Legal reforms pave way for new energy exploration projects in Thailand

Thailand’s domestic hydrocarbons resources are fairly small. According to the June 2018 “BP Statistical Review of World Energy”, at the end of 2017 the country had 300m barrels of proven oil reserves – less than 0.05% of the world’s total – and about 7.1trn cu feet of natural gas, roughly 0.1% of the global total.

Nevertheless, the assets have been the subject of considerable legislative activity of late, as the government works to maximise the value it extracts from domestic resources. Historical misalignments have been addressed, and legal agreements for exploitation are now in step with international best practices.

Creating the Right Framework

Before 1960 reserves were maintained for domestic use by Thai corporations, and policies and incentives were not conducive to international investment or participation. As a result, very little exploration was done, as the country lacked expertise and the necessary capital. In the 1960s, however, regulations were changed to attract capital from overseas, and agreements with international oil companies were reached starting in 1967.

In 1971 the Petroleum Act and the Petroleum Income Tax Act were passed, and these were in place, with amendments, until very recently. While effective, the acts were not in line with global standards, with the country solely employing a concession system whereby international participants would bid on what amounted to licences for exploration and production.

In 2017 new laws by the same names were enacted to align processes and structures with international practices, greatly altering the way the sector is managed. Most importantly, production-sharing agreements (PSAs) and service contracts (SCs) were introduced. Concessions, in which ownership remains with the state until the product passes the well head, can still be employed, however. The Ministry of Energy chooses the blocks to be tapped and under what type of contract.

A number of additional guidelines are set out in the new acts, covering capital commitments, ownership levels and disclosure responsibilities. With PSAs, the state will continue to own a share of the oil even after production, and net profits will be taxed at 20%. Under SCs, which can last for up to three years, the oil extracted will be owned by the government.

Amendments to the laws had been in discussion for years, but the government was unable to agree upon the exact nature of the changes, in part because the original proposal included the creation of a national oil company. It was felt by some that such an entity would allow the government to take equity stakes in future blocks. While rules establishing a national oil company were eventually omitted and the bills were passed, it remains an issue of government interest. A legislative panel was to be formed to discuss the possibility of creating such a company.

Bidding Rounds

As of early 2018 Thailand had held 20 rounds of bidding and a total of 38 concessions were in operation. The current concessions for the Bangkot and Erawan gas fields end in 2022 and 2023, respectively. These blocks will be auctioned off in 2018, with winning bids expected to be announced in December, according to the Department of Mineral Fuels. The bids had originally been set for 2017 but were delayed, causing consternation among some upstream companies. Due to uncertainty in the market surrounding the government’s slow action on the expiring Bongkot and Erawan concessions, most oil and gas operators have reduced their capital expenditure and service companies find themselves unable to plan effectively for the short and medium term.

In early 2018 Shell Integrated Gas Thailand agreed to sell its 22.2% stake in the Bongkot field to local PTT Exploration and Production (PTTEP) for $750m, with the transaction completed in June. PTTEP now owns 66.7% of assets and Total of France controls the rest. An earlier sale of assets in the field was cancelled due to the slow pace of negotiations with the proposed buyer, Kuwait Foreign Petroleum Exploration Company.