Thai government announces first oil and gas auction since 2007

23 Oct 2014

Thai government announces first oil and gas auctio...

Thailand’s National Energy Policy Committee announced on 22 October that 23 onshore and six offshore blocks will be auctioned for exploration and production activities on 18 February 2015. The announcement of the 21st bidding round came with further clarification on the terms governing the new concessions and may signal the completion of amendments to the much-delayed 2007 Petroleum Act. The government is seeking greater foreign investment in the oil and gas sector to meet growing domestic demand amid declining production. Nonetheless, energy reform groups are likely to ramp up pressure on the government to amend the contracting terms to increase revenues from the sector.

The announcement heralds the first bidding competition for oil concessions since 2007, when the Department of Mineral Fuels awarded 28 concessions for onshore and offshore exploration blocks. Thailand faces a domestic fuel deficit and is under significant pressure to secure foreign investment to develop its proven reserves of nine trillion cubic feet (TCF) and probable reserves of 9.57 TCF of natural gas. According to the Ministry of Energy, the concessions currently on offer are estimated to hold between 1-5 TCF of natural gas and 20-50 million barrels of crude oil.

According to the Deputy Permanent Secretary of Energy Dusit Nakhontap, new conditions imposed on concession winners in the upcoming bidding round are focused around environmental concerns, with restrictions on exploration activities in protected watershed areas, national parks, wildlife sanctuaries and tourist destinations. These restrictions are likely a response to a major oil spill off the coast of Koh Samet in July 2013, which led to a freezing of all Environmental Impact and Environmental Health Impact Assessments amid public concerns over lax environmental regulations. The accident also prompted protests in the affected areas and has led to several legal cases against the government and state-owned companies filed by the fishing and tourism industries.

The fiscal terms of the new concessions will be governed by the ‘Thailand Three’ petroleum concession regime, which also governs the concessions awarded in the previous round. These terms are favourable to operators and indicate a trend consistent with previous contracting practices, where the maximum effective rate for royalty fees was just 13 percent of oil revenues. The terms include an annual incremental royalty of 5 to 15 percent, a 50 percent tax on net profits, and an annual incremental special benefit that varies based on revenue and exploration investment. In addition, concession holders will have to contribute a minimum of USD 30,950 per year on educational development in the localities where exploration is taking place, increasing the amount to around USD 62,000 per year during the production phase.

The announcement of fiscal terms that remain favourable to operators suggests that impending changes to the Petroleum Act — which have been delayed repeatedly over recent years — will also be designed to attract further investment and therefore are unlikely to have a significant impact on the profitability of oil and gas projects in Thailand. The government appears determined to restore investor confidence, though changes to the act will likely impose stricter environmental compliance requirements to subdue domestic opposition in the wake of the Koh Samet spill. Although no date has been announced for when the amendments to the Petroleum Act will be made, the pace of energy reform since the military junta came to power in May suggest it could be before the auctioning round in February. This would also be consistent with previous changes to petroleum legislation, with the sixth amendment to the Petroleum Act in December 2007 coming just after the awarding of blocks in the 20th bidding round in October that year.

The attractive fiscal terms will promote investment, but their announcement will also likely revitalise efforts by civic groups to pressure the government to move away from current concession-based contracting model. Significant numbers of protesters campaigned for energy sector reform during the unrest between November 2013 and May 2014 that brought down the administration of Yingluck Shinawatra. These protesters have continued to call for a tightening of the Petroleum Act, renationalising the energy sector, and increasing revenues from oil and gas operators. Following the announcement of the auction, energy reform groups in Nakhon Ratchasima—located in northeast Thailand, where most of the 23 onshore blocks are located —already petitioned the prime minister to revoke all petroleum concessions, saying they were outdated and failed to extract sufficient benefits for the host country. The fact that other countries in the Association of Southeast Asian Nations (ASEAN) have moved away from concession-based contracting practices and generally impose higher fees for operators will support these groups’ case and could lead to further, less investor-friendly, legislation in the longer term.


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