­ment of its oil re­serves.

“At the time, the run­ning joke was that the au­thor­i­ties had al­ready taken the money be­fore a drop of oil was ex­tracted,” he said. “If true, this would lend it­self to the idea that the gov­ern­ment wanted too much – and now that the price of oil is low, it didn’t make sense for Chevron to do any­thing about Block A.”

And with oil prices show­ing lit­tle sign of re­claim­ing the peaks of the early 2000s, Hig­gins said, the day when Cam­bo­dia would join the ranks of oil-ex­port­ing na­tions seems a dis­tant prospect in­deed.

“Maybe seven or eight years ago, it was es­ti­mated that the cost to re­cover those re­serves was about $70 a bar­rel,” he said. “And when oil is $100 or above, then that makes sense. For the last five years or so, maybe longer, the price of oil has been be­low that. To­day, de­pend­ing on which mea­sure, it’s some­where around $50. So why would any­one bother with a re­serve where it costs more to ex­tract the oil than they can sell it for?”

While Har­wood re­mained hope­ful that the pro­duc­tion agree­ment be­tween Kris En­ergy and the gov­ern­ment could see the lon­gawaited project take off in the near fu­ture, he said that the

King­dom’s fail­ure to come to an agree­ment with Chevron over the past decade might have been a bless­ing in dis­guise.

“As long as those re­sources re­main in the ground, I ex­pect that at some point they will be pro­duced,” he said. “It’s a shame that Cam­bo­dia couldn’t re­tain a com­pany like Chevron to de­velop and op­er­ate its first ma­jor oil and gas project. At the same time, if they had been able to get things up and run­ning be­fore the oil price crashed in 2014, then they might have ac­tu­ally found them­selves in a dif­fi­cult sit­u­a­tion now with low oil prices but those high de­vel­op­ment costs locked in.”

Nor, it seems, was the de­vel­op­ment of Cam­bo­dia’s oil re­serves nec­es­sar­ily go­ing to be a boon for the King­dom’s emerg­ing econ­omy. Econ­o­mists have long warned of the stress that abrupt in­flows of for­eign cur­rency – such as that brought in by a sud­den re­sources boom – can wreak on an econ­omy that lacks the in­sti­tu­tional in­tegrity to man­age it. Given the rul­ing party’s record of sell­ing off the na­tion’s nat­u­ral re­sources and al­legedly lin­ing its own pock­ets with the pro­ceeds, the idea that Cam­bo­dia’s new­found oil wealth would trickle down to those who need it most seemed op­ti­mistic at best.

“Of­ten, re­sources such as oil present more of a curse than a ben­e­fit,” Hig­gins ex­plained. “We see this in coun­tries in Africa, in places like Venezuela… it can re­shape the econ­omy in terms of a lot of in­flows that drive up in­fla­tion, which might make the man­u­fac­tur­ing in­dus­try, for ex­am­ple, less com­pet­i­tive. It isn’t an un­am­bigu­ously good thing to have these re­sources. A lot de­pends on how you man­age them.”

For Ear, though, the loss of a po­ten­tial wealth fund that could have re­duced the na­tion’s decades-long re­liance on for­eign aid to main­tain ba­sic so­cial ser­vices was a bit­ter blow.

“Oil re­sources could have been banked as sov­er­eign wealth for Cam­bo­dia’s fu­ture pros­per­ity,” he said. “There’s lots on that in the Extractive In­dus­tries Trans­parency Ini­tia­tive (EITI), but Cam­bo­dia never signed on to EITI. Look at how Nor­way did it. It has banked the money and in­vested it in or­der to make more from it. If Cam­bo­dia had done that, it’d be well on its way to im­prov­ing the lives of each of its cit­i­zens.”

Although Kris En­ergy is now aim­ing to pro­duce 8,000 bar­rels a day by early 2020, the Sin­ga­porean com­pany – which re­ported a net loss af­ter tax of $237m last fis­cal year de­spite ris­ing rev­enues – is still look­ing for part­ners to share in the in­vest­ment. In a state­ment to the me­dia af­ter the sign­ing of the agree­ment last month, in­terim CEO Jef­frey McDon­ald was tri­umphant. “This is a ma­jor step for­ward in the de­vel­op­ment of the Ap­sara oil field and es­tab­lish­ing Cam­bo­dia as an oil-pro­duc­ing na­tion,” he said. For Hig­gins, though, the fu­ture ap­pears far murkier. “Pre­sum­ably they got [the con­trol­ling stake] for a very cheap price, and… there may be a big pay­off if oil prices re­bound. Some­thing may change that makes the eco­nomics vi­able,” he said. “[But] un­less some­one comes up with a dif­fer­ent tech­nol­ogy that al­lows them to ex­ploit it more eas­ily, it’s hard to see the oil ever com­ing out.”

Top: Fer­di­nando Bec­ca­lli-Falco, left, pres­i­dent of Gen­eral Elec­tric In­ter­na­tional, talks with Cam­bo­dia’s then-deputy prime min­is­ter Sok An, who was also the chair­man of the Cam­bo­dian Na­tional Petroleum Au­thor­ity, in Phnom Penh in July 2007. Gen­eral...

Then-Thai Prime Min­is­ter Thaksin Shi­nawa­tra (left) talks to Cam­bo­dian PM Hun Sen in Au­gust 2006 at a meet­ing to dis­cuss jointly de­vel­op­ing oil and gas re­sources in over­lap­ping off­shore fields

Par­tic­i­pants at the Fu­elling Poverty Re­duc­tion with Oil and Gas Rev­enues: Com­par­a­tive Coun­try Ex­pe­ri­ences con­fer­ence, held in Phnom Penh in 2008 (top); a graphic show­ing ar­eas for oil ex­plo­ration in Cam­bo­dia (mid­dle); Sok An and Hun Sen were both...

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