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The struggle between Thailand and Cambodia over oil and gas resources

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While international attention is focused the political risk resulting from the ongoing diplomatic tit for tat between Cambodia and Thailand over Preah Vihear, overlooked is the fight to exploit ...

While international attention is focused the political risk resulting from the ongoing diplomatic tit for tat between Cambodia and Thailand over Preah Vihear, overlooked is the fight to exploit untapped oil and gas reserves under their disputed maritime boundary in the Gulf of Thailand.

The disputed area, also known as the Overlapping Claims Area (‘OCA’), has been a point of contention in the relationship between the two countries and the settlement of the dispute would be a boon to not only diplomatic relations, but also to further energy exploration and production in South-East Asia.

As Thailand’s energy needs increase and the Cambodia’s nascent oil and gas industry matures, there is increasing pressure from many quarters to see the dispute between Thailand and Cambodia settled.

This file is available for download from our website.

CONTENTS

Progress towards a resolution of the dispute

Preah Vihear temple a stumbling block to settling the OCA dispute

Revenue Sharing

Is the Thai proposal unfair?

Thailand is still the main winner under the Cambodian proposal

What will bring both sides to finally settle this dispute?

- A change of philosophy to marine border demarcation

- A more mature Cambodian oil and gas industry

- Increased gas demand by Thailand

Could the concept of a Joint Development Area a solution?

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The struggle between Thailand and Cambodia over oil and gas resources The struggle between Thailand and Cambodia over oil and gas resources Document Transcript

  • Briefing Note POLITICAL AND MARKET INTELLIGENCE 17 SEPTEMBER 2010 CONTENTS Progress towards a resolution of the dispute Preah Vihear temple a stumbling block to settling the OCA dispute Revenue Sharing Is the Thai proposal unfair? Thailand is still the main winner under the Cambodian proposal What will bring both sides to finally settle this dispute? - A change of philosophy to marine border demarcation - A more mature Cambodian oil and gas industry - Increased gas demand by Thailand Could the concept of a Joint Development Area a solution? 2 2 3 3 4 4 4 5 5 Despite the rhetoric over Preah Vihear, the disputed maritime boundary between the two countries in the Gulf of Thailand is the key outstanding issue between the nations. Thailand & Cambodia The struggle over petroleum resources in the Gulf of Thailand While international attention is focused on the ongoing diplomatic tit for tat between Cambodia and Thailand over Preah Vihear, overlooked is the status of the disputed maritime boundary between the two countries in the Gulf of Thailand. The disputed area, also known as the Overlapping Claims Area (‘OCA’), has been a point of contention in the relationship between the two countries and the settlement of the dispute would be a boon to not only diplomatic relations, but also to further energy exploration and production in South- East Asia. As can be seen in the map, the OCA is 27,000 sq km offshore area estimated to contain up to 11 trillion cubic feet of natural gas and underdetermined
  • CLC ASIA - THE STRUGGLE OVER PETROLEUM RESOURCES IN THE GULF OF THAILAND 2 quantities of condensate and oil. The OCA area is bounded by the Cambodia claim of 1972 (western boundary) and the Thai claims of 1973 (eastern boundary line), as well as the 1991 Cambodian-Vietnam maritime border (southern boundary). As Thailand’s energy needs increase and the Cambodia’s nascent oil and gas industry matures, there is increasing pressure from many quarters to see the dispute between Thailand and Cambodia settled. Source: Department of Minerals and Fuels, Thailand Progress towards a resolution of the dispute While a 2001 MOU between Thailand and Cambodia outlined an agreed framework to settle the maritime dispute, progress has been slow as political tensions between Cambodia and Thailand have remained fragile since 2003 when the Thai embassy and Thai owned businesses were attacked in Cambodia. Subsequent tensions over the disputed border demarcation near the Preah Vihear temple have also meant that substantive talks remain elusive. While there were periods where relations thawed and talks to resolve the OCA dispute were held, the Thai cabinet at the end of 2009 voted to scrap the 2001 MOU. This has added further uncertainty as to how talks may proceed in future. Still, resolution of the OCA dispute cannot begin until there is a final resolution to Preah Vihear….. Preah Vihear temple a stumbling block to settling the OCA dispute…. In 1962 following a lengthy dispute, a majority of the International Court of Justice (ICJ) in The Hague awarded the Prae Vihear temple to Cambodia. While Thailand eventually respected the court’s decision, anger remains over the loss of sovereignty, and Thailand vigorously claims rights over 4.6sq km of land surrounding the temple itself, which is located in the far north of Cambodia. Constitutionally, all issues regarding territorial sovereignty must be passed by the Thai parliament, where there is significant opposition to any relinquishment of territorial claim, regardless of political alignments. The temple dispute and topic of sovereignty are highly charged issues in the Thai
  • CLC ASIA - THE STRUGGLE OVER PETROLEUM RESOURCES IN THE GULF OF THAILAND 3 …and those solutions should avoid all appearances of compromising Thailand’s territorial integrity at Preah Vihear for economic benefit elsewhere. political discourse. Even creating the impression of forfeiting sovereignty can be politically fraught. In 2008, Thai foreign minister Noppadon Pattama was forced to resign after a court ruled he had violated the constitution after the government supported Cambodia’s moves to have Preah Vihear World Heritage listed. In the ensuing scandal the entire cabinet was threatened with possible impeachment. A number of diplomatic and military sources in Thailand who have suggested that discussions on the maritime border issue cannot truly begin until some compromises have been reached on the temple issue. Any talk of settling the maritime disputes generally leads to accusations of ‘selling out’, especially from the Thai side, where compromises on the Preah Vihear issue are seen as a trade-off for additional economic benefit from the Cambodian’s in the OCA. Revenue sharing The issue of revenue sharing was a key problem identified by both Thai and Cambodian sources. Both countries have presented competing proposals in earlier talks. Cambodia proposes dividing the disputed area in a checkerboard fashion, creating at least 14 different blocks. Revenues and management of the blocks would be shared equally on a 50/50 basis. The main Thai counter-proposal is that the disputed area be divided into three strips running north-south, with the revenue from the central area to be shared equally on a 50/50 basis. The share from the outer areas would be weighted in favour of the country adjacent to that area, approximately 80/20 to Thailand on the western side of the OCA and 80/20 to Cambodia on the eastern side of the OCA. Most of the oil and gas reserves likely to be closer to the Thai side of the disputed area. Is the Thai proposal unfair? In the absence of firm data on reserves in the OCA (exploration not being allowed given the ongoing dispute), experts have indicated that it makes intuitive sense that most of the exploitable reserves are located towards the Thai side of the OCA. This is because the Pattani basin, the geological formation which contains most of the offshore oil and gas reserves in undisputed Thai waters, extends into the OCA. Conversely, geological formations on the Cambodian side of the border have made drilling there challenging and uneconomic in some instances. The result of this situation is that the Thai proposal for revenue sharing favours the Thai’s, given the balance of the reserves that can be economically drilled sit on the Thai side of the OCA.
  • CLC ASIA - THE STRUGGLE OVER PETROLEUM RESOURCES IN THE GULF OF THAILAND 4 Thailand is still the main winner under the Cambodian proposal The Cambodian proposal for a 50/50 revenue split, though rejected by Thailand, would nevertheless see Thailand gain the largest share of the overall economic benefits. Based on both interviews undertaken by CLC Asia and publicly available reports, it appears given the level of sophistication of Thai based oil producers, Thai based companies (e.g. PTTEP) and assorted contractors would need to undertake the bulk of the work in the OCA, and thus derive a majority of the benefits. Thailand would also gain a new source of gas for power generation lessening the reliance on Burmese supplies. Thailand would also gain more through displacement of imported oil, which comprises a substantial percentage of its daily consumption. As such, the potential for compromise will largely rest on Thailand’s ability to agree to a revenue sharing agreement which recognises the inherent external benefits that will accrue to Thailand. Three key issues need to be addressed before a resolution is possible What will bring both sides to finally settle this dispute? We think there are three key factors which need to be addressed before a resolution is possible. A change of philosophy to marine border demarcation A Thai navy expert familiar with the issue of the maritime border also suggested a ‘good starting’ point for movement on the issue of the OCA is that if Cambodia accepts the fact that the line which Cambodia has drawn through Kut Island (a Thai resort island ceded by France in 1904 ) does not have any legal basis. From the Thai perspective, Cambodia may have to draw another line by using the median line principal, to delimit the territorial sea and continental shelf between the two countries. This would be a start from where both countries can begin to look at delimiting the border in the top portion of the OCA (see map), which both countries have stated they must delimit, before any movement on a JDA can be achieved. A more mature Cambodian oil and gas industry The other key element of ‘compromise’ will be the natural development of the Cambodian exploration and production sector, as well as refining industries. A more developed Cambodian sector which can compete with Thailand’s mature oil and gas industry has been identified by long time Cambodian advisors as the only real way for Cambodia to strengthening its bargaining position against Thailand regarding the OCA. This would allow Cambodian based industry to more fully capture the economic benefits from the development of fields in the OCA. While there has been much promise in the past about Cambodian reserves, drilling by Chevron in Cambodian waters has proven much more difficult,
  • CLC ASIA - THE STRUGGLE OVER PETROLEUM RESOURCES IN THE GULF OF THAILAND 5 with production forecasts much less than the optimistic figures which were published earlier this decade by multilaterals such as the IMF. The IMF has predicted approximately 400 to 700 million barrels of reserves, whereas a key advisor to the Cambodian government expects that proven reserves of around 50 million barrels are more realistic, with a recovery rate of 6 % to potentially 14%. A more mature Cambodian oil and gas sector will come slowly however. Though there has been much hyped speculation surrounding the potential of the industry in Cambodian waters, the reality is that development of reserves is more difficult than expected. While Chevron is expecting to pump oil from its first well in December 2012, the development of an industry comparable to Thailand’s is quite a way off. Thailand’s increased reliance on Myanmar will likely push to towards the negotiating table Increased gas demand by Thailand It is quite well known that Thailand is heavily reliant on gas for power production. The majority of this gas will need to be imported in future as its reserves in the Gulf of Thailand and from Burma dwindle. The Cambodian’s see this situation as one of the key factors in bringing Thailand to the negotiating table. However, in addition to their goal of a more mature O&G industry, the Cambodian position for negotiating a settlement to the OCA is one that is increasingly aware that there is no rush to push Thailand, given that there are higher benefits from Cambodia waiting for Thailand to ‘need’ Cambodia more, and increased economic upside from a more mature Cambodian industry. A JDA would allow exploitation of the OCA, without directly ceding claims to sovereignty over the area. Could the concept of a Joint Development Area be contemplated by authorities of both countries? The concept of a Joint Development Area (JDA) seems to be the only realistic solution to both countries overlapping claims in the Gulf of Thailand. The concept of a JDA, according to a Thai academic familiar with border disputes, is the best – if not only – solution to the political difficulties in Thailand surrounding the potential loss of sovereignty. This is because the concept of the JDA does not necessarily mean that Thailand or Cambodia have to formally relinquish claims over territory. Rather the JDA can operate while ongoing issues surrounding demarcation can be discussed separately.
  • CLC ASIA - THE STRUGGLE OVER PETROLEUM RESOURCES IN THE GULF OF THAILAND ABOUT CLC ASIA Chris Larkin Managing Director Chris is the founder of CLC Asia Chris private sector clients in Asia, Australia and the UK. After beginning his career in Australia, Chris moved to Thailand where he became an internal advisor to the Thai government on privatisation and econo privatisations of PTT and Airports of Thailand, as well as working with a variety of State Owned Enterprises. Since moving to the private sector, Chris has advised a number of private sector clients on and political risk issues non as well as helping leading energy companies on their IR strategy His analy well regarded publications, including the Mining Journal and Wall Street Journal, as well as regional publications such as the Bangkok Post, The Nation, and the Phnom Penh Post. Chris has an Honour Policy and Management from Monash University, Australia, as well as having completed a Minerals Economics course from the University of Melbourne. Chris is fluent in English and Thai and has dual Australian a citizenship. THE STRUGGLE OVER PETROLEUM RESOURCES IN THE GULF OF THAILAND Chris is the founder of CLC Asia. Chris has over 15 years experience working for both government and private sector clients in Asia, Australia and the UK. After beginning his career in Australia, Chris moved to Thailand where he became an internal advisor to the Thai government on privatisation and economic regulatory policy, working on the privatisations of PTT and Airports of Thailand, as well as working with a variety of State Owned Enterprises. Since moving to the private sector, Chris has advised a number of private sector clients on government relations, market entry, policy and political risk issues. He has also performed both financial and non-financial M&A due diligence on a number of entities as well as helping leading energy companies on their IR strategy His analysis and views have also been sought by a wide range of as well regarded publications, including the Mining Journal and Wall Street Journal, as well as regional publications such as the Bangkok Post, The Nation, and the Phnom Penh Post. Chris has an Honours degree in Economics and a Masters of Public Policy and Management from Monash University, Australia, as well as having completed a Minerals Economics course from the University of Melbourne. Chris is fluent in English and Thai and has dual Australian a citizenship. He is married with two children and based in Bangkok. THE STRUGGLE OVER PETROLEUM RESOURCES IN THE GULF OF THAILAND 6 years experience working for both government and After beginning his career in Australia, Chris moved to Thailand where he became an internal advisor to the Thai government on mic regulatory policy, working on the privatisations of PTT and Airports of Thailand, as well as working Since moving to the private sector, Chris has advised a number of market entry, policy He has also performed both financial and ligence on a number of entities across Asia as well as helping leading energy companies on their IR strategy. sis and views have also been sought by a wide range of as well regarded publications, including the Mining Journal and Wall Street Journal, as well as regional publications such as the Bangkok s degree in Economics and a Masters of Public Policy and Management from Monash University, Australia, as well as having completed a Minerals Economics course from the Chris is fluent in English and Thai and has dual Australian and Thai He is married with two children and based in Bangkok.
  • CLC ASIA - THE STRUGGLE OVER PETROLEUM RESOURCES IN THE GULF OF THAILAND Trevor Bull Associate Director – Governance THE STRUGGLE OVER PETROLEUM RESOURCES IN THE GULF OF THAILAND Trevor has been an internal advisor to the Thai government for 15 years. Trevor joined CLC Asia in 2010 as a senior became an Associate Director in 2012. In addition to his role at CLC Asia, Trevor works as the Resident International Advisor to the Energy Regulatory Commission of Thailand (ERC) since its creation in 2008. His work with the ERC includes supporting the development of procedures and processes for the economic regulation of the power and gas sectors in Thailand as well as capacity building for Commission and Staff. Formerly, Trevor was the Manager of Sector Restructuring at the State Enterprise Policy Office at the Ministry of Finance, Thailand. His work included supporting the development of policy for market and regulatory restructuring for the transport, water, energy and telecom sectors. The Sector Restructuring team supported the establishment and capacity building of economic regulators for these sectors for both price and non price regulation. Trevor was the World Bank’s Privatisation Advisor attached to the Thai Ministry of Finance. Trevor has also managed a team of consultants at the Thai Ministry of Finance for the Asian Development Bank funded project on developing commercial finance for local government units in Thailand. This project on municipal finance involved the design and implementation of capacity building for local government officers and the development of a regulatory framework to govern municipal borrowing. Prior to joining the Ministry of Finance in 1999, Mr. Bull was employed by the National Energy Policy Office, working on electricity and gas sector restructuring. Trevor is an Australian citizen with Thai permanent residency. He is fluent in English and speaks Thai t o an advanced level. THE STRUGGLE OVER PETROLEUM RESOURCES IN THE GULF OF THAILAND 7 government for 15 Trevor joined CLC Asia in 2010 as a senior consultant and works as the Resident International Advisor to the Energy Regulatory Commission of Thailand (ERC) since its creation in 2008. His work with the ERC upporting the development of procedures and processes for the economic regulation of the power and gas sectors in Thailand as well as capacity building for Commission and Staff. was the Manager of Sector Restructuring at the rise Policy Office at the Ministry of Finance, Thailand. His work included supporting the development of policy for market and regulatory restructuring for the transport, water, energy and telecom sectors. The Sector Restructuring team supported the ishment and capacity building of economic regulators for these sectors for both price and non price regulation. Prior to this was the World Bank’s Privatisation Advisor attached to the sultants at the Thai Ministry of Finance for the Asian Development Bank funded project on developing commercial finance for local government units in Thailand. This project on municipal finance involved the design and r local government officers and the development of a regulatory framework to govern municipal Prior to joining the Ministry of Finance in 1999, Mr. Bull was employed by the National Energy Policy Office, working on electricity Trevor is an Australian citizen with Thai permanent residency. He is fluent in English and speaks Thai t o an advanced level.
  • CLC Asia helps investors negotiate the complexities of working with government in Asia. In Thailand, we have over half a century of in-house experience of working with the Royal Thai government at our disposal. Market and industry analysis We provide in-depth market studies and initial non- legal/non-financial due diligence for potential investments in Asia. Our work goes beyond ‘off the shelf’ studies available elsewhere in order to give clients a clear picture of a target company, as well as relevant market dynamics and structure, key players, industry trends and market outlook. Political risk analysis Utilising our unique network of contacts and key decision makers, we offer clients comprehensive assessments of political risk events which may arise in a market. These events can include corruption, bureaucratic blockages, poor stakeholder relations, government and policy shifts, terrorism and security, legal and regulatory irregularities, religious and health related concerns. Government relations & communications The principals of CLC Asia have significant experience advising governments and state owned entities in the region. We can help private sector clients refine their message to government clients in a way which best communicates our clients’ business as well as assisting in stakeholder relationship matters. Policy advisory As policy advisors who have worked in the heart of government, we provide our clients with clear and informed background and interpretation on government strategy and policies, helping our clients align their commercial objectives with policy realities and frameworks. Our consultants are based ‘on the ground’ in Asia and have extensive experience in the region. All of our principals have worked for both the private and public sectors in the region, and can provide a unique insight to the political and business environments of the region CONTACT Bangkok All Seasons Place 26th Floor, Capital Tower 87/1 Wireless Road Bangkok 10330 Thailand Tel: +66 1 866 1002 Fax: +66 2 654 3511 Email: enquires@clc-asia.com