Oil and gas regulation in Cambodia - Commentary on prospects for investors
This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
Summary and Implications
After decades of conflict and political instability Cambodia is slowly emerging as an investment destination. After a flurry of investors trying to tap into its potential oil and gas reserves, it seems to have fallen off most oil and gas investors’ radar, a situation not helped by a global downturn in oil and gas prices. Cambodia has reacted and is trying to regain lost momentum though an overhaul of its policies, regulations and approach to developing the industry.
The Challenge
Despite international interest since the 1990s, the country has no proven reserves of oil or natural gas with no reliable estimates readily available. However, preliminary exploration has led to some positive results, most recently and notably in the offshore area Block A, which was declared a commercial discovery by Chevron Corporation in August 2010.
Cambodia, at the moment, imports all its oil and gas to meet its domestic needs. This reliance on imported fuel has a heavy impact upon the economy and is driving an imperative to become more self-sufficient. This is taking the form of Cambodia's first oil refinery, which is being built in the Kampot province, and the proposed development of two petroleum pipeline projects, one offshore and one onshore. With energy demand set to surge over the next decade as the economy grows, a renewed focus on the development of the national oil and gas industry is allowing Cambodia to take great strides towards the goal of achieving energy independence.
As a cornerstone to any country’s development of its natural resources and sector specific knowledge, a national oil company is important. There have been reports released in March 2015 that the Ministry of Mines and Energy (MME) and the Finance Ministry are in the early stages of developing a national oil company. However, to date, there has been no update on its status.
Cambodia’s oil and gas blocks
Cambodian has six offshore blocks (A to F) and 19 onshore blocks (I to XIX). There are also four further areas in an overlapping claims area (OCA) which is currently contested with Thailand.
As of February 2014, exploration of Block A was completed and the block was declared to have a commercial discovery. Spanning approximately 4,709 square kilometres, Block A is reported to contain an estimated 700m barrels of oil and 3–5tn cubic feet of natural gas. The relevant stakeholders have agreed on the development concept for the extraction of oil from Block A. However, oil and gas production is not expected until 2018.
Despite exploratory contracts being awarded for all six offshore blocks, progress on the development of these blocks has been slow. Low global oil prices and various other elements have resulted in sluggish exploration campaigns, with almost a cessation in block development in Cambodia. As a result, in a bid to restart the industry, the Cambodian government terminated the contracts for three of the offshore Blocks B, D and F early this year, citing a failure on the part of each of the respective companies to perform their obligations under the petroleum agreements. It is unclear when the blocks will be re-assigned, although it has been reported that the Cambodian government is giving CPHL (Cambodia) Co Ltd a six-month exclusivity period to re-bid for Block D.
Contracts have so far been granted for three of Cambodia’s 19 onshore blocks. These blocks are all at a very early stage of development, and no estimates or data are available yet. However, while the attention of international investors over the past decade has been focused on offshore blocks, new data on the Tonle Sap Basin and improved security in the countryside have opened new exploration opportunities in these untested areas.
The Cambodian government intends to invite bids for all unassigned blocks, however at current there has been no proposed timeline for this process.
The OCA measures approximately 27,000 square kilometres, and it has been estimated to contain up to 11 tn cubic feet of natural gas and up to 3.6bn barrels of oil.1 The Cambodian government had granted, in late 1997, conditional licenses to five companies to drill in four blocks of the OCA. The right to drill was conditional on an agreement between Cambodia and Thailand.
In this respect, a memorandum of understanding (MoU) was signed between Cambodia and Thailand in 2001, setting up a joint-development regime over certain areas of the OCA and attempting to define a maritime border between others. Negotiations were disrupted by the change in Thai leadership in 2006, and in 2009 the MoU was suspended by Thailand. In 2014, Cambodia formed a special OCA committee headed by the Deputy Prime Minister and Senior Minister of border affairs to negotiate the development of resources with the Thai government. Discussions are still ongoing and it is hoped that an agreement may be close, notably in relation to the most delicate issues, such as revenue sharing and sector allocation to be covered by the joint development.
Oil refinery
First announced in 2013, but then faced with a series of delays, it appears that Cambodia’s first oil refinery is finally underway. An engineering, procurement and construction (EPC) contract valued at $620m was inked between Cambodia Petrochemical Company and China National Petroleum Corporation (CNPC) Northeast Refining & Chemical Engineering Company on 5 May 2016 to construct the first phase of the oil refinery across Kampot and Sihanoukville provinces. It is estimated that the first phase of the oil refinery will be completed at the end of 2018, with an oil production capacity of 2m tons per year and a planned increase to a capacity of 5m tons a year thereafter.
Petroleum Pipelines
On 26 April 2016, it was reported that the Cambodian government commissioned feasibility studies for constructing a network of oil and gas pipelines across Cambodia. The first would be an offshore oil pipeline from the Gulf of Thailand to the Preah Sihanouk province, then a second onshore pipeline to run across the seven provinces: Preah Sihanouk, Kampong Speu, Phnom Penh, Battambang, Siem Reap, Kampong Cham and Kandal.
Prospects for the Future
Although Cambodia’s oil and gas industry is still young, and the first agreement for commercial extraction is yet to be signed, the sector holds considerable promise for both potential investors and the Cambodian Government. A proper development of the legal and regulatory framework will be crucial to fulfil that promise, to meet the expectations of the international oil and gas industry and, as stated by Prime Minister Hun Sen, to “make sure that oil is a blessing but not a curse”.
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The Nabarro Oil & Gas team has extensive experience in the sector, Cambodia and regionally.
