Documente Academic
Documente Profesional
Documente Cultură
Cambodia
United Nations Development Programme
No. 53, Street Pasteur, Boeung Keng Kang,
P.O. Box 877 Phnom Penh, Cambodia
Tel: (855) 23 216167 or 214371
Fax: (855) 23 216257 or 721042
E-mail: registry.kh@undp.org
http://www.un.org.kh/undp/
2006
UNDP Cambodia
Insights for Action Initiative
Background: UNDPs Insights for Action (IFA) initiative was developed and launched in
May 2004 in the follow-up to a meeting between H.E. Prime Minister Hun Sen and
Dr. Hafiz Pasha, the Regional Bureau Director of UNDP. The Prime Minister emphasized
that Cambodia needs UNDP much more for its ideas than its money.
The IFA initiative was created to undertake policy research and to facilitate policy
dialogue among the Cambodian Government, Cambodian society and Cambodias
development partners.
Purpose: The IFA initiative is aimed at generating innovative ideas and practical
knowledge for the effective implementation of the Governments Rectangular
Strategy. Special focus is given to those aspects of the Rectangular Strategy with
greatest scope for rapidly advancing progress towards Cambodias Millennium
Development Goals (CMDGs). In addition to a Knowledge Generation component,
there is also a Knowledge Sharing component aimed at helping catalyze and develop
support for needed decisions and actions.
New Knowledge Generated: Valuable new knowledge and insights in several critical
areas have already been generated through well targeted research in collaboration
with the Supreme National Economic Council (SNEC), a cross-ministerial advisory
council that reports directly to the Prime Minister.
Knowledge Sharing: The Insights for Action initiative has also been developing a
range of knowledge sharing activities and modalities including the Cambodia
Economic Forum (CEF), successfully launched in January 2006, media conferences,
website development, and the beginning of a series of Insights for Action publications.
Foreword
The discovery in late 2004 of potentially significant reserves of oil and gas off the coast
of Cambodia presents potentially major opportunities for the countrys socioeconomic development, but also some potentially major challenges.
Judging from experiences in a number of other low income developing countries over
the past forty years, the sudden surge of petroleum related revenues can have major
implications for a countrys development path and the well-being of its people.
Unfortunately, more low income developing countries than not have been impacted
negatively following a sudden surge of revenues from petroleum and other such nonrenewable natural resource extraction. Reflecting these negative experiences, a new
development term has emerged called resource curse.
Therefore, this second Insights for Action Discussion Paper attempts to facilitate a
better understanding of the possibilities in Cambodia by outlining the findings of an
initial scoping of the oil and gas sector in the country. The purpose of such a scoping
is to motivate and facilitate advance planning in case future petroleum revenues
prove to be significant.
The paper also outlines some key principles to ensure that the oil and gas sector
develops with efficiency and with maximum net revenues accruing to Cambodia
through the negotiation of effective Production Sharing Contracts.
Most important, the paper provides an initial analysis of some of the basic safeguards
needed to better ensure that Cambodia avoids the serious mistakes made by
governments in some oil exporting developing countries, and Cambodian people
avoid a resource curse and enjoy a resource blessing.
The research for this paper was carried out in the summer of 2005 with the assistance
of the Harvard Universitys John F. Kennedy School of Government and Professor Brian
Quinn from Stanford Universitys School of Law, in collaboration with researchers from
the Cambodia National Petroleum Authority (CNPA). The main findings of this research
were presented at the Cambodia Economic Forum (CEF) in January 2006 organized by
the Supreme National Economic Council in collaboration with CNPA and UNDP.
Participants included His Excellency Prime Minister Hun Sen, Senior Ministers and
other policy officials, local universities, the international development community,
NGOs, and other stakeholders.
Given the potentially major socio-economic implications for Cambodian people,
UNDPs Insights for Action initiative plans further applied research in this important
subject area as the possibilities evolve.
Insights for Action
UNDP Cambodia
January 2006
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
Table of Contents
Introduction
Upstream Issues
2
2
Downstream Issues
7
7
8
8
8
9
11
11
13
14
15
16
17
18
18
20
21
21
22
23
Conclusion
24
25
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
GDP
IMF
JDA
KWH
Kilowatt hour
LPG
MW
Mega Watt
NGO
Non-governmental organisation
OCA
ODA
PSC
Production-Sharing Contract
UNDP
VAT
WTO
iii
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
INTRODUCTION
Recent discoveries in offshore Block A and expectations of possible discoveries in the
overlapping concession area (OCA) between Thailand and Cambodia are generating
new interest in the oil sector. It is still too early in the process to say with any certainty
how much, if any, of the discoveries will ultimately be commercially viable. However,
it is not too early in the process to begin to plan and to think about how Cambodia
can prepare itself in the event that there are significant oil and/or gas resources in
commercial quantities.
The United Nations Development Programme (UNDP) does not have a direct interest
in the oil and gas sector, however, experience in developing countries which have
found significant hydrocarbon resources suggests that the UNDP and international
donors can play a role in assisting host country governments to prepare to efficiently
manage the sector as it develops. There are many examples of resource rich countries
in the developing world where poor management of the sector becomes a roadblock
to the country's ability to meet its own development goals, presenting both
macroeconomic and political challenges. With proper planning and adequate
management, however, there is no reason why Cambodia should fall into the pile of
unsuccessful resource-rich economies.
This paper is not intended to provide a complete overview of all policy and
management issues in the oil and gas sector. It is, rather, intended to raise important
issues and in order to stimulate further discussion within the Cambodian National
Petroleum Authority (CNPA) and between CNPA and UNDP. This first section of this
paper provides analysis of some of the most important issues relating to exploration
and production of hydrocarbons (Upstream), including analysis of the model
production-sharing contract (Model PSC) in use in Cambodia. In the Upstream sector,
Cambodia's focus should be on maximizing the revenues associated with exploration
and production of crude oil and natural gas. The second section of this paper deals
with issues facing CNPA relating to potential development of petroleum refining and
local marketing of refined petroleum products (Downstream). In the Downstream
sector, Cambodia should ensure that consumers and end-users have access to refined
petroleum products and natural gas at world prices. The third section of this paper
provides options for managing revenue that might be expected from Cambodia's
upstream activities. The emphasis regarding management of oil and gas revenues
should be on the most efficient utilization of the resources to promote achieving
Cambodia's long-term development goals. The final section of this paper focuses on
management and development challenges facing CNPA itself, including legislative
and regulatory challenges.
Even modest
improvements
in the Model
PSC can result
in large
marginal
gains for the
Cambodian
side given the
length of the
contracts and
the amounts
of revenue
involved.
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
UPSTREAM ISSUES
Upstream Development Principle
Negotiations with international exploration and production companies should be
structured and carried out so as to maximize revenue from production sharing
contracts (PSC) and the joint development area (JDA) with Thailand.
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
Cost Recovery
12.5%
0.0%
20.0%
7.5%
10.0%
10.0%
90%
40%
85%
70%
50%
45%
10.0%
Cost Recovery
58%-42%
68%-32%
85%-15%
60%-40%
65%-35%
50%-50%
50%
Profit Tax
50%
Royalty
5-15%
Thai (III)
#
*
Royalty
The chart below estimates the average percentage of revenue per barrel that the
relevant host country might expect to receive given the contract terms above at
various prices per barrel of crude oil. At lower prices, CNPA's estimated revenue per
barrel can be expected to be less than that of any of its neighbors. When the Model
PSC was first negotiated in the late 1990s, long-term oil price targets were in the range
of only about $20 per barrel. At these prices, CNPA would have only expected revenue
on the order of ten percent of revenues, the lowest expected revenue in the region.
Over the past five years, industry analysts have adjusted their long-term target prices
to the $40 range. At these higher prices and assuming costs of production remain
relatively low (assumed $10 per barrel), CNPA can expect revenues on par with those
of other countries in the region. From the chart below, it appears that there may be
room to negotiate improvements in future iterations of the Model PSC so as to limit
the downside risk (of a decline in crude prices). CNPA might also want to consider
lowering maximum cost recovery available to the Contractor so that it is more in line
with other countries in the region so as to increase the guaranteed cash flow available
to CNPA as profit oil.
$25.00
45%
45%
56%
41%
43%
39%
$35.00
53%
53%
67%
49%
50%
46%
$45.00
57%
57%
73%
53%
54%
50%
$55.00
60%
60%
76%
56%
57%
52%
$65.00
62%
62%
79%
58%
59%
54%
Assuming a fixed cost of $10.00 per barrel and profit oil splits equal to the highest marginal splits in favor of the government.
Different actual costs may have significant impacts on the amount of revenue available.
Includes revenue from corporate taxes.
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
On the natural gas side, the 65-35 allocation of profit gas in the Model PSC is favorable
to the Contractor. Unlike the allocation of profit oil, the profit gas allocation under the
Model PSC does not employ a sliding-scale which would improve the allocation in
favor of the CNPA as average production per day increased. Using a static allocation of
profit gas, rather than a sliding-scale, does not appear to have a basis. Given the nature
of the reservoirs offshore Cambodia there may be limited economies of scale
associated with increasing production, however the fact that the Contractor will be
able to recover its costs through the cost allocation formula, the lack of economies of
scale is not a sufficient argument against employing a sliding scale to favor CNPA at
high levels of production.
The Model PSC guarantees the Contractor a 16 percent real rate of return on any
investments made in order to develop production for Cambodia's downstream
domestic market for natural gas. As the guarantee of a 16 percent real return will be
paid for by adjusting CNPAs natural gas allocation downward, a guarantee such as this
has significant implications with regard to the size of revenues that Cambodia might
expect to receive from natural gas development. The guaranteed rate of return makes
it more likely that the Contractor will pursue larger than necessary developments
before local market demand has developed to sufficiently to support such
development. Depending on the the absolute amount of the guarantee and the price
of natural gas, CNPAs revenues from natural gas could be significantly reduced as a
result of pursuing development of downstream natural gas opportunities before
there is sufficient market demand to support that development.
For a more detailed analysis of relevant contractual terms in the Model PSC see
Appendix I.
Pending discussions with Thailand regarding the JDA present an opportunity for the
CNPA to improve the revenue position of Cambodia relative to contractors. It will be
likely that the JDA will adopt a single approach to granting development rights and
that the terms will be an improvement of the current Model PSC. Of course, if the JDA
develops a Thai-styled concession approach rather than a production sharing
approach, CNPA may have to go through an additional learning process before
becoming proficient with its terms. Nevertheless, once the JDA's model petroleum
agreement is in place, CNPA can use it to improve its position relative to all
subsequent contractors both in and out of the OCA. It will, of course, be critical that
CNPA is well represented and negotiates the terms of the JDAs model PSC when it is
negotiated.
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
International
exploration
companies
rely on large
legal teams
and outside
counsel when
negotiating
PSCs. CNPA
should not be
afraid to do
the same.
International exploration companies rely on large legal teams and outside counsel
when negotiating PSCs. CNPA should not be afraid to do the same. Relying on
experienced outside legal counsel in order to negotiate on behalf of CNPA could have
very positive benefits with respect to revenue accruing to CNPA in connection with
PSCs.
Hiring competent legal counsel to represent CNPA for the negotiation of a PSC assist
might cost as much as $750,000. Though this might appear at first glance to be a large
fee, relative to the potential benefit that might accrue from competent and effective
legal counsel, it is not. For example, if outside legal counsel can improve the revenue
allocation one percent in the direction of CNPA over the Model PSC, which could
improve CNPA annual revenue by almost $1 million (assuming 75,000 barrels per day,
at $50 per barrel). Competent legal counsel can help build additional flexibility into
the PSC in favor of Cambodia that might assist in the development of a local
petroleum services sector.
Most legal advisors will charge their clients in one of three ways: hourly rate, set fee or
hourly rate on a contingency basis. Each of these arrangements has its own
advantages and disadvantages. Hourly rates encourage legal advisors to spend a
great deal of time on issues large and small. While this usually assures thorough
analysis of all issues, it can become quite expensive. Set fees for particular projects
ensure certainty of price. Legal advisors will have the incentive to minimize the
amount of work they do under these arrangements in order to maximize their profit
margin. As a result, legal advisors have an incentive to skimp on analysis of issues.
Finally, contingency arrangements appear, at first glance, to be a convenient
arrangement, but contingency payments can create incentives for legal advisors to
ensure that a deal is signed, sometimes to the detriment of the clients rights. CNPA
should avoid contingency and set-fee arrangements. Though more expensive, hourly
rates will ensure that CNPA's legal advisors are working mostly for the benefit of the
CNPA.
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
Previously, CNPA has used international legal counsel as resource persons. Under
these arrangements CNPA consulted in preparation for negotiations with potential
contractors. Using legal advisors in this manner is relatively inexpensive, but CNPA
should reconsider this approach. CNPA should consider allowing legal counsel to be
the primary negotiator of the PSC on behalf of CNPA. The presence of a third party
(legal counsel) as primary negotiator creates additional negotiating room for CNPA.
CNPA can use that negotiating room to push for better terms and, if necessary, for
compromise. While there may be sensitivities about a heated negotiation, competent
counsel will not feel embarrassed about asking for a lot, pushing the other side and
demanding the best deal for CNPA. The "good-cop, bad-cop" negotiating strategy is
well known, but yet still quite effective. Using outside legal counsel creates
opportunities to improve CNPA's position in negotiations without injuring
relationships between the principals.
One area where more aggressive use of outside counsel will be helpful will be in the
resolution of negotiations with Thailand over the OCA and the JDA. Given Thailand's
growing need for new hydrocarbon resources to meet demand by 2010, the Thai side
will likely be under increasing internal pressure to reach agreements with both
Cambodia and contractors. This pressure may create negotiating leverage that outside
counsel and CNPA can use to improve Cambodia's relative position in negotiations.
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
DOWNSTREAM ISSUES
Downstream Development Principles
Policymakers are presently discussing development of certain downstream industries
in Cambodia. Given the large amounts of capital investment required by this sector,
CNPA should rely on a number of basic principles in guiding their decision-making
regarding whether and how to develop certain downstream activities. These
principles include the following:
1)
2)
3)
4)
Market risks
associated
with private
investments in
downstream
industries
should remain
with the
private sector.
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
Avoid Cross-Subsidization
Upstream and downstream projects each need to stand independently on their own
feet. The CNPA should avoid selling crude oil or natural gas to domestic downstream
projects at less than export prices. Selling crude oil and natural gas at the highest price
possible, avoiding cross-subsidization, will maximize revenue and ensure that
Cambodia's energy resources are used in the most efficient manner possible.
Providing crude oil and natural gas to downstream projects at less than export prices
is a hidden subsidy that could cause gross distortions and inefficiencies. If there are
social needs or concerns that policymakers wish to address through downstream
projects, a more transparent subsidy program might be better suited to meeting
those goals.
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
hidden subsidy to the refiner. Assuming a $50 per barrel price for crude oil, this hidden
subsidy could cost Cambodia approximately $100 million per year. The simple analysis
above assumes 100 percent utilization of a local refinery and does not take into
account the fact that the particular product mix of heavy and light fuels produced by
a local refinery may not precisely match local demand, leaving open the possibility
that additional imports of particular product types might still be required.
Because of the requirements of the Model PSC for sales of the Contractor's crude to
any local refinery at world prices, Cambodia should not expect that significant price
reductions will result from a small refinery coming online. Indeed, if the investment
cost for a small refinery is financed with a foreign currency loan (including a soft loan),
net foreign exchange savings may also be minimal, if not negative depending on the
nature of the financing. As a result, the $100 million hidden subsidy for a local refinery
would be insurance against supply disruption only.
The question that policymakers should ask is whether $100 million per year is too
expensive for insurance and whether or not there are more cost effective ways to
reach the same supply security goal. While potential supply disruption is a legitimate
policy issue, it must be looked at in context. For the most part, international trading
markets for oil are deep and buyers and sellers are anonymous. International
commercial players have little motivation to stop supply to any particular customer.
Refining capacity in the region may, for the time being, be tight, but that does not in
any way signal that significant supply disruptions are on the way. Given the current
structure of international oil markets, the risk of supply disruption is limited. It is
unlikely that if a major supplier, like Vietnam, unilaterally decided to stop supplying
refined product to Cambodia that alternative supplies wouldn't be available from
elsewhere in the region. Indeed, Cambodia's present competitive retail distribution
market is a de facto energy security policy. Multiple importers sourcing product from
a variety of sources and countries assures that Cambodia has a diversified source for
its energy needs and that the risk of unilateral disruptions of refined products from
any particular source will not have extreme negative consequences on the
Cambodian economy. One player in the downstream retail business described the
diversification strategy as breathing through both the nose and the mouth.
The analysis above is not a strict argument against development of oil refineries in
Cambodia. At some point, it may become financially attractive for the private sector to
invest its own resources in the development of a refinery in Cambodia. Indeed, if
reserves prove to be large enough, there may well be a commercial argument for
private sector investments to develop large-scale refineries to serve both the
domestic and export markets. When that point comes, guided by the principles set
forth above, Cambodia should feel confident in licensing private investors to develop
such oil refineries.
10
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
11
Currently almost
all of Cambodia's
270 MW of
installed electric
generation
capacity is made
up of diesel-fired
generators.
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
With those conditions, the medium term potential for the development of natural gas
will likely be limited to supplying natural gas for power generation.
Currently almost all of Cambodia's 270 Mega Watts (MW) of installed electric
generation capacity is made up of diesel-fired generators. Peak demand in 2004 was
only 120 MW. As a result of the low load factors and reliance on diesel generation to
meet baseload demand, the retail price of power is very high. In Phnom Penh the
average retail price ranges from $0.16-0.25/kilowatt hour (kwh). Cambodia still does
not have a national grid with only 17 percent of the population having access to any
power. The Phnom Penh market makes up 85 percent of all electricity consumption in
the country. Rural areas are served by rural electric cooperatives and small networks
with retail prices ranging from $0.30-0.60/kwh. The rest of the population relies on
kerosene lamps or batteries for power. By 2008, approximately 40 percent of Phnom
Penh's power requirements will be imported from Vietnam at prices between $0.030.85 per kwh depending on time of day and season.
Depending on the costs of building a pipeline and the export price of natural gas to
Thailand, there may be opportunities for investments in natural gas generation of
electric power. However, given the small size of the current market for power in
Cambodia, it may not be commercially feasible to install a small capacity combined
cycle plant in addition to making the necessary investments in pipelines and offshore
infrastructure required to bring gas onshore. Current discussions envision installing a
180 MW combined cycle plant. Given current demand and the installed base, 180 MW
might be too large initially.
Additionally, most of Cambodias current generating capacity is private, selling power
to Electricity of Cambodia through power purchase agreements. These agreements
could be relatively expensive to renegotiate or cancel. As a result, the issue of
developing natural gas-fired generating capacity needs to be carefully studied.
Discussions relating to installing a large combined cycle generating station to serve
the Cambodian market with the surplus power made available for export to Vietnam
or Thailand are still premature. Nevertheless, it is likely that the first investments in
downstream natural gas will, and should, be in the power sector. As in downstream
development of oil, CNPA should evaluate development of downstream gas applying
the same general principles illustrated above.
Fertilizer plants relying on natural gas as a fuel stock appear to be a low priority item
in the natural gas development agenda. This low priority is well placed. In many
countries, there is a wish by planners and policymakers to develop fertilizer plants in
order to ensure local farmers have cheap access to fertilizer. Foreign investors are not
generally interested in investing in fertilizer plants, particularly small capacity plants
with relatively high costs.
12
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
Fertilizer plants, like oil refineries, are characterized by significant economies of scale.
Low cost fertilizer plants have a capacity to produce between 500,000 and 1,000,000
tons per year. According to the Ministry of Agriculture, total domestic demand for
fertilizer in 2004 was 20,000 tons. Unless Cambodia is considering entering the
fertilizer export market, any fertilizer plant that is built in Cambodia will likely be a
relatively high cost one, requiring subsidies in order to be competitive with world
prices. Discussions regarding fertilizer plants are best put off for future years. Other
investments to assist agriculture might result in higher returns upgrading irrigation
systems, for instance.
13
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
14
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
purposes, suppose this is true. That suggests (assuming oil prices at $55 per barrel and
an average revenue split of 60 percent over 25 years) an annual revenue of
approximately $660 million per year, roughly equivalent to Cambodias total budget
expenditures in 2003. If, ultimately, there are additional resources found in Cambodias
other blocks as well as in the JDA, annual revenues from oil and gas could be multiples
of Cambodias present annual budget.
Effective management of these potentially large inflows could provide resources for
needed investments to help Cambodia reach its development goals, as well as provide
a national endowment that might be used to support Cambodian development for
generations to come. Ineffective management could bring on macroeconomic
problems and promote corruption. Given the large amounts presently being
envisioned, it is hard to imagine that, if poorly managed, the macroeconomic
problems would not be enormous. All of this suggests that prudent planning for
potential petroleum revenues is called for. Discussions on this subject should start
well in advance of production and at multiple levels as there may be significant
legislative hurdles to get over in order to ultimately resolve the question of
management of petroleum revenues.
When entering into discussions and assessing revenue management options, CNPA
and the government should consider the following principles:
1) Government should adopt and maintain sustainable fiscal policies in its
national budgeting;
2) Revenue from oil and gas production should be managed in a petroleum fund
in a manner that is transparent and accountable to the people of Cambodia;
3) A petroleum fund should be independent of politics and the national budgeting
structure;
4) Expenditures from a petroleum fund should be investments in human and physical
capital, rather than consumption, so as to help achieve long-term development
goals;
5) Decisions must be made as to how to balance long-term and current needs and
the rate of spending from a petroleum fund; and
6) Funds invested by such a petroleum fund should be conservatively and
professionally managed offshore.
15
The existence
of potential oil
revenues is not,
and should not
be, interpreted
as a signal to
policymakers
that domestic
tax revenues
are no longer
important.
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
16
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
Politicization
of the
management
entity could
easily result in
poor allocation
of investment
funds as well as
poor expenditure
decisions.
All public reporting of a petroleum fund should be subject to regular auditing and
review by an independent international auditor.
Independence
Careful consideration of the management structure should be a high priority in the
design of any petroleum fund.
The structure designated to manage both investments of a petroleum fund as well as
approving expenditures in Cambodia should be independent, to the maximum
degree possible, of short term politics. Politicization of the management entity could
easily result in poor allocation of investment funds as well as poor expenditure
decisions. A petroleum fund should be staffed by career professionals subject to a
management board (setting direction and approving budgets) that has the
participation of multiple stakeholders. Such a management board should include
others outside the day-to-day political process.
Chad provides one potential governance model for a fund. In Chad, ExxonMobil, the
Chadian government and the World Bank agreed to a structure according to which
Chads oil revenues are paid directly into an offshore account. This account is subject
to strict accounting and transparency regulations. In order to spend funds from this
account, the government must submit projects to the Revenue Oversight Committee,
only half of whose members come from the Government. This Committee is tasked
with evaluating projects and has the right to reject ones which it deems to unwise.
A similar fund now being proposed for Timor-Leste establishes a Board of Eminent
Persons non-political well-respected individuals from Timor and abroad who will
play a management oversight role in the operation of a petroleum fund set up to
manage the revenues from the Timor Gap.
17
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
In addition to an independent board, a petroleum fund should keep its activities out
of the national budgeting structure. This will help to address the fungibility issue and
encourage continued improvement of the domestic fiscal regime. At the same time,
financing on a project-by-project basis helps to ensure that the expenditures by the
fund are investments in human and physical capital rather than consumption.
18
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
In considering how to create a petroleum fund, the question of design of the fund is
critical. There are multiple models. Below are just a few possible models that
Cambodia might consider:
Permanent Income Fund:
In this model, all revenues from oil and gas are invested and only the income
received from the investments is made available. By converting oil and gas in the
ground to cash in the bank, this approach attempts to monetize natural resources
for the permanent benefit of the people of Cambodia. The permanent annual
income associated with this approach is smaller than one might expect from other
approaches, especially in early stages. As a result, it requires strong political will to
resist pressures to spend more of the fund immediately.
Percentage of Revenue Fund:
In this model, a designated percentage of revenue from oil and gas sales is
distributed on an annual basis. This approach can be highly volatile and is not
recommended because of the negative impact on planning and budgeting that
the "boom and bust" cycle associated with swings in oil prices can have. The US
state of Alaska employs this type of fund. Alaska got around the potential problem
of budgeting operations attempting to rely on uncertain revenues by distributing
oil revenues directly to Alaskan residents.
Constant Revenue Fund:
In this model, a designated percentage of gross domestic product (GDP) is
distributed from the petroleum fund on an annual basis. While this approach can
ensure a predictable stream of revenue over time, in the early stages, accumulation
of savings will be slow and in later stages, the fund will be depleted as GDP grows.
This approach does not guarantee a permanent revenue stream from the exploited
oil and gas.
Fiscal Deficit Fund:
In this model fund (the Norwegian model), revenues are accumulated in the fund
and are only paid out to cover fiscal budget deficits. This approach requires strong
fiscal discipline. In the context of continuing structural deficits and fiscal laxity, this
approach might rapidly deplete resources with little or no long-term benefit.
19
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
20
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
DEVELOPMENT OF CNPA
Established in 1998, the government has designated CNPA to be the key regulatory
body for the oil and gas sector. CNPA is still small, but as the oil and gas industry in
Cambodia grows, CNPA will undoubtedly grow in size, skill and responsibility. As CNPA
develops it should consider the following principles:
1) CNPA should focus on its core competencies
2) CNPA should invest in human resources
3) CNPA should see itself as a steward of Cambodian resources for development
21
This lack
of human
resources
will present
a constraint
to the
development
of CNPA as
well as to
the industry.
Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
purpose such a licensing regime should serve. Crude oil trading is a type of
commodity trading done on the international market. If a Cambodian financial
services company, or a Cambodian trading company, or an international oil company
with offices in Cambodia should want to purchase and sell crude oil on the markets in
Singapore, it is not clear why they should be required to seek a license from CNPA.
The draft decree also grants CNPA the power to license importers of refined petroleum
products. Again, it is hard to know what purpose such a licensing authority will serve.
CamControl will check the quality of imported products. Environmental regulation of
importers is rightly the province of the Ministry of Environment. Also, quantitative
restrictions on imports are not allowed under the World Trade Organization (WTO)
rules. Granting CNPA authority to grant licenses for imports of refined products could
well come back to haunt CNPA in the event an uneconomic local refinery is developed
and such a refinery requires protection from competitive imports.
CNPA should guard against trying to do too much. For each activity it adds, there
should be a clear and persuasive rationale how it fits in CNPA's core mission and why
some other entity should not be responsible for the particular activity.
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Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
There are a number of options for managing this medium-term resource problem.
These options include: additional on-the-job training with contractors for CNPA
personnel; supporting the re-establishment of the geology department; and sending
undergraduate and graduate students overseas for degree programs in geology,
petroleum engineering, etc. Scholarship programs and support for re-opening of local
university departments might be funded out of the Model PSC's training budget. The
current level of training funds is low, but with improved prospects of commerciality,
CNPA should be able to negotiate significant increases in Contractors' budgets for
education and training.
Stewardship
The concept of stewardship is perhaps as important, if not more important, than any
other of the guiding principles in this paper. As regulator of upstream development in
the oil and gas sector, CNPA should be guided by the principle of stewardship. As
steward of Cambodia's natural resource wealth, CNPA's decisions and regulatory
actions should be made with the goal of conserving and developing the value of the
natural resource for the people of Cambodia. Oil and gas are exhaustible resources so
unnecessary wasting of those assets cannot be tolerated. By ensuring the wise
development of Cambodia's natural wealth, CNPA will be playing a critical and vital
role in Cambodia's long-term economic development.
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Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
CONCLUSION
This paper has provided some high level principles intended to guide the decisionmaking process in a number of areas related to the development of the oil and gas
sector in Cambodia. Development of the sector is still in its early stages. There are
challenges in upstream and downstream areas as well as in the efficient use of any
petroleum revenues. Cambodia can ensure that any wealth that is generated by the
oil and gas sector is used wisely in order to promote economic growth and
development. However, ensuring that the oil and gas sector plays a positive role in
economic development will require that the government begin to engage in
discussions and policy debates on a number of fronts. These discussions and the
accompanying decisions are best done before resources are produced in any
significant quantities.
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Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
1. Definitions
This section sets out definitions for terms used in the contract (identified with capital
letters). This section is often treated as "boilerplate", but this is an incorrect approach.
Definitions for terms can have significant impacts on the interpretation as well as the
implementation of contracts.
Note: One example where close reading of contract definitions results in a different
interpretation is in the definition of Minimum Rate of Return in the Model PSC. The
Minimum Rate of Return is defined as an "internal real rate of return" and not
((
internal nominal rate of return.)) While there is only one word difference between
the two potential definitions, there are real (i.e., cash) implications of choosing
between one and the other.
4. Exploration Period
This section sets out the term of the various stages of the exploration period,
including conditions under which extensions to the various stages will be granted.
Note: At the end of Stage 3, if the Contractor has not been able to establish a
domestic market for natural gas, then Stage 3 of the exploration period will be
automatically extended for an additional one year period. Because it is possible
that both oil and gas exist in the contract area, this clause is ambiguous. This
extension is unrelated to the existence of potential oil, but it provides the Contractor
with a unilateral option to delay production for one year. While such an extension
might be appropriate where there is only a possibility of oil, where both natural gas
and oil are possible, CNPA might not want to provide the Contractor with an
additional opportunity to delay production.
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Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
Note: It appears that under clause 8.4(d) the Contractor has the ability to delay
development of natural gas (and oil) by seeking automatic renewals of its production
permit until there is an economically viable market for gas. The Model PSC is
ambiguous as to whether this ability to delay is specific to gas or if it can also be
relied on where the Contractor has discovered oil and gas. This ambiguous provision
can easily be read as an option in favor of the Contractor. The option remains with
the Contractor until 15 years into what should be the production period at which
point, CNPA will have discretion whether or not to issue a production permit. If
CNPA does not issue a production permit, then the Contractor must relinquish the
area.
9. Production Operations
This section sets out a basic description of the approval process of work programs as
well as specifying the 30 year term of the production period. The term provision
includes a clause regarding extension of the Model PSC.
Note: This provision appears to provide the Contractor a unilateral option to
extend the life of the contract almost indefinitely after the end of the 30 year
production period. This is unusual and precludes the possibility that 37 years after
the Model PSC has been signed that CNPA might wish not to extend the contract
with the Contractor. CNPA should not include an automatic extension in future
iterations of the Model PSC.
Note: The process for approval of work programs provides an opportunity to
attempt to renegotiate certain terms of the contract. For example, the annual
requirement for education spending is a minimum of $150,000 per the terms of the
Model PSC. The approval process for the Work Program provides an opportunity to
pressure the Contractor to increase its spending for CNPA training, including the
provision of educational scholarships abroad.
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Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
The Model PSC requires that the Contractor re-inject any non-commercial
associated gas. The Contractor will be able to lift this gas at a later point when there
is a commercial market for it. Re-injection, rather than flaring, of unused associated
gas is a good thing, however, since the costs associated with re-injection will be
treated as a recoverable cost. CNPA should carefully assess the marginal costs
associated with re-injection before requiring the Contractor to do so.
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Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
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Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
The domestic supply obligation does not apply to natural gas. The Contractor
maintains the right to export its share of natural gas and is under no obligation to
make any of its allocation of natural gas available for the domestic market. This is
unusual as one might imagine Cambodia might at some point in the future require
quantities in addition to its allocation of natural gas to supply the power sector as
well as any other downstream investments that come online.
The marketing provision in the Model PSC allows CNPA to piggy-back its marketing
efforts on top of the Contractor's efforts. Especially in the early stages before CNPA
or a national oil company have much experience in crude oil trading, having access
to the Contractor's expertise in crude oil trading will be extremely valuable.
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Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
Note: The Model PSC calls for the establishment of a Social Development Projects
Fund. Contributions by the Contractor to this fund will be considered recoverable
costs under the terms of the Model PSC. CNPA should carefully consider whether
and how to administer such a fund.
Note: The Model PSC provides that the Contractor will be "exempt" from the Value
Added Tax (VAT), among other taxes. Exemption from VAT is a technical term and
results in the Contractor not being eligible for a refund under the tax laws. CNPA
should consider using language that will ensure that Contractors are eligible for
refunds on all VAT paid.
Note: The Model PSC provides that the Contractor shall receive exemptions from
income tax collection for up to ten Nominated Employees. CNPA should reconsider
providing exemptions from the personal income tax laws of foreign nationals
working in Cambodia. European nationals are not typically taxed by their home
countries unless they are resident there. U.S. citizens are taxed on global income,
but enjoy an initial exemption on approximately the first $80,000 of income. Also,
investment decisions of large multinational enterprises are rarely made on the
basis of incremental benefits to certain individuals within the organization.
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Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
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Review of Development Prospects and Options for the Cambodian Oil and Gas Sector
Note: The Model PSC provides that the Contractor will spend a minimum of
$150,000 for training of Cambodian staff of CNPA. This figure is a minimum and is
subject to annual negotiation as part of the Work Program. CNPA should consider
aggressively trying to raise the specified training amount in future Work Programs
so as to be able to fund increased training and educational opportunities for its
staff and students who might enter the industry at some point in the near future.
Note: There is no cap on foreign employees. While it will no doubt be in the
Contractor's interest to hire as many Cambodian nationals as possible, by setting a
cap (at some point in the future) on the number of foreign employees, the Model
PSC can create additional hard incentives to increase attention to development of
Cambodian employees and staff.
Additional Provisions
CNPA should consider adding the following provisions to future iterations of the
Model PSC:
Participating Interest Provision:
A participating interest provision will allow a Cambodian oil production company
to participate in production at their option at some point during the production
period. Costs associated with such production operations would be subject to
recovery on a pro-rata basis along with the costs of the Contractor. By including
such a provision, CNPA can create future flexibility to assist the development of
local oil services and a production industry. In conjunction with this provision,
CNPA may wish to consider adding a newly formed Cambodian oil production
company as an additional party to future Model PSCs.
32
Cambodia
United Nations Development Programme
No. 53, Street Pasteur, Boeung Keng Kang,
P.O. Box 877 Phnom Penh, Cambodia
Tel: (855) 23 216167 or 214371
Fax: (855) 23 216257 or 721042
E-mail: registry.kh@undp.org
http://www.un.org.kh/undp/
2006