Thailand's FDI in oil and gas exploration and production
(06-01-2007)
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Today's article is an interesting case study of a company that was founded as a state-owned company but which has since gone on to become one of Thailand's largest multinational corporations holding large amounts of Thai Foreign Direct Investment overseas.
PTT Exploration and Production Company (PTTEP) is the exploration and production branch of PTT, Thailand's state-owned oil company.
The company was founded in 1985 by the Thai government to "explore, develop, and produce Thailand’s petroleum reserves to maximize the Country’s highest possible benefit from energy resources."
In 1992 PTTEP privatised to reduce the Thai government's "administration and funding burden."
PTTEP has also entered the power generation sector.(Source for this information)
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What status does PTTEP have among Thai companies?
2. Are there many profitable opportunities left for oil and gas exploration within Thailand?
3. How does PTTEP's expected behaviour differ between now when it has been privatised and its shares sell on SET and the past when it was government owned?
4. Does the government still own part of PTTEP even after privatisation? How does this influence the goals of the company?
5. Why has PTTEP been expanding so aggresively recently?
6. Is PTTEP's expansion into other countries expected to increase sales? By how much? Is this increase certain? Why or why not?
7. By how much is PTTEP planning to increase its reliance on international operations for revenue in the near future? (Do calculation)
8. Was PTTEP the only company to lose in Unocal's oil exploration project in Burma?
9. What investment objectives does PTTEP have for domestic oil and gas fields?
10. Will Thailand ever reach self-sufficiency in natural gas or oil?
11. After PTTEP's bad Burma experience does it still operate in risky countries?
12. Is PTTEP operating in other Southeast Asian countries?
13. Does it have operations in South Asian countries?
14.What geological expertise does PTTEP have?
15. What steps can multinationals like PTTEP take to avoid risk in countries that don't have very open economies yet?
16. Is PTTEP doing any joint projects with multinationals from other countries?
17. What further plans for expansion have the successful bid on the Egyptian project prompted?
Bangkok Post Article: January 6, 2007
Keeping the juice flowing
When it comes to satisfying local oil thirst and rewarding its shareholders, PTTEP looks abroad and follows the roads less takenUMESH PANDEY
Regional expansion by PTT Exploration and Production Plc, Thailand's largest oil and gas exploration company, has helped it diversify its operations away from the relatively mature market of Thailand and enabled it to give higher returns to its shareholders.
"The exploration market in Thailand is at a relatively mature stage. As a company listed on the Stock Exchange of Thailand, we have the duty to try to provide higher returns for our shareholders and this could not be done if we continued to limit our operations in Thailand alone," president Maroot Mrigadat said in a recent interview.
He says that PTTEP, 66% owned by PTT Plc, which in turn is majority owned by the Finance Ministry, has two roles to play for the country's sake - expand to meet demand for energy resources and give higher returns to shareholders.
"These are the two main driving factors why we have been expanding outside Thailand so aggressively," he says.
PTTEP, which currently pumps out 172,000 barrels of oil equivalent per day has used global and regional expansion as a way to build sales volume. For 2007, it expects to see its sales volume increase by at least 10% backed by the various oil and gas fields it has successfully drilled in countries such as Oman.
Like many other companies, PTTEP failed in its first foreign venture when it invested with the US giant Unocal in onshore fields in Burma. But today it has learned its lesson and projected that 25% of its revenue will be derived from international operations by 2010. Currently, they account for only about 10% of the company's nearly 70 billion baht in revenue.
"The 25% is what we project with the assets we currently have. If we are more successful than we think, then this projection may go up further," he says.
Despite the higher projection and greater contributions now flowing from the foreign operations, PTTEP's home base continues to be its huge operation in the Gulf of Thailand.
As part of its plans to keep the domestic oil and gas fields, PTTEP is also looking to extend the lifespan of existing fields. Therefore, its investment budget for 2007 has been revised up from the 50 billion baht previously planned.
Thailand, he says, is a fairly mature market in that most of the areas where natural gas and oil can be found have been explored. The few that remain are in overlapping areas with Cambodia, Vietnam and Malaysia.
Among the other areas that can be explored is the Andaman sea although it is far more dangerous than the Gulf of Thailand.
"The constraints we have from the domestic market are among the key drivers," Mr Maroot says. "Thailand will never be self-sufficient in its domestic demand for natural gas or oil from the reserves that we have. We will have to continue to import both."
From its initial setback in Burma, PTTEP has graduated to operating in countries where some global multinationals dare not enter, such as Algeria, Iran and Oman. It also recently announced a venture in Egypt.
Closer to home, apart from Burma, PTTEP is operating in Vietnam, Cambodia and Indonesia, with plans to move into other parts of the region such as India and Bangladesh in the near future. It is studying the possibilities of such ventures in South Asia but no firm conclusion has been reached yet.
"Recently, we have been quite successful with our ventures outside Thailand. We are in Vietnam, Cambodia, and others outside the region, but we are very successful in this region, as we have the advantage in the Gulf of Thailand, where we know the geology well," says Mr Maroot.
But operating in countries that are still in the process of opening up their economies and where changes in rules and regulations could take place any time also means that companies such as PTTEP need to keep close contact with governments and policymakers.
"What we have learned from the experiences outside Thailand is that patience is the greatest virtue," he says.
"Our host countries shouldn't feel they are being taken advantage of. We think the best way to participate is that both sides should feel equal in any kind of partnership."
Apart from this, the company looks at various investment criteria such as the basic return, and the usual potential of gas or oil reserves in that particular country along with the geo-political situation of that region.
"We look at these issues to analyse the returns and if the returns are in line with our objectives," Mr Maroot says.
"We have ventured into countries that most Thai companies have not gone in such as Oman, where we now have two blocks. The oil from there would be exported to Thailand. We are in Iran where exploration work has already started and we have a very successful story in Algeria (where PTTEP has two concessions)."
In late December, PTTEP also announced that its consortium had won two petroleum exploration contracts in Egypt.
The consortium, which also includes Sipetrol International SA, Edison International SpA, and Centrica Energy, received approval in principle by the Egyptian Natural Gas Holding Company (Egas) as the winners of concession Blocks 2 and 8 in an international bid, subject to final government approval.
The onshore Block 2 (Rommana) covers 6,184 square kilometres in Sinai in the northeast of Egypt. Sipetrol will hold a 40% interest in the project, while PTTEP and Centrica will hold 30% each.
The offshore Block 8 covers 4,294 sq km in Sidi Adb El Rahman, northwest of Egypt. Edison is the operator, with a 40% holding, followed by PTTEP and Sipetrol with 30% each.
The joint ventures have minimum commitments to conduct exploration activities such as seismic surveys and to drill exploration wells in the first three years.
PTTEP said its success in the Egas bid was another major step in expanding its investment in North Africa, which has high petroleum potential.
PTTEP's Oman project is projected to draw around 50 million to 60 million standard cubic feet a day of natural gas and 4,000 barrels a day of condensate soon, Mr Maroot said.
More prospects
In Burma PTT Exploration and Production Plc says it has discovered a promising amount of petroleum at M9 field in Burma.
The company said last week that exploration work done on Dec 4 last year showed there were enough probable reserves in the block to warrant further work.
M9, believed to be among the largest reserves if and when full exploration work starts, could eventually be among the leading revenue generators for PTTEP.
PTTEP currently has a total of 32 gas and oil projects in nine countries. Its major fields include Bongkot, S1, B8/32 and 9A, and Pailin.
The company said the result from the drilling indicated a maximum flow rate of approximately 71.4 million standard cubic feet per day (mmscfd) of natural gas. The successful drilling results confirmed the future potential core development area in block M9.
Bongkot, the company's largest field, located in the Gulf of Thailand, has a daily production capacity of about 600 mmscfd.
The company in December also said that it had seen some potential for crude oil in its offshore Block 16-1 in Vietnam.
Following drill stem tests, the preliminary results showed the field has a significant crude oil flow rate of around 7,000 to 7,300 barrels a day.
PTTEP's Indonesian operations, meanwhile, have also been doing well. The company late last year signed a farm-in/farm-out agreement for Block Bengara I with PT Medco E&P Bengara Co Ltd. Under the agreement, PTTEP Bengara I Co, a subsidiary of PTTEP, will hold a 40% interest while PT Medco E&P Bengara retains 60% and is the operator of this project.
The onshore Block Bengara I covers 2,311 square kilometres. The block is located in the eastern part of Kalimantan island, Indonesia.
For the period from 2006-10, the company has projected average petroleum sales volume equivalent to 179,000 barrels per day for 2006, 224,200 for 2007, 236,300 in 2008, 240,100 in 2009 and 238,400 barrels per day in 2010.
Vocabulary
the juice - the oil, juice normally means "fruit juice" something you drink, here the author is being creative and using a metaphor: JUICE means OIL, DRINK OIL means CONSUME OIL, OIL THIRST means DEMAND FOR OIL (See Berkeley linguist Lakoff for more on metaphor)
PTT Exploration and Production Plc - Thailand's formerly government owned oil exploration company that was privatised in 1992 (See Wikipedia on Energy Industry Liberalization and Privatization in Thailand and PTTEP Company Profile)
diversify - increase the variety of things, change so that things are not all the same
mature - has reached a state of complete development (like a full grown adult rather than an "immature" (not mature) child)
a mature market - a completely developed market (little further development possible)
onshore, offshore - some drilling for oil is done on land (onshore) and some is done at sea (offshore)
x is derived from y by z - z gets x from y
home base - the center of the company (where all activities originate from)
overlapping - when two things include some of the same things, when the edges of two things include the same area (this idea is better seen visually)
a setback - a problem that causes a delay in a project
geo-politics - the study of how geography affects politics and the relations between countries
geo-political situation - the political situation (taking geography into account)
x in line with y - x follows plan y as expected (for example if there is a high educational standard most schools will try to follow it as best they can)
x brought into line with y - take action to make x follow plan y
a block - an area allocated to a company for oil exploration
a concession - a special right or privilege that is given to someone (for example a telecommunications concession allows one to sell telephone service and an oil exploration concession allows one to explore for oil in a given area)
a consortium - a group of firms or people that have agreed to cooperate with one another
agree in principle - agree in general terms (without knowing the details or whether it is even really possible)
in principle - regarding the general idea
received approval in principle - received approval of the general idea (but the details have not been worked out)
concession blocks - an area with oil exploration rights owned by someone (like a plot of land owned by someone)
x subject to y - x affected by y, x follows law y
x subject to government approval - x won't happen unless the government gives permission
a commitment - a promise to do something
minimum commitments to x - a promise has been made to do at least x
condensate - the liquid coming from a gas or vapour when it condenses
prospects - business possibilities (See Read Bangkok Post Vocabulary)
x enough to warrant y - there is enough x to make doing y a good idea
revenue generators - the projects in a company from which a company gets a lot of revenue (and profit also probably)
maximum flow rate - the maximum amout that can be pumped out of a place
x is confirmed - x is happening for sure (said officially by someone with authority to say it)
farm out - give work to other people to do
farm-in/farm-out agreement -
Answer Key:
1. What status does PTTEP have among Thai companies?
PTTEP is Thailand's largest oil and gas exploration company.
2. Are there many profitable opportunities left for oil and gas exploration within Thailand?
No, oil and gas exploration within Thailand is a mature market, meaning that it is completely developed and companies have to look elsewhere if they want to make profits that will satisfy shareholders.
3. How does PTTEP's expected behaviour differ between now when it has been privatised and its shares sell on SET and the past when it was government owned?
Companies that are privately owned and whose shares sell publicly on a stock exchange have a "duty to try to provide higher returns" for their shareholders.
An oil and gas exploration company cannot do this by limiting its business to Thailand since Thailand no longer has the exploration opporunities needed to provide higher returns.
4. Does the government still own part of PTTEP even after privatisation? How does this influence the goals of the company?
Yes, the Finance Ministry indirectly owns a large fraction of PTTEP, so the company works for the country's sake in two ways:
a. Expanding to meet demand for energy resources in Thailand.
b. providing higher returns to the Finance Ministry which is a major shareholder.
("He says that PTTEP, 66% owned by PTT Plc, which in turn is majority owned by the Finance Ministry, has two roles to play for the country's sake - expand to meet demand for energy resources and give higher returns to shareholders.")
5. Why has PTTEP been expanding so aggresively recently?
To find more energy resources for Thailand and to provide increased returns to shareholders which include the Thai government.
6. Is PTTEP's expansion into other countries expected to increase sales? By how much? Is this increase certain? Why or why not?
Yes, sales volume is expected to increase sales by 10% in 2007 due to oil and gas PTTEP is getting from other countries.
The increase in sales volume is "projected" which means it is "expected" and not certain. In fact, the companies prior experience in another country, namely Burma, was a failure.
The question that is not addressed here is profitability. Sales volume can be high while profitability is low, for instance, because of declining world oil prices.
("For 2007, it expects to see its sales volume increase by at least 10% backed by the various oil and gas fields it has successfully drilled in countries such as Oman...Like many other companies, PTTEP failed in its first foreign venture when it invested with the US giant Unocal in onshore fields in Burma.")
7. By how much is PTTEP planning to increase its reliance on international operations for revenue in the near future? (Do calculation)
Over the next four years PTTEP is planning to increase its reliance on international operations at a rate of about 4% per year.
(25% - 10% / 4 years = 3.75)
("[it]...projected that 25% of its revenue will be derived from international operations by 2010. Currently, they account for only about 10% of the company's nearly 70 billion baht in revenue.")
8. Was PTTEP the only company to lose in Unocal's oil exploration project in Burma?
No, it was not the only company to lose. ("like many other comapnies")
9. What investment objectives does PTTEP have for domestic oil and gas fields?
It is planning to make investments to "extend the lives" of these fields.
10. Will Thailand ever reach self-sufficiency in natural gas or oil?
No, Thailand's reserves are not enough. Thailand will have to continue to import.
11. After PTTEP's bad Burma experience does it still operate in risky countries?
Yes, it operates in Algeria, Iranm, and Oman, countries which "global multinationals dare not enter."
The article implies that PTTEP has learned from its Burma experience so that these risky countries do not pose as much of a risk to them as they do to others.
(See the answer to question #15 below).
12. Is PTTEP operating in other Southeast Asian countries?
Yes, within Southeast Asia PTTEP has operations in Vietnam, Cambodia and Indonesia.
13. Does it have operations in South Asian countries?
No, in South Asia it is only "studying the possibilities" of operations in India and Bangladesh.
14.What geological expertise does PTTEP have?
PTTEP has an "advantage in the Gulf of Thailand" where they "know the geology well."
15. What steps can multinationals like PTTEP take to avoid risk in countries that don't have very open economies yet?
"...operating in countries that are still in the process of opening up their economies and where changes in rules and regulations could take place any time also means that companies such as PTTEP need to keep close contact with governments and policymakers."
Patience is also needed.
16. Is PTTEP doing any joint projects with multinationals from other countries?
Yes, it has just received approval for a project in Egypt it is doing with other foreign companies: Sipetrol International SA, Edison International SpA, and Centrica Energy.
(As a further research project learn more about these companies on the internet.)
17. What further plans for expansion have the successful bid on the Egyptian project prompted?
PTTEP is planning further expansion into North Africa.
("PTTEP said its success in the Egas bid was another major step in expanding its investment in North Africa, which has high petroleum potential.")
