Delay to Thai oil and gas bidding round raises likelihood of future regulatory changes


26 Feb 2015

Delay to Thai oil and gas bidding round raises lik...

An indefinite delay to Thailand’s 21st bidding round for 29 oil and gas blocks will slow investment in the sector and marks a success for environmental and civic activists, who had called for changes to contracting terms. A planned review of the regulatory regime governing the sector will now take at least three months to conduct and creates uncertainty for potential investors in Thailand’s long-stalled and increasingly politicised oil and gas sector.  

Prime Minister Prayuth Chan-ocha announced an indefinite delay of the auction on 24 February, following several months of demonstrations by campaigners, since it was originally announced in October 2014. Campaigners, including civic groups and some politicians, have argued that the concession-based regime outlined under Thailand’s 2007 Petroleum Act does not provide the state with adequate revenues and grants overly favourable fiscal terms to exploration companies. Civic groups have called for changes to the outdated legislation and constitutional amendments to increase state control of natural resources via the introduction of Production Sharing Contracts (PSCs), similar to those in other oil and gas producing Southeast Asian countries.

The success of campaigners in delaying the bidding round will also embolden them to maintain pressure on the government to enact future reforms in the oil and gas sector. The continued responsiveness of the National Reform Council – a military-appointed body tasked with drafting political and economic reforms – to demands for reforms will be indicative of the longer-term prospects of campaigners to influence policies governing the sector. This could present a noteworthy consideration for operators with exploration licenses, especially if these are perceived as having been granted on terms that do not provide the government with sufficient revenues. A more negative public environment could increase operators’ exposure to direct activism and elevate the importance of community engagement strategies and public relations in Thai operations.

The delay, and the announced three-month review of contracting terms, increase the likelihood of significant change to Thailand’s regulatory regime. This review of terms and expected changes to the Petroleum Act mean that a bidding round before the third quarter of 2015 is unlikely, contributing to significant uncertainty for prospective operators, including the China National Petroleum Corporation and Japan’s Mitsui, who have publicly expressed interest in Thai blocks. The government had thus far supported the existing concession system as a better way of ensuring energy security, providing incentives to investors at a time of low oil prices while alleviating the government’s necessity to provide funds for the exploration of petroleum resources. However, the PM’s admission of the need for time to review the Petroleum Act suggests that changes to regulations are likely, while delays to future bidding are now certain.

Amid current regulatory uncertainty, future environmental obligations and contract renewal periods will likely be key areas of legislation reviewed, alongside the broader fiscal terms governing contracts. Under current legislation, operators are only granted a one-off ten-year contract renewal, which has been cited as a deterrent to reinvestment in blocks and could be amended to favour investors. Meanwhile, tighter environmental compliance obligations are likely and could be used to placate some activist concerns about exploration in existing blocks that have previously delayed certain projects.

The Thai government clearly must balance competing public interests with investor appetite ahead of any future bidding round. It will be sure to provide terms still attractive to investors at a time of lower global oil prices and reduced expenditure on exploration, especially as the latest delay will reaffirm concerns over the high degree of regulatory uncertainty and the government’s long-standing inability to drive developments in the sector. The outcome of the review is uncertain but three potential regulatory outcomes are outlined below:

Introduction of PSCs for all blocks

  •   Extended delays to bidding round with parliamentary approval needed for new regulatory regime and policy changes
  •   Tightening of fiscal terms currently governed by concession regime; Thai government currently takes a 67 percent cut of pre-tax profits, compared with average 74 percent for other Southeast Asian nations using the PSC model

Terms governing blocks are split between a mix of concession and PSC regimes

  •   Variable regulatory framework and fiscal terms governing different exploration blocks
  •   High-risk blocks more likely to be kept under concession regime, and PSC terms introduced to govern offshore blocks estimated to contain 11 trillion cubic feet of natural gas and an unknown amount of oil

Government maintains current concession regime ahead of bidding round

  •   Unlikely following the announced delay to the bidding round, but possible if political divisions block reforms to the Petroleum Act or the government overrides opposition in order to end persistent delays in the bidding process amid falling investor confidence and growing economic pressure
  •   Increased politicisation of exploration and production contracting terms, increasing exposure to public activism and longer-term policy reviews by a future government
  •   Stricter environmental obligations on operators introduced as a concession to campaigners

For previous PGI analysis of the Thai oil and gas sector from October 2014, click here.

 

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