Gazprom has breathed new life into exploration on the Vietnamese shelf.
The Russian-Vietnamese joint venture, Vietgazprom, with the collaboration of the gas industry’s Zarubezhneftegaz, began 3D seismic exploration in July in the Bao Vang (Golden Panther) gas deposit which was discovered a year ago offshore Vietnam.
The company is also expecting to discover other deposits. The conditions for their future development have not been discussed, with the exception of one: the priority market for the hydrocarbons extracted is domestic.
Gazprom's entry in Vietnam is happening against a particular background: firstly, of a decline in extraction from the country’s large-scale but already ageing Bach Ho (White Tiger) deposit, which has been developed by the Vietsovpetro joint venture between Zarubezhneft and Petrovietnam for almost three decades (though in the latter stages of the project, this was complicated in terms of mutual understanding between the parties); and secondly – and significantly – of noticeable activity here by a great number of companies from other countries.
Since you could not call the economic prospects for Gazprom’s investment in Vietnam obvious, its approach here can be understood as acting as an alternate strategic partner in this most friendly-to-Russia of the south-eastern Asian states and, naturally, by acknowledging the serious geopolitical interest in Vietnam on the side of the Russian government.
According to data from the Oil & Gas Journal, proven stocks of oil in Vietnam in 2007 amounted to 600 million barrels. All the deposits are located on the South China Sea shelf, where relatively little exploration of the subsoil has taken place.
Oil production in Vietnam grew right up to 2004, reaching levels of 441,000 barrels per day, after which it can be seen to have decreased - down to 340 thousand barrels per day currently. Above all, this explains the drop in production at Bach Ho (White Tiger), the largest deposit in the country. The joint Russian-Vietnamese oil-producing company Vietsovpetro, formed in 1981 as an equal joint venture between Zarubezhneft and the Vietnamese state company, Petrovietnam, is the operator of the project in question. During its existence, Vietsovpetro has produced more than 150 million tonnes of oil.
Analysts from the EIA (US Energy Information Administration) believe that possibilities exist in the country to grow oil production to more than 400,000 barrels per day in 2008 using new deposits, even given the continuing drop in production at White Tiger.
Vietnam’s entire oil and gas system is controlled by the state company Petrovietnam, which participates in all projects with foreign investors - on the basis of Production Sharing Agreements (PSA) and/or in the form of joint ventures. As Chong Xhong Shon, vice-president of the subdivision of the national company, Petrovietnam Exploration Corp (PVEP), informed the Oil and Gas Journal (OGJ), work conditions for foreign investors in Vietnam do not have overall standards and result from individual negotiations concerning each specific land parcel.
Right now, international major companies (ConocoPhillips, BP, Chevron) are working on the Vietnamese shelf, along with smaller private western companies (for example, Talisman from Canada, and Santos from Australia), as well as foreign government companies, including PETRONAS from Malaysia, KNOC from Korea, and ONGC from India (table 1).
The most promising prospect for oil and gas is the Cuu Long Basin in the southern part of the Vietnamese shelf, where the energies of the majority of foreign interests are concentrated. Fortunately, Vietsovpetro’s White Tiger is also located in this basin. The development of other large deposit in the basin – Su Tu Vang – is lead by the Cuu Long consortium, in which Petrovietnam has a 50% share, ConocoPhillips has 23.25%, KNOC has 14.25%, SK Corp has 9% and Geopetrol has 3.5%. It is expected that in the first half of 2008, the consortium’s production level will reach 100,000 barrels per day.
The Japan Vietnam Petroleum Company (JVPC) joint venture is the operator for the other promising deposit in this basin - Phuong Dong. Oil production in the region of 23,000 barrels per day is planned to begin here by 2008.
Vietnam is obliged to export practically all oil production and buy in ready-made oil products because it lacks its own oil refineries. Domestic demand for oil products is constantly growing. According to EIA data, it is reaching more than 290,000 barrels per day and could increase this year to 330,000. At the same time, oil is the main source of fuel; it accounts for nearly half of the consumption of all energy resources (which has significant meaning in a country which also has hydropower).
Production on the shelf is faced with a large number of legal difficulties because of the unresolved question of delimitation of the shelf between the states on the coastline.
For example, in June 2007, BP was forced to curtail its exploration work on the Parasel Archipelago because of the on-going territorial dispute between Hanoi and Peking concerning possession rights to the chain of islands in question, which was occupied in 1974 by the Chinese People’s Republic, shortly before the end of the Vietnam War. At the same time, Vietnam successfully resolved the problem of “grey areas” with Malaysia, by being given 23,000 barrels of oil per day from the jointly-developed RM-3 commercial zone.
According to OGJ data, the disputed stocks of gas in Vietnam in 2007 amounted to around 200 billion cubic metres. Gas production is constantly growing, but the entire volume goes to the domestic market where gas represents 12% of the energy consumption of the country. The major offshore gas deposits are Lan Tay and Lan Do, opened by BP in 1992. A gas project based on these deposits is being carried out at a cost of $1.3 billion: within the framework of this, gas will flow along the 420 kilometre-long Nam Con Son underwater gas pipeline to the power plant at Phu My. For this, a consortium of companies BP (32.67%), ConocoPhillips (16.33%) and Petrovietnam (51%) are planning to increase gas production from both deposits to 5.5 billion cubic metres in 2008. At the end of 2006, KNOC and Petrovietnam began gas production at the Rong Doi and Rong Doi Tay deposits, as well as in the Nam Con Son basin. Today, production by the Korean/Vietnamese joint venture amounts to 1.4 billion cubic metres per year.
At the same time, in Block 9-2 and Block 16-1 sectors in the Song Hong basin in the north of the country, a consortium with participation from Petrovietnam, Soco International and the Thai company PTTEP has planned to produce 4.7 billion cubic metres of gas in 2008.
From 2000, Petrovietnam has been working actively in production collaboration projects abroad (table 2).
Reboot. Northern Approach
Gazprom, in the form of its subsidiary enterprise, Zarubezhneftegaz (formed earlier jointly with Zarubezhneft, although last year its shares were consolidated by Gazprom), began work in Vietnam in the Song Hong basin in the north of the country, which is less developed industrially and less popular amongst foreign investors.
We are reminded that at the time of the war with America, the country was divided into two parts – the capitalist South with the large western-style city of Saigon (now Ho Chi Minh City) and the socialist North, where even today the population has a noticeably lower standard of living.
Here it is also possible to notice that at the start of the twenty-first century, a coolness was emerging between Zarubezhneft and Vietnam which was linked to the unwillingness of the Russian company (just like other foreign partners, as it happens) to build a large oil refinery at Dung Quat in the central part of the country, which is as far from the production area as it is from the main consumers in the industrial south and the “metropolitan” north. It is obvious that the desire of the Vietnamese authorities was to even out the economy of such different parts of the country, having symbolically combined them in the area where there was recent combat glory – the legendary 17th parallel.
However, Gazprom did not take part in the construction of the previously-discussed oil refinery – and in 2009 the plant, which has a capacity of 6.5 million tonnes per year, was put into production by Petrovietnam on its own.
Another stumbling block in the collaboration between Zarubezhneft and Hanoi’s officialdom were the working conditions. Foreign operators and investors had been pouring into the Vietnamese oil and gas sector, and the country did not want to continue to dole out superfluous (as far as it was concerned) preferences to “old friends”, all the more through discussions concerning new projects and blocks. In short, the relationship between the Russian Federation and the Socialist Republic in the oil and gas arena needed to be “rebooted”.
This work began at the end of the 1990s, through Gazprom’s efforts. After preliminary negotiations and framework agreements, at a Russian-Vietnamese meeting at the highest level which took place in Moscow in the autumn of 2000, a licensed block 112 in the Bak Bo Gulf was selected for joint work and the corresponding contract was signed, without conducting a call-for-tender and on the recommendation of the Vietnamese side.
Zarubezhneftegaz and Petrovietnam set up Vietgazprom, a joint trading company (SOK) in which they have equal shares which acts as the contractor in block 112 and is financed on a cost-basis principle based on annual budgets. The Russian side is putting in 100% of the financing of geological exploration from the moment the boundaries of the first developed area are defined. The costs will be reimbursed from the day industrial gas production starts under conditions which will be agreed by both parties.
The contract term will be 25 years (from June 2002), with a possible 5-year extension.
Within the framework of the basic version, this set-up approves gas production for the domestic Vietnamese market and its distribution for export to the southern districts of China.
According to the agreement on collaboration, signed by Gazprom officials and Petrovietnam in November 2006 during the visit to Hanoi by the president of Russia, Vladimir Putin, the parties intend to develop full-scale collaboration in all strands – from exploration and production to marketing hydrocarbons, to create the infrastructure for processing, transportation, oil and gas storage facilities, distribution networks and filling station networks.
Large gas expectations
Within the scope of the contract, the exploration programme is made up of three parts: Phase I – sinking three exploration wells and 3D seismic profiling over an area of 800 km2; Phase II - sinking two exploration wells; Phase III – sinking one exploration well. Later on, the two last phases were combined.
Within the scope of phase I, Vietgazprom sank well no. 1 (VGP 112-BT-1X) to a depth of 3,493m in February 2004. On getting the results of the exploration well, Vietgazprom offered to widen the working area to include neighbouring block 113 in the contract area, which was done in 2005.
3D seismic profiling was carried out in the new section over an area of 800 km2, the results of which were marked out as the top-priority facilities for drilling. These were the Bao Den and Bao Wang (Golden Panther) structures, the total gas resources of which were assessed in the region of 200 billion m3, and together with the small neighbouring structures, 300 billion m3. Vietgazprom negotiated a contract for constructing the second and third exploration well from the drill ship Neptune Discoverer (Neptune Marine & Drilling Pte Ltd).
Vietgazprom sank the second well (VGP-113-BD-1X) in June 2007, and the ship then passed to the drilling spot for the third well (VGP-113-BV-1X), which currently is drilled to a project depth of 2,515m. Tests are now being carried out in the well. This third well – on the Bao Wang structure – has also registered industrial gas reserves. The inflow of gas has amounted to 400,000 m3 per day. The gas presented itself as almost pure methane and gas condensate was present in well output. The opening of the deposit was done in August 2007.
The company is continuing work in two directions: measures connected with exploration of the open deposit (drilling, more precise definition of the boundaries and the reserves), and also extension of the work in the contract area according to combined phases II and III. 3D seismic exploration work is currently being undertaken in the area where the deposit was discovered (the Fugro company is acting as sub-contractor, and the Norwegian ship Seisquest has begun operations), and also 2D seismic profiling in the drilling zone (by the Murmansk-registered ship Professor Polshkov). Drilling of a second exploration well is planned on the Bao Den structure.
Vietgazprom intends to extend the contract area to the Bao Wang deposit, since a preliminary assessment has shown that its boundaries fall within the scope of block 112, for which the company possesses a licence. According to the exploration plan, construction of 6 exploratory wells is provided for – 3 for each deposit cupola. The southern cupola with proven gas content is planned for top-priority drilling.
Representatives from Vietgazprom expressed their hopes for discovering large industrial gas reserves in Vietnam. It is clear that guaranteeing the domestic market is not the aim of the project – either from an economic or a geopolitical point of view. The target market is southern China and other countries in the region, which is a priority from the point of view of Russia’s political presence in South-East Asia, for which Vietnam is the most comfortable, not to say the only, springboard.
At the end of May 2008, a Gazprom delegation headed up by chairman of the board Aleksei Miller visited Vietnam. During meetings with officials from the country and Petrovietnam, discussions took place about the possibilities for the Russian gas giant to participate in designing a general blueprint for development of the Vietnamese gas sector, and to take part in projects in other countries. The parties discussed four new blocks, where the development operator would be Vietgazprom, which are included on the shelf in the south of the country.
The agreement also provides for the creation by the parties of a joint venture – Gazpromviet – to ensure that the company participates in oil and gas projects on Russian land and in other countries.
OIL & GAS Journal, N. Petrov, E. Kuzin.