Vietnam Still Holds Much E&P Opportunity
As oil companies struggle with the collapse in crude prices and industry upheaval, assessing the future of exploration and production (E&P) in specific countries requires a longer term vision of a market in which prices will have stabilized and rebounded to a level yet undetermined.
As oil companies struggle with the collapse in crude prices and industry upheaval, assessing the future of exploration and production (E&P) in specific countries requires a longer term vision of a market in which prices will have stabilized and rebounded to a level yet undetermined. Seen in this lengthier view, Vietnam holds substantial E&P opportunity because of its resource potential, its expanding economy and surging internal energy demand, the diverse group of global operators active in the country, and the interest of national oil company Petrovietnam in expanding partnerships with international E&P players.
At the same time, a limitation on this upside lies in the dispute between Vietnam and China over territorial waters, which is affecting international investment in some E&P prospects. While sporadic tensions have arisen between the countries, Vietnam and China remain in discussions over the disputed areas. A peaceful resolution could benefit both countries and the oil and gas industry. Notably, well to the north of the disputed waters, Petrovietnam and China National Offshore Oil Company have a joint exploration agreement covering the Gulf of Tonkin.
In the decades since the end of the Vietnam War, exploration and development in Vietnam have grown by leaps and bounds. With 4.4 billion bbl of oil reserves, the country now ranks No. 3 in the Asia-Pacific region, trailing only China and India.
Always an Interest
“Vietnam has always been an interest among international oil and gas companies,” said Suraya Tulot, Vietnam EP upstream researcher at IHS. “It is an opportunity that companies are looking at, especially the independents.”
Almost all of Petrovietnam’s domestic upstream activity has been offshore in shallow water. From the beginning, the Cuu Long Basin has been the center of Vietnamese E&P. However, activity has spread to the Nom Con Son, Song Hong, Phu Khanh, Phu Quoc, and Malay-Tho Chu basins, as well as others, and deepwater development is getting under way.
“Vietnam is relatively underexplored,” Tulot said. “While the focus has been on Cuu Long, there are opportunities in the Nam Con Son and Song Hong basins and elsewhere.” Petrovietnam’s Ky Lan 1X gas discovery in the Song Hong Basin late last year is one example. That success has piqued interest among other companies. Eni and KrisEnergy have recently acquired exploration blocks in the vicinity.
Bach Ho Proves a Tiger
Oil and gas E&P activity in Vietnam began in the 1960s in the onshore Hanoi Trough formation. Attention later shifted to offshore prospects. The first major success occurred in 1986 with the discovery of oil at the Bach Ho (White Tiger) field in the Cuu Long Basin by Vietsovpetro, a joint venture (JV) formed in 1981 between Zarubezhneft of the former Soviet Union and Petrovietnam. Initial production flowed from a Lower Miocene structure. However, deeper drilling into fractured granite basement rock yielded a much larger discovery, which was brought into production in 1988.
Granite basement rock is nonsedimentary and usually not associated with oil and gas accumulations. However, in some cases this rock can hold hydrocarbons that have migrated from nearby source rock. While fractured granite basement reservoirs have low permeability, migrated hydrocarbons can accumulate in the natural fracture networks. But these reservoirs are challenging to understand because of their heterogeneity, and drillers in the past had typically avoided them in favor of less-complicated targets.
The success at Bach Ho put the Vietnamese oil industry in the position of learning how to produce from a fractured granite basement, and the Cuu Long Basin has an abundance of these reservoirs. Bach Ho became a prolific field, peaking at more than 260,000 B/D of production in 2001, and it is still producing 75,000 B/D.
The Vietnamese industry has become the global authority on producing oil from fractured granite basement rock, and more than 1.7 billion bbl of oil have been produced from the country’s granite basement reservoirs through last year. Although basement production will not contribute as much in Vietnam’s future, it will still play an important role in the country’s E&P activities for years to come.
Since the early success at Bach Ho, Vietnamese production has greatly expanded. Petrovietnam, including JVs, now produces oil and/or gas from almost 40 fields in granite basement and sedimentary reservoirs. That number takes in several international fields in Malaysia, Russia, Algeria, Peru, and Venezuela in which Petrovietnam holds interests. By itself, the company generates about 25% of Vietnam’s gross domestic product.
Many Global Companies
Approximately 30 operating companies from all parts of the world are active in Vietnam, with companies representing the United States, Spain, Italy, the United Kingdom, France, Russia, Australia, Japan, Malaysia, and other East Asian and Middle Eastern countries. Among the companies are ExxonMobil, Murphy, Repsol (through its recent acquisition of Talisman), Soco, Gazprom, Rosneft, Santos, Mitsui, and Petronas.
In a number of cases, Petrovietnam has formed JVs with international E&P firms to operate certain projects. The oldest and largest of the JVs is Vietsovpetro. More than 25 international service companies and equipment suppliers are also active in the country.
“Vietnam has become very welcoming of international partners to help with upstream opportunities,” said Joe Knierien, executive director at Globalinx Group, a business development firm that is very active in Vietnam. “The Vietnamese are very interested in the latest technology to help them achieve their goals, and experience such as that of the US companies in deepwater development will be especially beneficial as Vietnam moves into some of those projects.”
Vietnam’s oil production (including condensate) has increased modestly over the past 3 years to 339,800 B/D in 2015. However, with an expanding and industrializing economy that grew by nearly 7% last year, refined product demand was the equivalent of 476,800 B/D of crude oil. The country made up the difference by importing products. Although Vietnam exports some oil, it is a net importer because its exports are more than offset by the imported product barrels. The excess of product demand over oil production is expected to continue.
Natural gas production in Vietnam has been rising over the past 4 years and last year amounted to 1.03 Bcf/D. The country’s reserves of 23.9 Tcf are ranked fourth in East Asia behind China, Indonesia, and Malaysia. Vietnamese production is expected to increase in the next 5 years as major field developments come on line. All of the country’s gas production goes to domestic consumption.
Petrovietnam has signed a memorandum of understanding (MOU) and front-end engineering and design contract with Tokyo Gas for the construction of a liquefied natural gas (LNG) import terminal at Thi Vai near Ho Chi Minh City and is considering building additional LNG import facilities.
The country’s oil production is projected to decrease slightly this year and next because of declines at some major fields and the effects of reduced exploration, according to Petrovietnam Vice President Nguyen Quoc Thap. There were five exploration wells drilled last year (not including appraisal wells), compared with 12 in 2014. However, with planned output from the Ca Rong Do (Red Emperor) deepwater project, the Su Tu Trang (White Lion) field, and potentially some smaller fields, production is expected to resume growth in 2018 and 2019, Thap said.
Assessing the Variables
After 2019, more variables come into play if Vietnam is to be able to sustain or increase current levels of production. Prices will play a major role and probably already have had an impact by scaling back the exploration activity typically needed to offset depleting reserves from producing fields. Only two exploration blocks were awarded by Vietnam in last year’s offshore licensing round, well below awards in previous rounds during recent years.
Vietnam’s deepwater prospects represent a small part of the country’s offshore acreage but could hold the key to sustaining production. The prospects lie mainly in the Phu Khanh and Tu Chin-Vung May basins and parts of Nam Con Son.
Oil prices will be critical to future investment. Industry analysts estimate that Vietnam has a breakeven oil price of about USD 55/bbl for new small-to-medium projects in shallow water. New deepwater oil projects would target much larger reserves but likely require a higher price forecast to justify a final investment decision (FID).
Looking ahead, operator Repsol is developing the Ca Rong Do oil and gas condensate field in Block 07/03 of the Nam Con Son Basin. In more than 1,100 ft of water, it will be Vietnam’s first deepwater project and feature the country’s first tension-leg platform.
First production from Ca Rong Do is slated for October 2018. At its peak, the field will produce 30,000 B/D of oil and 50 MMcf/D of sales gas. Estimated recoverable reserves are 50 million bbl of oil and 2 million to 4 million bbl of condensate. In addition to Petrovietnam, Pearl Oil (a unit of Mubadala Petroleum), and Pan Pacific are participating in the project.
Other projects in progress are:
- First-phase expansion of the Su Tu Trang gas condensate field in Block 15-1 of the Cuu Long Basin, scheduled for completion in the fourth quarter. Gas production of 50 MMcf/D will be increased to 150 MMcf/D, with 100 MMcf/D injected into the reservoir to boost current condensate production of 7,000 B/D to 20,000 B/D. Operated by the Cuu Long Joint Operating Company, Su Tu Trang’s participants are Petrovietnam, Perenco, ONGC Videsh, and Korea National Oil Corporation.
- The Thien Ung gas development in Block 04-3 of the Nam Con Son Basin. First gas is expected in the third quarter, with production to peak at 65 MMcf/D of sales gas. Operated by Vietsovpetro, the participants are Petrovietnam and Zarubezhneft.
- The Southwest Gas development in Block B, 48/95 and 52/97, of the Malay-Tho Chu Basin, with estimated probable recoverable reserves of 3.8 Tcf. Production is expected to start in 2020 and peak at 575 MMcf/D of sales gas. Operated by Phu Quoc Petroleum Operating Company, the participants are Petrovietnam, PTTEP, and Mitsui.
- The Ca Voi Xanh (Blue Whale) gas project on Blocks 117–119 of the Song Hong Basin. Estimated to hold between 5.67 Tcf and 12.57 Tcf of natural gas in place (with estimated recoverable reserves of 3 Tcf to 8 Tcf), Ca Voi Xanh represents the biggest gas discovery in Vietnam’s history. ExxonMobil and Petrovietnam are partners in the project, with ExxonMobil the operator. The two companies signed an MOU July of last year to move forward with development plans but an FID has not been made. If sanctioned, the project would be anticipated to produce first gas in 2023.
New marginal developments will also be important to Vietnam’s oil and gas future, as a number of potential projects exist. Vietnam may need to enhance development incentives, possibly through changing project tax treatment and/or adopting new models for production sharing contracts.
Petrovietnam is also investigating the potential of shale and coalbed methane development in the Hanoi Trough. Joint exploration studies with Eni, Arrow, Keeper, and other companies are in progress.
A Lot Going for Vietnam
Despite some question marks, Vietnam’s oil and gas industry has a lot going for it because of its strong technical capability and the country’s prospects for robust economic growth and hunger for energy. On a net basis, Vietnam will continue to need every barrel of oil and cubic foot of gas that it can produce. Petrovietnam will likely approach that goal with vigor, as its willingness to boost production by participating in foreign E&P projects attests.
The company also is building a refining and petrochemical complex at Nghi Son, which will be the country’s largest. A joint investment of Petrovietnam, Kuwait Oil, Idemitsu, and Mitsui, the USD 9 billion facility will start up in 2018. With a crude oil processing capacity of 200,000 B/D, the complex will supply 40% of Vietnam’s refined product demand. While the combined output of Nghi Son and Vietnam’s sole other refinery at Dung Quat will fall well short of meeting the country’s surging product demand, the new complex will facilitate the further industrialization and modernization of Vietnam.
“What’s driving the need for more energy right now is the upcoming Trans-Pacific Partnership agreement between 12 countries (including Vietnam) that is expected to be signed this year,” Knierien said. “So there is a tremendous amount of growth in anticipation of the new trade agreement. Looking farther ahead, the country needs more power, more energy, and more fuel to provide electricity, to develop more manufacturing capacity, the roadways, the pipelines, and all the infrastructure it needs.”
In short, oil and gas will continue to be a top priority for Vietnam, and global companies seeking to invest their funds and expertise in the country’s E&P opportunities will be most welcome.