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Vietnam Oil And Gas Report Q1 2007

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Vietnam Oil And Gas Report Q1 2007

  1. 1. Vietnam Oil & Gas Report Q1 2007 Including 5-year industry forecasts by BMIPart of BMI’s Industry Survey & Forecasts SeriesPublished by: Business Monitor InternationalPublication Date: February 2007 Business Monitor International © 2007 Business Monitor International. Mermaid House, All rights reserved. 2 Puddle Dock, London, EC4V 3DS, All information contained in this publication is UK copyrighted in the name of Business Monitor Tel: +44 (0) 20 7248 0468 International, and as such no part of this publication Fax: +44 (0) 20 7248 0467 may be reproduced, repackaged, redistributed, resold in email: subs@businessmonitor.com whole or in any part, or used in any form or by any web: http://www.businessmonitor.com means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher. DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.
  2. 2. Vietnam Oil & Gas Report Q1 2007© Business Monitor International Ltd Page 2
  3. 3. Vietnam Oil & Gas Report Q1 2007CONTENTSExecutive Summary .........................................................................................................................................6SWOT Analysis.................................................................................................................................................7 Vietnam Economic SWOT...................................................................................................................................................................................... 7 Vietnam Political SWOT ........................................................................................................................................................................................ 7 Vietnam Business Environment SWOT .................................................................................................................................................................. 8Regional Market Overview ..............................................................................................................................9 Asia/Pacific Region .................................................................................................................................................................................................... 9 Table: Asia/Pacific Oil Consumption (000b/d)...................................................................................................................................................... 9 Table: Asia/Pacific Oil Production (000b/d) ....................................................................................................................................................... 10 Table: Asia/Pacific Oil Refining Capacity (000b/d) ............................................................................................................................................ 11 Table: Asia/Pacific Gas Consumption (bcm) ....................................................................................................................................................... 12 Table: Asia/Pacific Gas Production (bcm) .......................................................................................................................................................... 13 Table: Asia/Pacific LNG Exports/(Imports) (bcm).............................................................................................................................................. 14 Vietnam................................................................................................................................................................................................................ 14Business Environment Rankings .................................................................................................................16 Vietnam................................................................................................................................................................................................................ 16 Asia/Pacific Region .................................................................................................................................................................................................. 16Vietnam Business Environment Ranking ....................................................................................................18 Economics – Long-Term Risk ................................................................................................................................................................................... 18 Politics – Long-Term Risk ........................................................................................................................................................................................ 18 Oil & Gas Growth .................................................................................................................................................................................................... 18 Oil/Gas Reserves ...................................................................................................................................................................................................... 18 Licensing/Regulation ................................................................................................................................................................................................ 18 Competitive Environment.......................................................................................................................................................................................... 18Business Environment Overview .................................................................................................................19 Political Risk Summary............................................................................................................................................................................................. 19 Economic Risk Summary .......................................................................................................................................................................................... 19 Business Environment Risk Summary ....................................................................................................................................................................... 19 Legal Code/Corruption............................................................................................................................................................................................. 20 Labour Force............................................................................................................................................................................................................ 21 Foreign Direct Investment (FDI) ......................................................................................................................................................................... 22 Tax Regime .......................................................................................................................................................................................................... 24Oil Market Outlook .........................................................................................................................................25 Assessing The Risks ............................................................................................................................................................................................. 25 Table: Crude Price Forecasts 2007 ..................................................................................................................................................................... 27 Revised Forecasts ..................................................................................................................................................................................................... 27 Table: Oil Price Forecasts................................................................................................................................................................................... 28Regional Supply and Demand.......................................................................................................................29 Asia/Pacific............................................................................................................................................................................................................... 29 Table: Oil Production (000b/d) – Asia/Pacific ................................................................................................................................................... 30 Table: Oil Consumption (000b/d) – Asia/Pacific ................................................................................................................................................. 31© Business Monitor International Ltd Page 3
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Vietnam Oil & Gas Report Q1 2007Global Picture .................................................................................................................................................32 Table: Global Oil Consumption (000b/d) ............................................................................................................................................................ 33 Table: Global Oil Production (000b/d) ............................................................................................................................................................... 34Industry Forecast Scenario ...........................................................................................................................35 Oil and Gas Reserves........................................................................................................................................................................................... 35 Oil Supply and Demand....................................................................................................................................................................................... 35 Gas Supply and Demand...................................................................................................................................................................................... 36 Refining And Oil Products Trade......................................................................................................................................................................... 37 Revenues/Import Costs ........................................................................................................................................................................................ 37 Table: Vietnam Oil & Gas – Historical Data & Forecasts .................................................................................................................................. 38 Other Energy ....................................................................................................................................................................................................... 39 Table: Vietnam Other Energy – Historical Data & Forecasts............................................................................................................................. 40 Key Risks to Forecast Scenario ................................................................................................................................................................................ 40Economic Outlook..........................................................................................................................................41 Table: Output & Population ................................................................................................................................................................................ 43Regional Case Study – ConocoPhillips .......................................................................................................44 Table: Exploration And Production 2005 ............................................................................................................................................................ 45 Table: Commercial Realisation – Refining And Marketing 2005......................................................................................................................... 48Competitive Landscape .................................................................................................................................49 Executive Summary................................................................................................................................................................................................... 49 Table: Key Players – Vietnam Oil & Gas Sector ................................................................................................................................................. 50 Overview/State Role.................................................................................................................................................................................................. 50 BP – Summary .......................................................................................................................................................................................................... 51 ConocoPhillips – Summary....................................................................................................................................................................................... 51 Petronas – Summary................................................................................................................................................................................................. 51 Table: Key Upstream Players .............................................................................................................................................................................. 52 Mitsubishi – Summary .............................................................................................................................................................................................. 52 Table: Key Downstream Players ......................................................................................................................................................................... 52 KNOC – Summary .................................................................................................................................................................................................... 52 Chevron – Summary ................................................................................................................................................................................................. 53 Others – Summary .................................................................................................................................................................................................... 53Company Monitor...........................................................................................................................................54 PetroVietnam....................................................................................................................................................................................................... 54 BP Vietnam.......................................................................................................................................................................................................... 57 Petronas Vietnam................................................................................................................................................................................................. 59 Zarubezhneft ........................................................................................................................................................................................................ 61BMI Forecast Modelling .................................................................................................................................63 How We Generate Our Industry Forecasts ............................................................................................................................................................... 63 Energy Industry ........................................................................................................................................................................................................ 64 Cross checks ............................................................................................................................................................................................................. 64 Sources ..................................................................................................................................................................................................................... 64© Business Monitor International Ltd Page 4
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  6. 6. Vietnam Oil & Gas Report Q1 2007Executive Summary The latest Vietnam Oil & Gas Report from BMI forecasts that the country will account for just 1.13% of Asia/Pacific regional oil demand by 2010, while providing 4.87% of supply. Asia/Pacific regional oil demand rose to an estimated 24.74mn b/d last year and should average 25.36mn b/d in 2007, before reaching 27.64mn b/d by 2010. Asia/Pacific gas consumption in 2006 is estimated at 419bcm, with demand of 602bcm targeted for 2010. Production last year of 342bcm should reach 490bcm by the end of the decade. Vietnam’s share of consumption in 2006 was an estimated 1.67%, while its share of production is put at 1.59%. By 2010, its share of demand is forecast to be 2.82%, with the country accounting for 3.50% of supply. For the whole of last year, our preliminary estimates of average prices are US$61.30 per barrel for the OPEC basket, US$65.03 for Brent, US$66.24/bbl for WTI and US$61.30 for Urals. For 2007, the revised BMI forecasts are for the OPEC basket to average US$55 per barrel. Based on last year’s typical price differentials, this implies Brent at US$58.72, WTI averaging US$59.94/bbl, and Urals at US$55 per barrel. Our central view is that the OPEC basket price will slip from US$55/bbl this year to US$50 in 2008, before settling around US$45/bbl in 2009/2010. Vietnamese real GDP growth is forecast by BMI at 8.2% for 2006, up from an estimated 8.0% in 2006. We are assuming 8.2% growth in 2008, followed by 8.7% in 2009 and 8.5% in 2010. Exploration success is on the rise in Vietnam, with a growing number of international oil companies (IOCs) partnering PetroVietnam in finding and developing hydrocarbon resources – particularly gas. We are assuming oil and gas liquids production of no more than 380,000b/d by 2010, although the country is thought to have pumped 390,000b/d last year. Consumption is forecast to increase by 4-6% per annum to 2010, implying demand of 311,000b/d by the end of the forecast period. Gas supply and demand is forecast to increase from last year’s estimated 7bcm to 17bcm by the end of the decade. In the BMI Business Environment Ranking matrix, Vietnam receives a slightly higher composite score of 31, which now ranks the country joint seventh out of 14 states included in the Asia/Pacific region, alongside Thailand. The overall business environment can be considered neutral in a regional context, thanks to a very high level of perceived economic and political risk. These factors are offset partly by the country’s high oil/gas reserves to production ratio (RPR) and healthy short- to medium-term gas output growth. Neither Vietnam’s regulatory regime nor its competitive landscape is particularly attractive in a regional context. IOC spending has been rising, largely in conjunction with the development of the country’s gas industry.© Business Monitor International Ltd Page 6
  7. 7. Vietnam Oil & Gas Report Q1 2007SWOT AnalysisVietnam Economic SWOTStrengths Vietnam has been one of the fastest-growing economies in Asia over the past decade, averaging growth of 7.4% a year. The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 29% in 2002.Weaknesses Increasing regional and international integration of the economy will present major challenges to less competitive areas of the economy.Opportunities The government is becoming more determined to reform the Vietnamese economy, and is pushing ahead with difficult reforms to the state-owned enterprise (SOE) sector.Threats Despite a welcome improvement on the current account deficit, credit-rating agencies are concerned about the speed of domestic reforms, with intrusive bureaucracy and lingering corruption likely to deter some investors. The fiscal deficit is an ongoing concern, and the government must push ahead with plans to diversify the tax system.Vietnam Political SWOTStrengths The Vietnamese government is the most modern in a generation, and appears determined to push ahead with the economic reforms necessary to make Vietnam into an industrialised country by 2020. Relations with the US are improving, following the full restoration of diplomatic relations in 1995, and the normalisation of trading relations in 2001.Weaknesses Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party. The government recognises the threat that corruption presents to its legitimacy, and has acted decisively to clamp down on graft among party officials.Threats Continued unrest in Vietnam’s troubled Central Highland region, amid violent protests by the Montagnard ethnic minority group. Ongoing disputes over sovereignty of the Spratly Islands in the South China Sea, which are claimed by Vietnam, China, Taiwan, the Philippines and Malaysia.© Business Monitor International Ltd Page 7
  8. 8. Vietnam Oil & Gas Report Q1 2007Vietnam Business Environment SWOTStrengths Ongoing reforms to bureaucracy in Vietnam, in a bid to speed up the approval regime for foreign investors and make it more transparent. Vietnam has a significant natural gas resource base and should deliver healthy volume growth over the short to medium term. The level of IOC investment has been rising as companies boost exploration efforts and begin to develop gas resources and infrastructure. Vietnam acceded to the World Trade Organisation (WTO) on 11 January 2007.Weaknesses Vietnam remains one of the world’s most corrupt countries, a major deterrent to foreign investors. The ongoing graft problem is reflected in Vietnam’s score in the 2005 Corruption Perceptions Index by Transparency International of 2.6, lower than the regional average of 3.9. Oil volume growth is modest and the country lacks any domestic refining capacity.Opportunities Despite the threat of tariffs, Vietnam’s exports to the US are booming following the free trade agreement (FTA) signed between the two countries in December 2001. Warming ties with the US should offer a further source of loans and investment for Vietnam’s growing economy. The exploitation of gas resources means Vietnam can develop new gas- based industries such as power generation, fertilisers, aluminium and petrochemicals. Plans to build two new refineries will provide a local source of petroleum products, the basis for exports and for associated industries.Threats The textile sector will continue to struggle following the phasing out of textile quotas for all WTO members on January 1 2005. Now Vietnam has joined the WTO and export quotas have been removed, it will face intense competition from China. Vietnam needs to press ahead with key energy projects such as refinery building and develop new sources of crude production as the Russian- partnered project goes into decline.© Business Monitor International Ltd Page 8
  9. 9. Vietnam Oil & Gas Report Q1 2007Regional Market OverviewAsia/Pacific Region Thanks to the growth of China and India, the Asia/Pacific region is highly significant in terms of oil and gas consumption, has a rapidly expanding refining and petrochemicals system, and is a key importer of liquefied natural gas (LNG). The region features a number of important oil and gas producers, but volumes are under pressure, resulting in rising imports.Table: Asia/Pacific Oil Consumption (000b/d)Country 2003 2004 2005 2006e 2007f 2008f 2009f 2010fAustralia 851 856 884 890 903 917 931 945China 5803 6772 6988 7355 7723 8109 8514 8940Hong Kong 289 314 285 288 294 299 305 312India 2420 2573 2485 2600 2678 2785 2924 3071Indonesia 1132 1150 1168 1100 1128 1156 1185 1214Japan 5455 5286 5360 5380 5400 5420 5440 5460Malaysia 480 493 477 481 490 500 515 530Pakistan 321 325 353 360 371 386 401 417Philippines 330 336 314 319 325 335 345 355Singapore 668 748 826 834 859 885 912 939South Korea 2300 2283 2308 2315 2330 2345 2360 2375Taiwan 868 880 884 893 911 929 947 966Thailand 836 913 946 915 930 953 977 1002Vietnam 221 236 246 253 263 277 293 311BMI universe 21974 23165 23524 23983 24605 25295 26050 26836other Asia/Pacific 715 730 745 752 760 775 790 806Regional total 22689 23895 24269 24735 25364 26070 26840 27642e/f = BMI estimate/forecast. Historic data: BP Statistical Review of World Energy, June 2006/BMI Research. Allforecasts: BMI Research. Oil use of 21.4mn b/d in 2001 reached an estimated 24.74mn b/d last year. It should average 25.36mn b/d in 2007 and then rise to around 27.64mn b/d by 2010. Vietnam accounted for an estimated 1.02% of 2006 regional consumption, with its market share expected to be higher at 1.13% 2010.© Business Monitor International Ltd Page 9
  10. 10. Vietnam Oil & Gas Report Q1 2007Table: Asia/Pacific Oil Production (000b/d)Country 2003 2004 2005 2006e 2007f 2008f 2009f 2010fAustralia 624 541 554 540 510 510 505 495China 3401 3481 3627 3670 3710 3680 3630 3590India 800 816 784 795 790 790 850 850Indonesia 1183 1152 1136 1050 1045 995 990 975Japan 0 14 15 15 14 14 13 13Malaysia 831 857 827 850 840 840 825 800Pakistan 51 50 54 54 55 57 60 60Philippines 20 40 55 56 58 60 60 60Singapore 0 0 0 0 0 0 0 0South Korea 0 0 0 0 0 0 0 0Taiwan 1 1 1 1 1 1 1 1Thailand 223 220 276 275 270 265 255 255Vietnam 364 427 392 390 390 380 380 380BMI universe 7498 7599 7721 7696 7683 7592 7569 7478other Asia/Pacific 430 435 413 393 373 354 337 320Regional total 7928 8034 8134 8088 8056 7946 7905 7798e/f = BMI estimate/forecast. Historic data: BP Statistical Review of World Energy, June 2006/BMI Research. Allforecasts: BMI Research. Regional oil production was just under 8.0mn b/d in 2001, and last year averaged 8.09mn b/d. It is set to decline to 7.80mn b/d by 2010. Vietnam last year accounted for an estimated 4.82% of regional oil supply, and its market share is expected to be up to 4.87% by the end of the forecast period. Oil imports are growing rapidly, because demand growth is outstripping the pace of supply expansion. In 2001, the region was importing an average 13.41mn b/d. This total had risen to an estimated 16.65mn b/d in 2006 and is forecast to reach 19.84mn b/d by 2010. The principal importers will be China, Japan, India and South Korea. By 2010, the only net exporters will be Malaysia and Vietnam.© Business Monitor International Ltd Page 10
  11. 11. Vietnam Oil & Gas Report Q1 2007Table: Asia/Pacific Oil Refining Capacity (000b/d)Country 2003 2004 2005 2006e 2007f 2008f 2009f 2010fAustralia 846 772 772 846 846 846 846 846China 5487 6289 6587 7100 7500 7500 9000 9000Hong Kong 0 0 0 0 0 0 0 0India 2333 2513 2558 2600 2850 2850 3000 3000Indonesia 1056 1056 1056 1056 1056 1500 1500 1500Japan 4645 4531 4531 4531 4531 4531 4531 4531Malaysia 515 515 515 625 625 625 625 625Pakistan 306 306 306 400 400 500 500 500Philippines 420 330 330 400 400 400 400 400Singapore 1255 1255 1255 1255 1255 1255 1255 1255South Korea 2598 2598 2598 2598 2598 2598 2598 2598Taiwan 1159 1159 1159 1159 1159 1309 1309 1309Thailand 860 876 876 876 876 876 1000 1000Vietnam 0 0 0 0 0 200 200 350BMI universe 21480 22200 22543 23446 24096 24990 26764 26914other Asia/Pacific 1311 1260 1323 1389 1459 1532 1608 1689Regional total 22791 23460 23866 24835 25555 26522 28372 28603e/f = BMI estimate/forecast. Historic data: BP Statistical Review of World Energy, June 2006/BMI Research. Allforecasts: BMI Research. Refining capacity for the region was 22.82mn b/d in 2001, rising steadily to an estimated 24.84mn b/d last year. China and India will account for the bulk of additional capacity growth, with the regions total capacity forecast to reach 28.60mn b/d by 2010 – ahead of oil demand, therefore implying little need for net imports of refined products. Vietnam had no refining capacity in 2006, but its market share is set to rise to 1.2% by 2010 if newbuilds proceed as planned.© Business Monitor International Ltd Page 11
  12. 12. Vietnam Oil & Gas Report Q1 2007Table: Asia/Pacific Gas Consumption (bcm)Country 2003 2004 2005 2006e 2007f 2008f 2009f 2010fAustralia 26 25 26 28 28 30 31 33China 33 39 47 56 68 81 97 117Hong Kong 2 2 2 2 2 3 3 3India 30 33 37 40 43 47 52 56Indonesia 33 37 39 41 43 46 48 50Japan 83 79 81 84 88 91 95 99Malaysia 32 34 35 36 36 37 37 38Pakistan 23 27 30 33 35 37 40 43Philippines 3 2 3 6 10 15 25 35Singapore 5 7 7 7 9 10 12 13South Korea 27 32 33 35 37 39 40 43Taiwan 9 10 11 12 13 14 15 16Thailand 28 27 30 32 34 36 38 40Vietnam 2 4 5 7 10 12 15 17Regional total 335 358 385 419 456 497 548 602e/f = BMI estimate/forecast. Historic data: BP Statistical Review of World Energy, June 2006/BMI Research. Allforecasts: BMI Research.© Business Monitor International Ltd Page 12
  13. 13. Vietnam Oil & Gas Report Q1 2007Table: Asia/Pacific Gas Production (bcm)Country 2003 2004 2005 2006e 2007f 2008f 2009f 2010fAustralia 33 35 37 43 45 48 52 55China 35 41 50 53 55 58 61 64India 30 30 30 33 36 38 39 42Indonesia 73 75 76 80 85 95 100 110Malaysia 52 54 60 65 70 75 80 90Pakistan 23 27 30 33 35 37 40 43Philippines 3 2 3 6 10 15 25 35South Korea 0 0 1 1 1 1 1 1Taiwan 1 1 1 1 1 1 1 1Thailand 20 20 21 23 25 28 30 33Vietnam 2 4 5 7 10 12 15 17Regional total 271 291 314 342 372 408 443 490e/f = BMI estimate/forecast. Historic data: BP Statistical Review of World Energy, June 2006/BMI Research. Allforecasts: BMI Research. In terms of natural gas, the region last year consumed an estimated 419bcm, with demand of 602bcm targeted for 2010, representing the strongest growth globally (43.7% between 2006 and 2010). Production of an estimated 342bcm in 2006 should reach 490bcm in 2010 (+43.3%), but implies net imports rising from 77bcm per annum to 112bcm. This is in spite of many Asian gas producers being major exporters. Vietnam’s share of gas consumption in 2006 was an estimated 1.67%, while its share of production was 1.59%. By 2010, its share of gas consumption is forecast to be 2.82%, with the country accounting for 3.50% of supply.© Business Monitor International Ltd Page 13
  14. 14. Vietnam Oil & Gas Report Q1 2007Table: Asia/Pacific LNG Exports/(Imports) (bcm)Country 2003 2004 2005 2006e 2007f 2008f 2009f 2010fAustralia 7.1 10.0 11.4 15.0 16.6 18.2 20.7 22.1China - - - (2.0) (4.0) (8.0) (11.0) (14.0)India - (2.6) (6.0) (7.4) (7.5) (9.4) (12.7) (14.3)Indonesia 37.7 36.8 31.5 33.2 35.8 42.5 44.8 51.4Japan (79.9) (76.9) (76.3) (84.3) (87.7) (91.2) (94.9) (98.7)Malaysia 18.9 18.9 28.5 27.4 32.2 35.9 40.7 49.2South Korea (26.9) (31.2) (30.5) (34.4) (36.1) (37.9) (39.9) (41.9)Taiwan (7.2) (9.1) (9.6) (10.6) (11.6) (12.8) (14.0) (15.3)Regional total (50.3) (54.1) (51.0) (63.0) (62.4) (62.7) (66.2) (61.5)e/f = BMI estimate/forecast. Historic data: BP Statistical Review of World Energy, June 2006/BMI Research. Allforecasts: BMI Research. Leading gas importers by 2010 will be Japan, China, India, South Korea, with Indonesia, Malaysia and Australia the principal net gas exporters. Asia is a thriving market for LNG trade, thanks to the distances between suppliers and consumers making pipeline routes too costly. China is currently signing up LNG purchase deals, beginning with Australia and Indonesia, and will eventually become a major player in the regional LNG market. Indias LNG import plans are in disarray, but the country is expected to increase purchases over the medium term. Recent major domestic gas discoveries should increase the countrys gas self-sufficiency over the longer term.Vietnam According to the June 2006 BP Statistical Review of World Energy, Vietnam’s proven oil reserves are 3.1bn barrels, although recent published estimates have varied greatly. Oil and liquids production fell to 392,000b/d in 2005. Seven operating oilfields exist and the offshore Nam Con Son and Cuu Long basins provide the bulk of the oil. Vietnam is a net exporter of crude oil. The country has no oil refining capacity, however, although the first plant should be operational by 2009. Meanwhile, refined products imports are in excess of 240,000b/d, with Singapore a major supplier of fuels to the country. Natural gas production is around 7bcm, building up steadily as domestic demand rises and infrastructure is established. Vietnam has 150mn tonnes of coal, mostly anthracite. Production has increased dramatically in recent years, resulting in higher exports (primarily to Japan) and an increase in coal stockpiles. Electricity generating capacity is five gigawatts (GW). Hydro-electric power accounts for around 52% of generation,© Business Monitor International Ltd Page 14
  15. 15. Vietnam Oil & Gas Report Q1 2007 while thermal power represents the remainder. In September 2002, it was announced that a new 5,000km natural gas pipeline will pass through Vietnam. The line, which will be built through the Asia-Pacific Economic Co-operation (APEC) forums Partnership for Equitable Growth (PEG), will link an Indonesian gas field with Vietnam, Malaysia, Thailand and China. In May 2004, PetroVietnam and Thailands state- owned PTT signed a Memorandum of Understanding (MoU) to conduct a feasibility study to build a gas pipeline network in southern Vietnam. Some 12 industrial zones covering 250sq km in Ho Chi Minh City are encompassed by the study, which was scheduled to have been completed by the end of 2005. It was reported in October 2005 that the Vietsovpetro joint venture (JV) between Russia and Vietnam is to spend US$245mn on a gas pipeline in southern Vietnam. The 325km line will link the offshore PM3 block with Khanh An village in southern Ca Mau province, where a power station will be located. The pipeline is to carry 2bcm per annum of natural gas and should be operational by early 2007.© Business Monitor International Ltd Page 15
  16. 16. Vietnam Oil & Gas Report Q1 2007Business Environment RankingsVietnam Vietnam’s overall business environment can be considered neutral in a regional context, thanks to a very high level of perceived economic and political risk. These factors are offset partly by the country’s high oil/gas RPR and healthy short- to medium-term gas output growth. Neither Vietnam’s regulatory regime nor its competitive landscape is particularly attractive in a regional context. IOC spending has been rising, largely in conjunction with the development of the country’s gas industry. This is a country that can be expected to make further positive progress in terms of its business environment. Since the previous quarter, it has clawed its way up from a share of ninth position to equal eighth, keeping company with Japan, Pakistan and the Philippines. The country certainly has the potential to challenge Japan. The eventual improvement in perceived political and economic risk will help greatly, but increased oil investment, exploitation of reserves and some steps towards deregulation and improved competitive framework are more likely over the short to medium term.Asia/Pacific Region Since the previous quarter, there have been relatively few changes in the league table of regional business environment ratings. Australia and Taiwan continue to occupy the top and bottom slots, although the latters score has dropped by one point to just 18 – some 30 points short of Australia’s points haul. Malaysia has lost its share of second place, falling to third behind India, thanks to a one-point decline in its composite score. India holds outright second place and has improved its score to 38, but remains 10 points behind Australia. China retains its share of fifth place, which it cohabits with South Korea. Vietnam is up from equal eighth to a share of seventh, having seen its composite score rise by a point. New oil and gas discoveries have the potential to move the country still higher over the next several quarters. Japans score of 30 has once again held at the previous quarters level, but the country is down from a share of eighth place to joint ninth. Also sharing ninth place are Pakistan and the Philippines, both with unchanged scores. Indonesia will again be disappointed to see that its improved score has failed to nudge it higher in the league table. It now receives 29 points, but remains in 12th place. Hong Kong’s score is down by one point, but it remains 13th, and Taiwan continues to hog the foot of the table with its paltry 18 points. The strength of energy demand growth remains the key positive factor in the region, with resource potential only moderate. State involvement is generally high and the regulatory framework poor in comparison with other key regions. The political and economic environment varies, depending on maturity. However, the overall trends in most areas are improving. Japan stands out as being particularly weak in terms of demand growth, while Indonesia is suffering the most from supply growth deterioration and reserves decline. India and China remain the key countries, and here we expect to see improvements© Business Monitor International Ltd Page 16
  17. 17. Vietnam Oil & Gas Report Q1 2007 all around in terms of the overall business environment, although China continues to be hampered by its high level of perceived political risk.Table 7: Asia/Pacific Business Environment RankingCountry Economics Politics – Oil/Gas Oil/Gas Licensing/ Competitive Composite Regional – LT Risk LT Risk Growth Reserves Regulation Environment Score RankAustralia 8 9 3 10 10 8 48 1India 4 6 7 8 6 7 38 2Malaysia 7 5 5 7 6 6 36 3Singapore 10 8 3 1 7 6 35 4China 6 2 6 7 5 6 32 5=South Korea 9 5 1 6 5 6 32 5=Vietnam 1 1 7 9 6 7 31 7=Thailand 5 5 4 3 7 7 31 7=Japan 5 10 1 1 7 7 30 9=Pakistan 2 2 7 7 7 6 30 9=Philippines 1 4 8 5 7 6 30 9=Indonesia 4 3 4 6 7 6 29 12Hong Kong 3 4 2 1 7 7 23 13Taiwan 7 6 2 1 1 1 18 14LT Economic Risk: Based on BMI Country Risk Service Long Term economic risk rating. LT Political Risk: Based on BMI CountryRisk Service Long Term political risk rating. Oil/Gas Growth: Based on BMI forecasts for 2006-2010 oil/gas supply growth and oil/gasdemand growth. Oil/Gas Reserves: Based on oil and gas reserves/production (R/P) ratio for last calendar year. Licensing/Regulation:Based on BMI assessment of upstream licensing framework, regulatory regime and price controls. Competitive Environment: Basedon BMI assessment of number, size and type of oil/gas sector participants; extent of state involvement. Composite Score: Unweightedtotal of preceding six scores. Regional Rank: Highest composite score = most attractive energy sector environment within theAsia/Pacific region; lowest composite score = least attractive. Source: BMI Research.© Business Monitor International Ltd Page 17
  18. 18. Vietnam Oil & Gas Report Q1 2007Vietnam Business Environment Ranking In the BMI Business Environment Ranking matrix, Vietnam receives a composite score of 30, which ranks the country equal eighth out of 14 states included in the Asia/Pacific region, alongside the Philippines, Pakistan and Japan. The component parts of Vietnam’s score are:Economics – Long-Term Risk Using the BMI Country Risk Rating Service, the long-term economic rating is 54.8, compared with a global average of 60.8. In the Asian region, Vietnam has the joint lowest score, alongside the Philippines. The regional average is 69.3. Vietnam therefore scores one out of a possible 10 in our ranking.Politics – Long-Term Risk Using the BMI Country Risk Rating Service, the long-term political rating is 41.0, compared with a global average of 62.9. In the Asian region, Vietnam has the lowest score, behind Pakistan and China. The regional average is 61.6. Vietnam therefore scores one out of a possible 10 in our ranking.Oil & Gas Growth Countries are ranked by oil and gas output growth and/or consumption growth. Oil production is forecast to fall 3.1% by 2010, with gas output up 188.5% from a very low base. Oil demand growth is put at 26.4% over the period. This overall growth rate is well above average for Asia and Vietnam is allocated a score of seven out of a possible 10.Oil/Gas Reserves Countries are ranked by their RPR, which reflects the life of oil and gas reserves and provides an indicator of production upside potential. Vietnam’s oil RPR of 22 ranks highest in the region, while the gas RPR of 45 ranks fourth. The overall score is therefore nine.Licensing/Regulation The score is based on the extent of state ownership and the degree of deregulation. There is a largely benign licensing and production sharing system, partial deregulation and extensive direct state involvement. The score of five is average for the region.Competitive Environment This assesses the extent of competition and the scale of investment opportunity for IOCs. The upstream oil and gas opportunity for IOCs is reasonable and there is an improving competitive environment, with significant state involvement. We have therefore assigned the country a score of seven.© Business Monitor International Ltd Page 18
  19. 19. Vietnam Oil & Gas Report Q1 2007Business Environment OverviewPolitical Risk Summary The Communist Party of Vietnam (CPV) will maintain its strong grip on power over our forecast period. This is partly due to sustained economic growth, providing little reason for the public to demand a change of rule, but also as a result of cautious political reforms, as the government tries to shore up its legitimacy. However, pervasive official corruption will remain a major challenge facing the government, which could lead to growing popular disenchantment with the party. Relations with the US are improving, receiving a major boost from former prime minister Phan Van Khai’s visit to America in 2005, and we expect the US to grant Vietnam permanent normal trade relations in then near future. Vietnam’s key position in the international community is likely to be further bolstered by entry to the World Trade Organisation (WTO), which occurred on January 11 2007.Economic Risk Summary Vietnam began its programme of economic renovation, or doi moi, in 1986. While reform has been gradual, the country will continue to experience strong economic growth, driven in most part by the dynamic private sector. Entry to the WTO is expected to boost export levels, leading to a narrowing of the trade and current account over our forecast period. The dong will, however, continue its depreciating trend with the financial authorities managing the currency to maintain a competitive rate. Despite some recent progress, more needs to be done in reforming the state-owned enterprise (SOE) sector of the economy and the inefficient banking sector.Business Environment Risk Summary Vietnam remains an attractive place for foreign investors: in 2004 they poured US$1.61bn into the country. The government is keen to attract foreign investment, and is making continued efforts to improve the country’s operating environment. Despite significant progress, the government still needs to do more to reduce red tape, intrusive bureaucracy and corruption among party officials.© Business Monitor International Ltd Page 19
  20. 20. Vietnam Oil & Gas Report Q1 2007Legal Code/Corruption Vietnam has a two-tier courts system, with courts of first instances and courts of appeal. The court system consists of the Supreme Court, the provincial Peoples Courts and the district Peoples Courts. The Vietnamese legal code is currently in a state of flux and the authorities are drafting a unified legal framework for the conduct of business. A new Common Investment Law and a Unified Enterprise Law are being developed. Most of the legal documents in force relating to business were issued in the early 1990s under market-led reform programmes, however, between 2002 and 2006 Vietnam rewrote almost all of its laws and regulations affecting commercial activity and judicial procedures. Despite some progress in protecting intellectual property rights, the overall legal system in Vietnam is regarded as excessively cumbersome. Vietnams judicial system lacks transparency and there are widespread concerns about the independence of the judiciary. Both local and foreign firms prefer to resort to arbitration or other non-judicial means as a result of weaknesses in the judicial system – there is a general lack of confidence that the judiciary is capable of interpreting and enforcing the law. Vietnams legal system remains underdeveloped and, largely, biased against foreign entities. The court system provides inadequate redress for commercial disputes while contracts are difficult to enforce, particularly if a party is non-Vietnamese. Foreigners also see the commercial arbitration system as weak. When disputes arise, foreign investors tend to try to negotiate or include dispute resolution procedures in their contracts – however, even these are far from failsafe. Foreign and domestic arbitral awards are legally enforceable in Vietnam since it acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1995. Local courts must respect awards rendered by a recognised international arbitration institution. However, this provides no assurance that contracts will be honoured. Non-judicial means are therefore frequently used to enforce debt obligations. Firms generally avoid the judicial system because the process is lengthy and expensive, decisions are considered arbitrary and enforcement mechanisms are ineffective. Smaller companies rely on personal relationships while larger foreign companies may make use of their access to government to ensure contract enforcement. The new Uniform Enterprise Law will allow foreign investors to form any type of company instead of only limited liability companies. In general, foreign companies and the private sector are at a disadvantage compared to state-owned companies in terms of access to land. Foreign investors can currently only lease land from the Government or in industrial parks and free zones, though these restrictions are due to be lifted.© Business Monitor International Ltd Page 20
  21. 21. Vietnam Oil & Gas Report Q1 2007 Legislation has progressively enhanced the status of private investor. The 1992 constitution granted stronger land rights to individuals, including rights over commercial and personal property. Private land use rights (LURs) may be granted for up to 50 years. Since July 1 2004, the Land Law has allowed local private companies with long-term LURs to lease land to foreign investors. Enforcement of intellectual property rights (IPR) is wholly inadequate, with widespread pirating of products, particularly software, music and videos. The requirements of WTO accession mean that the government will have to substantially beef up IPR protection. Consequently, in July 2006, a new Intellectual Property Law came into effect designed to clarify the responsibility of government agencies charged with protecting IPR – though doubts remain over the effectiveness of its implementation. The police service is generally slow to act on administrative orders where trademarks have been infringed. Often violators will seek to extract a payoff in compensation for ceasing the infringement. Investors see official corruption as one of the biggest hindrances to running a business in Vietnam. Joint ventures with state-owned enterprises are particularly prone to corruption and abuse, though surveys indicate that while corruption affecting businesses is quite prevalent, the amounts involved are usually quite small. However, rapid economic growth provides opportunities for graft to grow more quickly than government systems can evolve. One of the best tools in restricting opportunities for corruption has been the expansion of the ‘One-Stop Shop’ (OSS) network – single agencies that deal with applications for a range of activities, including construction permits, LUR certificates, business registrations and approvals for local and foreign investments. The Law on Corruption Prevention and Control was passed by the National Assembly in November 2005. A central anti-corruption steering committee is to be established comprising representatives from the government, the National Assembly, state procurator, court and police, and will be headed by the prime minister. It will be able to temporarily suspend ministers and chairpersons of peoples committees and peoples councils if they are suspected of wrongdoing. The burden of red tape is amplified by the overlapping of government approvals. Vietnam ranks poorly in the length of time it takes to close a business. It can take about five years to close a business, compared to an average of 3.4 in East Asia & Pacific, and 1.5 years in OECD states.Labour Force Vietnam’s large, well-educated and inexpensive labour force remains one of the country’s chief draws to foreign investors. With the labour pool increasing by up to 1.5mn a year, it is growing bigger, while wage costs remain low. World Bank figures put the economically active population at 54.65mn, equivalent to© Business Monitor International Ltd Page 21
  22. 22. Vietnam Oil & Gas Report Q1 2007 65.9% of people aged 15-64. The unemployment rate in 2005 was estimated at 5.5%. Vietnam’s reform- driven economic growth has resulted in a restructuring of the labour market, with a shift away from agricultural employment to non-farm employment. A World Bank survey in 2004 put the number of farmers at 39% of the workforce, with 17% working for private companies, and just over 8% working for the government and state-owned enterprises. Managerial talent and skilled workers are generally in short supply, which has the effect of raising costs. Over-manning is rife, particularly in the state-owned sector, while foreign companies complain of excessive churn among qualified workers. One recent study showed that over the period from 2001-2003, the labour turnover rate among foreign companies reached 43.4%. The regulatory burden in Vietnam’s labour market is higher than the regional average, with an income tax system that is responsible for hiking labour costs to up to three times’ other Asian economies. There is also a higher minimum wage applicable to foreign companies (which will be abolished when Vietnam joins the WTO). The regulatory burden is lightening over time, however. In 2003, legislation was introduced which ended the requirement for foreign companies to recruit staff via state-owned employment bureaux. However, the requirement to use employment service agencies continues to apply to branches and representative offices of foreign companies. One of the main regulatory burdens is the social protection system, which imposes a compulsory social insurance contribution scheme in which employers must pay in 15% of the salary, with employees proving 5%. Regulations for hiring workers are significantly more onerous than the East Asia & Pacific average. Whereas the hiring cost is 17% of the salary in Vietnam, it is only 5% in Thailand, for example. Employers are required by law to establish labour unions, which must be a member of the Vietnam General Confederation of Labour, within six months of setting up. While most factories have trade unions, many of these do not operate in practice. Trade unions are more active in the public sector and only one-third of foreign companies have collective agreements with their workforces. Vietnam does not have a bad industrial relations record. Most work stoppages are in the south of the country, and strikes only average about 100 a year. Most strikes have resulted from legal or contractual breaches, including failure to pay wages and benefits, failure to pay social insurance contributions, and failure to pay severance pay at termination.Foreign Direct Investment (FDI) Increased FDI is an integral part of Vietnam’s ambitious economic expansion plans, and with ratings agencies pushing their grades higher, the country looks like a hardening investment prospect, especially for manufacturing. In 2004, FDI is estimated to have risen slightly from 2003’s US$1.45bn. The large inflows of FDI and donor aid continued in 2005. FDI levels have been growing in anticipation of Vietnam’s accession to the WTO, with the IMF estimating gross inflows of US$2.4bn for full-year 2005.© Business Monitor International Ltd Page 22
  23. 23. Vietnam Oil & Gas Report Q1 2007 WTO accession occurred in January 2007. Flows from multilateral donors are also important, having roughly matched flows from foreign private sources over the last five years. But, as the country tries to transform from a centralised to a more market-oriented economy, the investment framework is still poorly developed in many areas, with bureaucracy and a lack of transparency cited among major problems. Despite ambitious targets for foreign investment as an important source of fuel for economic expansion plans, a number of barriers to investment remain. An opaque legal system, an inflexible financial system, corruption, a lack of regulatory transparency and consistency, a ponderous bureaucracy and complex land purchase procedures are among areas criticised by foreign investors. The government has been introducing and amending legislation in an effort to remedy these perceived shortcomings. Key legislation includes: The Law on Foreign Investment (1989), which has been amended several times to make FDI more attractive. Government decree 24 of 2000, which carries a pledge to avoid expropriation and guarantees the right to repatriate profits. It also outlines the government’s intention to treat private and state sectors equally. A revised bankruptcy law and a Law on Competition, both passed by the National Assembly in 2004, in a bid to improve the FDI climate. The Vietnamese legal code is currently in a state of flux and the authorities are drafting a unified legal framework for the conduct of business. A new Common Investment Law and a Unified Enterprise Law are being developed in close consultation with local business and foreign investors. In July 2006, a new Intellectual Property Law came into effect designed to clarify the responsibility of government agencies charged with protecting intellectual property rights (IPR) – though doubts remain over the effectiveness of its implementation. The main forms of foreign investment are: JV agreements, under which foreign and domestic firms share capital and profits; Business Co-operation Contracts (BCC), which allow a foreign company to carry out business in co-operation with a Vietnamese firm through capital investment and revenue sharing, but without gaining right of establishment or ownership; Wholly Foreign-Owned Enterprises, which are becoming more common, especially those involving industrial production for export; and Build-operate- transfer (BOT) agreements, which have a reputation among foreign investors for providing regulatory and financing problems. Foreign portfolio investment is only permitted in small quantities. Investments in export processing zones (EPZs), industrial zones (IZs) and high-technology zones (HTZs) attract tax and other incentives, and offer a ready made operational infrastructure, which may be difficult© Business Monitor International Ltd Page 23
  24. 24. Vietnam Oil & Gas Report Q1 2007 to arrange outside. EPZ investments carry 10-12% profit tax. The first established was the Tan Thuan zone near Ho Chi Minh City in the early 1990s, where over 100 manufacturers currently operate. A number of others have since been built, though they have not been as successful as hoped, partly because all produce from EPZs must be exported. IZs are for use by firms in construction, manufacturing, processing or assembly of industrial products, often food processing and textiles production. IZ firms pay a 10% profit tax and get refunds if profits are reinvested. IZ firms may produce for the domestic market, as well as the export market. Most FDI in Vietnam in comes from South East Asia, notably Taiwan, South Korea, Japan and China/Hong Kong. Canada and the US are the largest non-Asian FDI sources. Leading sectors for FDI are manufacturing, other industry and oil and gas.Tax Regime Since 2003, corporate tax has been charged at a unified rate for both domestic firms and foreign investors. From the start of 2005, a self-assessment regime has been in effect. The previous tax audit system has been superseded by a tax investigation system Corporate Tax: The main rate is 28% for domestic firms and those involving foreign investment. Resident firms are taxed on global income. Non-resident firms are taxed only on Vietnamese-sourced income. A surtax of 10- 25% is charged progressively on income from land use rights. Individual Tax: Levied progressively up to 40%. Different regimes apply to domestic employees and resident expatriates. The income threshold above which tax is paid is higher for expatriates than for local employees. Resident individuals are taxed on global income. Non-residents are taxed on Vietnamese- sourced income only, at a flat rate 25%. Indirect Tax: The main VAT rate is 10%. A 5% rate is charged on some goods, including computers and accessories, construction, machinery, chemicals, coal and metallurgy products. The following attract a zero VAT rate: exported goods and software and services exported to firms in export processing zones. Registration is obligatory for businesses. Capital Gains: Usually taxed as income at corporate rate. Gains by foreign investors on the transfer of an interest in a foreign or Vietnamese enterprise attract a 25% tax. Gains by individuals on the transfer of a home or on land-use rights are taxed progressively up to 60%.© Business Monitor International Ltd Page 24
  25. 25. Vietnam Oil & Gas Report Q1 2007Oil Market Outlook Thanks to abnormally mild temperatures in the US, oil prices ended the year with a whimper, rather than a bang. In spite of inventories falling steadily during the last few weeks of 2006, there was little oil market response – and even the imposition by the UN of sanctions on Iran failed to attract the speculators. US prices last year averaged more than US$66 a barrel, representing a near-17% gain during a year of demand disappointment. Once again, market fundamentals took a back seat to myriad geo-political issues that kept traders on their toes and ensured the constant presence of ‘hot money’ that concealed a relatively weak underlying trend. For the new year, a reduction in OPEC capacity utilisation could be the biggest threat to oil prices, counteracting a likely improved demand trend and the recent reduction in OPEC supply. Prices look set to emerge lower in 2007, perhaps by as much as 10%, although there remain several unresolved issues capable of delivering continued volatility.Assessing The Risks The key influences this year will be OPEC quota adherence and capacity utilisation, global oil demand growth, non-OPEC supply expansion, and the political situations surrounding Iran, Nigeria and Iraq. Addressing them in turn shows an intriguing balance of risk on the upside and on the downside. Firstly, OPEC has so far delivered around half of the voluntary 1.2mn b/d supply reduction agreed in October. Having halted the decline in crude prices, but not delivered the expected recovery, the organisation may have taken more oil out of the market in December. It has now pledged a further 0.5mn b/d of cuts from February 1. Again, not all members will co-operate, but the overall decrease in supply of up to 1mn b/d should compensate for weather-related winter demand weakness, and continue the process of inventory reduction. If OPEC delivers all of the promised reduction, the market will tighten too quickly and prices could overshoot on the upside during the first quarter. If it fails to reduce supply from the November level, prices could slip back below US$60 a barrel. Capacity utilisation for the original OPEC 10 (excluding Iraq) peaked in July 2006 at 93.3% (with oil prices peaking around the same time), but had slipped to an estimated 89% in December. Even with the inclusion of Iraq, which has substantial theoretical spare capacity, utilisation in July was some 92.4%. There is scope for ex-Iraq utilisation of just 85-86% by the end of this year, which must mean a reduction in support for prices. The recent decision to allow Angola into the oil producers’ club won’t have any immediate impact on strategy, supply or utilisation issues, as the West African country is producing all of the oil available to it and there is no talk yet of a restrictive quota or voluntary constraint. It is our opinion that the lower OPEC capacity utilisation will account for much of the predicted 10% price decline forecast for 2007.© Business Monitor International Ltd Page 25
  26. 26. Vietnam Oil & Gas Report Q1 2007 Oil demand growth in 2006 is estimated to have been 1.1% to 1.3%, barely exceeding that of 2002 – when the US oil price averaged just over US$26/bbl. China will have accounted for 46% of the total growth, highlighting a worrying dependency on the world’s fastest-growing energy consumer. For the current year, the outlook is seen as more bullish. The Paris-based International Energy Agency (IEA) is forecasting a rise of 1.7% in 2007 oil consumption. The BMI growth forecast is identical, with OECD demand up just 0.8% and the non-OECD countries consuming 2.6% more oil. However, both BMI and the IEA admit to risk being on the downside. The global macroeconomic picture is far from clear at this early stage, with China continuing to be highly unpredictable as an energy consumer. The US Energy Information Administration (EIA) foresees a more bullish 1.5mn b/d rise in world oil consumption this year, with OPEC assuming almost 1.6% growth in demand. Given the fragile state of the global economy, it would be no great surprise to see demand estimates fall as the year unfolds. In terms of oil supply, we already know that OPEC is sufficiently concerned to have cut its own market share, making room for increased volumes of non-OPEC oil. Non-OPEC growth could be significant, with the IEA expecting a rise of up to 3% in supply this year. Comparisons are somewhat confusing, as Angola now forms part of our OPEC universe, but was still included in the non-OPEC segments of other parties’ last reports. Our own model, based on the detailed analysis of 61 countries, suggests scope for 1.6% non-OPEC supply growth in 2007 (reflecting in part the reclassification of Angola). We argue that, as ever, the IEA tends to be over-optimistic regarding the output potential of non-OPEC producers. Given the well-publicised project delays and cost over-runs relating to equipment shortages and infrastructure bottlenecks etc, we expect supply to surprise on the downside, thus leaving the market with less of an imbalance than suggested by current projections. However, OPEC has plenty of spare capacity with which to cover any shortfall. The US mid-term elections in 2006 effectively put a halt to any ambitions on the part of the Bush administration to ‘tackle’ the Iran issue. With the risk of unilateral (or bilateral were the UK to participate) military action now reduced greatly, only economic sanctions can be applied to the problem of Tehran’s nuclear persistence. The new measures agreed and implemented by the UN in December may have irritated Iran, but are unlikely to drive it towards use of the ‘oil weapon’. Equally, the UN is a million miles away from agreeing tougher measures that could disrupt world oil supply. Another year of debate and disagreement is inevitable, but the risk of Iranian oil flow being halted is considerably lower than it was perceived to be last year. While the impact of such an occurrence remains significant, potentially adding US$10 to the price of a barrel of oil, few believe it will happen. In Nigeria, however, the appetite for destruction being shown by rebel groups remains considerable. Attacks on facilities, plus kidnappings and other forms of direct protest seem certain to continue. We are assuming a restoration of Forcados exports by Royal Dutch Shell in 2007. This is far from certain. Supply risk in Nigeria may not be on the downside from current depressed levels, but there is considerable risk that export volumes will not recover quickly.© Business Monitor International Ltd Page 26
  27. 27. Vietnam Oil & Gas Report Q1 2007 In Iraq, the execution of former leader Saddam Hussein appears not to be having an extreme effect on the overall political turmoil. The high level of violence and continued military presence on the part of the US and UK bodes ill for political reform, stability and rising oil production. Again, our forecasts assume an improvement in Iraqi oil volumes this year. This looks to be a sensible stance, but there is a clear danger that the situation will not improve. OPEC can make up the shortfall in both Iraq and Nigeria, but only by restoring higher levels of production and thus raising capacity utilisation. Significant and sustained supply shortfalls in Iraq and Nigeria could mean up to US$5/bbl more on average 2007 prices.Table: Crude Price Forecasts 2007 Q406e Q107f Q207f Q307f Q307fBrent (US$/bbl) 59.2 58.6 61.0 59.8 55.5Urals - Med (US$/bbl) 56.4 54.8 57.3 56.1 51.7WTI (US$/bbl) 60.6 59.8 62.3 61.1 56.7OPEC basket (US$/bbl) 56.8 54.8 56.9 55.8 52.4Dubai (US$/bbl) 57.4 55.0 57.5 56.3 51.9Source: BMI research. e/f = BMI estimate/forecast.Revised Forecasts In Q406, we estimate that the OPEC basket price averaged US$56.80 per barrel, down significantly from the Q3 level (US$65.70), and barely above what we believe to be OPEC’s comfort level of US$55. The estimated average prices for the main marker blends are US$59.20 for Brent, US$60.60 for WTI and US$56.40 for Russian Urals (Mediterranean delivery). The typical decline from the third to the fourth quarter was around US$10/bbl. For the whole of last year, our preliminary estimates of average prices are US$61.30 for the OPEC basket, US$65.03 for Brent, US$66.24/bbl for WTI and US$61.30 for Urals. For 2007, the revised BMI forecasts are for the OPEC basket to average US$55 per barrel. Based on last year’s typical price differentials, this implies Brent at US$58.72, WTI averaging US$59.94/bbl, and Urals at US$55. We are now projecting supply expansion averaging 1.7% per annum between 2006 and 2010 (down from the previous estimate of 1.8%). The average in 2007-2010 is, however, almost 2.2% per annum, which is a significant increase over recent years and implies some risk of ongoing over-supply. Fortunately, the non-OPEC element of supply growth is relatively modest, allowing OPEC to regain some market share and exercise greater control over the market. Demand, meanwhile, is expected to grow at an estimated 1.8% per year (down from the October report’s assumption of 2.0%). Between 2007 and 2010, the annual© Business Monitor International Ltd Page 27
  28. 28. Vietnam Oil & Gas Report Q1 2007 average is forecast at 1.9%. This still lags the expected rate of supply growth and suggests a weaker outlook for prices. Given that surplus capacity is also set to develop among the OPEC nations, providing a psychological safety net for the oil market, we see scope for further price declines from the lower levels predicted in 2007. There is arguably equal risk on the downside in terms of supply and demand projections, given the signs of some global economic cooling and the apparent inability of the oil industry to bring projects into play at a rapid rate. If OPEC exercises sufficient production constraint, it can no doubt hold oil prices near recent levels. Equally, if it expands capacity and shows a willingness to continue over-supplying the crude market, it will have to live with somewhat lower prices. Our central view is therefore that the OPEC basket price will slip from US$55/bbl this year to US$50 in 2008, before settling around US$45/bbl in 2009/2010. Should OPEC defend successfully our presumed ‘target’ price of US$55/bbl during the challenging months of 2007, then it is reasonable to assume medium-term prices may surprise on the upside.Table: Oil Price Forecasts 2003 2004 2005 2006e 2007f 2008f 2009f 2010fOPEC Basket (US$/bbl) 28.1 35.7 51.3 61.3 55.0 50.0 45.0 45.0WTI (US$/bbl) 31.1 41.5 56.7 66.2 59.9 54.9 49.9 49.9Brent (US$/bbl) 28.8 38.2 54.9 65.0 58.7 53.7 48.7 48.7Urals (US$/bbl) 27.0 33.3 50.2 61.3 55.0 50.0 45.0 45.0e/f = BMI estimate/forecast.© Business Monitor International Ltd Page 28
  29. 29. Vietnam Oil & Gas Report Q1 2007Regional Supply and DemandAsia/Pacific While much of Asia last year saw a marked slowing of demand growth simply because of the rising cost of fuel, China surprised on the upside with its consistent and considerable consumption gains. The overall outcome for Asia in 2006 was weak, thanks to several regional governments reducing or abolishing price subsidies. Indonesia was arguably the clearest case, but estimates for growth in Thailand, the Philippines, Malaysia etc were all subdued in comparison with earlier years. The Thai coup may have had a further damaging effect on the economy and energy demand, but full regional demand data are not yet available. There will have been some distortions. The underlying Japanese oil trend was clearly weak, but the picture was confused by a higher oil burn in power stations thanks to a shortfall in Indonesian liquefied natural gas (LNG) volumes. Our estimates now suggest 7.36mn b/d of Chinese oil consumption in 2006, up from 6.99mn b/d the previous year. For the current year, we are assuming China will consume an average 7.72mn b/d (+4.9%). We now see Chinas oil consumption rising to 8.94mn b/d by 2010 (+21.5% between 2006 and 2010). For the Asia/Pacific region as a whole, we expect to see estimated demand of 24.74mn b/d in 2006 rise to 27.64mn b/d in 2010 (+11.8%). Of that increase, China accounts for almost 55%. India is another major contributor to the robust trend. We are forecasting consumption rising from last years estimated 2.60mn b/d to 3.07mn b/d in 2010 (+18.1%). Japan and South Korea, with their mature and energy intensive economies, will be responsible for little of the regions growth. Supply trends in the region are unlikely to impress, although Chinas domestic production has tended to surprise on the upside. None of the key Asia/Pacific producers have the ability to raise output appreciably, while some are faced with declining volumes and increased imports. For 2006, the region delivered an estimated 8.09mn b/d. From here, we head lower. By 2010, we expect the region to be pumping no more than 7.80mn b/d (-3.6%). Significant output declines are forecast in Australia (-8.3% between 2006 and 2010) and Indonesia (-7.1%). Malaysia, Vietnam and Thailand are all expected to register significant volume declines, while China and India should hold their ground rather better. For the region as a whole, the estimated import requirement of 16.65mn b/d last year is set to rise to 19.84mn b/d in 2010.© Business Monitor International Ltd Page 29
  30. 30. Vietnam Oil & Gas Report Q1 2007Table: Oil Production (000b/d) – Asia/Pacific 2003 2004 2005 2006e 2007f 2008f 2009f 2010fAustralia 624 541 554 540 510 510 505 495China 3401 3481 3627 3670 3710 3680 3630 3590India 800 816 784 795 790 790 850 850Indonesia 1183 1152 1136 1050 1045 995 990 975Japan 0 14 15 15 14 14 13 13Malaysia 831 857 827 850 840 840 825 800Pakistan 51 50 54 54 55 57 60 60Philippines 20 40 55 56 58 60 60 60Singapore 0 0 0 0 0 0 0 0South Korea 0 0 0 0 0 0 0 0Taiwan 1 1 1 1 1 1 1 1Thailand 223 220 276 275 270 265 255 255Vietnam 364 427 392 390 390 380 380 380BMI universe 7498 7599 7721 7696 7683 7592 7569 7478other Asia/Pacific 430 435 413 393 373 354 337 320Regional total 7928 8034 8134 8088 8056 7946 7905 7798e/f = BMI estimate/forecast. Historic data: BP Statistical Review of World Energy, June 2006/BMI Research. Allforecasts: BMI Research.© Business Monitor International Ltd Page 30

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