Regulatory uncertainty threatens investor interest in Thai oil and gas bidding round in June


15 May 2015

Regulatory uncertainty threatens investor interest...

Thailand’s energy minister Narongchai Akrasenee said on 24 April that the delayed bidding round for 29 oil and gas blocks would go ahead in June 2015. The announcement follows a three month delay to allow a review of contracting terms under the current Petroleum Act. Despite this, a new act is unlikely to be passed before the auction, raising significant uncertainty over what terms will be applied to investors. Environmental and civic activists will continue campaigning for higher state revenues from the sector and a move away from the current concession model. The absence of clarity surrounding the regulatory regime, ongoing reputational risk from civic activists and the underlying political uncertainty over the future of the military regime all threaten to deter investor interest in the upcoming bidding round.

Since the delay to the bidding round in late February, campaigners have continued to pressure the government to implement changes to the concession system enshrined in the Petroleum Act 2007. Civic groups have also proposed that the government use Section 44 of the constitution—used currently to maintain special powers that are available to the government under martial law—to amend the Petroleum Act without the legislative process, bringing in a production sharing contract (PSC) model for the new round. PGI’s February 2015 report on the delay provides further information on the context for the dispute and potential outcomes.

The lack of political progress makes it very unlikely that a new Petroleum Act will be ratified before the auction goes ahead in June. Regulatory uncertainty stemming from expected changes to contracting terms post-auction threaten to significantly lower interest in the onshore and offshore acreage on offer. Thus far, only Japanese Mitsui & Co. and Chinese state-owned company China National Petroleum Corporation (CNPC) are known to have expressed interest. In lieu of legislative changes, the government could apply additional clauses to awarded concessions, allowing it to reserve the right to apply PSC terms for high-potential blocks, such as the G3, G5 and G6 tracts. In addition to new ventures, such a decision could also leave existing operators vulnerable to retrospective amendments of terms. Concessions nearing expiry may not retain similar fiscal terms, if contracts are extended. Chevron has previously called on the government to clarify the management of five of its concession blocks due to expire in 2022 in order to facilitate further investment, but under current legislation the existing concession cannot be extended.

Officials have also suggested that previously confidential elements of concession agreements could be published in a bid to improve transparency and appease campaigners. The momentum of environmental and civic groups calling for an end to the concession-based system also poses reputational and potential operational risks to operators that will affect investor decisions, increasing the importance of public relations and community engagement strategies for new entrants to the oil and gas sector in Thailand. State-owned oil company PTT’s headquarters in Bangkok have been targeted by thousands of activists in November 2013 as well as further protests in February and June 2014 over sector deregulation, and further campaigns could also expose private operators to scrutiny and potential direct action. The limited reserves in the new blocks, estimated at 1.5 trillion cubic feet of gas and 20-50 mn barrels of crude oil, could also dampen interest in light of the current low oil price environment.

The wider political uncertainty in Thailand will further lower investor confidence and interest in committing to new ventures. Elections have been delayed to 2016, and a controversial constitutional reform process by the military-led government remains ongoing. Irrespective of the constitutional and electoral reforms sought by the government, the longer-term stability of any incoming civilian government and macro-economic performance will continue to be threatened by a high likelihood of civil unrest due to the contentious and deeply divided political environment.

 

Operating in Thailand or seeking to enter the market? Concerned about exposure to regulatory and political risk? To discuss your interests or request information on our Country Risk Assessments, contact us at: riskanalysis@pgitl.com

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