Proposed changes to hydrocarbons contract laws in Thailand's energy sector

Thailand’s oil and gas industry has been providing a steady if somewhat limited stream of new hydrocarbons deposits for decades, helping to offset the country’s growing demand for fossil fuels. The industry has remained largely stable over the years by striking a balance between government regulation and private sector incentives which have proven successful in maintaining a consistent pipeline of exploration and production activity. Yet with the arrival of the 21st oil and gas bidding round first floated in 2008 and subsequently delayed, this established regulatory regime is now undergoing a significant shake-up, which has left some industry participants to ponder the future commercial viability of Thailand’s oil and gas sector.

Policy Debates

As is often the case in policy shifts for extractive industries, the impetus for these changes is coming largely from populist sentiment outside the energy industry, which calls for an increased government share of the country’s energy resources while at the same time minimising the state’s financial risk associated with exploration activities. Non-governmental organisations, environmental activists and a smattering of politicians have all been clamouring for reform of the country’s existing oil and gas concession system since the 21st bidding round was first initiated nearly a decade ago. Campaigners have argued that the concession-based regime outlined under Thailand’s Petroleum Act (PA) does not provide the state with adequate revenues, and grants overly favourable fiscal terms to energy companies. Civic groups have called for changes to the legislation along with constitutional amendments to increase state control of natural resources via the introduction of production-sharing contracts (PSCs), similar to those in other oil and gas producing South-east Asian countries. As a result, the awarding of new blocks has been repeatedly delayed or cancelled and then reinstated, with the most recent estimate for a successful round targeted for mid-2016.

Tax Regime

Under the existing system, which is based on the PA and the Petroleum Income Tax Act (PITA) first enacted in 1971 and later amended under the 2007 acts of the same name, companies engaged in oil and gas activity are subject to a number of different taxes. The first, which is often cited as inequitable by opposition groups, is the concession royalty, which operates on a progressive sliding scale ranging from 5%-15% depending on the amount of oil produced, with a rate of 5% charged up to 60,000 barrels of oil equivalent (boe) produced per month and escalating up to the maximum of 15% for 600,000 boe per month or greater. To these taxes a special remuneratory benefit may be added, which ranges from 0-75% and is applied as a windfall profit tax that is imposed only if the capital costs are recovered and the companies achieve a drastically high annual revenue when compared to the investment cost. A further flat 50% petroleum tax is then also applied to the net profits of the concession operators.

Oil and gas companies are also obliged to pay out additional non-tax “special benefits” throughout the exploration and production processes. For each exploration block worked, these include: annual scholarships and community development payments of not less than BT1m ($30,100) per year per block during the exploration period and not less than BT2m ($60,200) per year per block throughout the production period; a minimum BT10m ($301,000) per block signature bonus, with a few outlier blocks requiring minimums of BT2m ($60,200) or BT100m ($3m); and a production bonus starting at a minimum of BT200m ($6m) for offshore blocks and BT400m ($12m) for onshore blocks, and escalating higher as production levels rise. In addition, contracts grant the right for a Thai company to farm in for a minimum 5% undivided participating interest in any project upon reaching the production stage, subject to reimbursement of its participating interest share of all expenditures. When added up, these taxes average a 67% take for the Thai government, exceeding the global average of 58% but less than the South-east Asian average of 74%, according to consultancy Wood Mackenzie.

Proponents of the overhaul cite what they perceive as more state-friendly contracts issued by neighbours such as Myanmar and Vietnam, which have drawn considerable investor interest in recent years. While it is true that PSCs transfer risk to private exploration and production outfits until wells begin yielding oil, at which point the government takes its cut, the complex tax structure and cost recovery mechanisms generally balance out to leave the state with the lion’s share of the profits.

Perhaps even more important to Thailand’s specific case is the mature nature of its reserves, which creates an additional need to incentivise companies to invest time and money in prospects which are generally more technically challenging, involve greater risk and offer much smaller potential payouts than other markets. “It is hard to get companies to invest in Thailand because the geological conditions are not as good as in other countries, such as Vietnam or Myanmar,” Thitisak Boonpramote, head of the mining and petroleum engineering department at Chulalongkorn University, told OBG. “We have already found all the biggest fields. There are not a lot of new discoveries to make anymore so it is very hard when you put a more restrictive regimen on top of that, especially with the current economic conditions.”

Moving On

As of early 2016, no clear decision on regulatory changes had been made public by any of the government entities engaged in policy reforms, although a number of proposed amendments had been circulating among the various stakeholders in the industry. Changes to the PA and PITA were drafted by the Department of Mineral Fuels and approved by the Cabinet throughout 2015, but had yet to be forwarded on to the National Legislative Assembly as of the end of 2015, nor had they been released to the private sector. These proposed amendments are widely expected to alter two central components of the existing legislation, including Section 23 of the PA by enabling the government to employ PSCs, and allowing the Ministry of Energy to implement certain procedures and guidelines for the new contracts.

Some of the ideas floated publicly by the government involve setting up a hybrid system which includes issuing both PSCs and traditional concessions. Although the methodology for determining which type of contract should be issued for each block type remains unclear, the general thrust of the plan is to grant concessions to new and/or marginal blocks with higher perceived risk, while relinquishing blocks when available production and exploration data suggests that they would conceivably be subject to the new PSCs. Apart from the opacity of the taxation and contract systems moving forward, other potential problems could arise regarding the participation of Thai companies in concessions allowed by law. “If we implement PSCs, the problem is that the organisation which acted as the national oil company, PTT Group, has already been floated on the stock market,” Thitisak told OBG. Without an experienced government entity possessing the necessary knowledge and expertise of the industry to act as the state’s proxy in any production-sharing arrangement, the configuration of any direct government participation in the upstream hydrocarbons sector remains unclear.

In Limbo

Of equal importance to the potential change in contract terms is the uncertainty facing key companies which are already operating oil and gas production contracts but are rapidly approaching their contract expiration dates. Operators of the country’s legacy fields in the Gulf of Thailand such as Chevron and PTT Exploration and Production (PTTEP) have already worked through their initial 30-year concessions and are well into their final 10-year extensions allowed by law under the PA. Together, PTTEP and Chevron hold petroleum contracts which account for the majority of the total output in the country, and both have contracts due to expire from 2022-23, lending a growing sense of urgency to the current situation.

The primary concern in this case is how to proceed after the extension period ends, given the importance of these fields to national energy production. Because the original PA does not specify what should happen to a concession upon the completion of its extension, operators remain uncertain as to whether the government will grant another extension, renegotiate a new extension under different terms or re-tender the concession.