DENPASAR, Indonesia -- U.S. energy producer Chevron has restarted arbitration with Thailand following the breakdown of negotiations over decommissioning costs at one of the country's biggest gas fields, in a dispute that risks severe disruption to the country's energy production.
Thai authorities have a lot on their plate. They are locked in a standoff with protesters in Bangkok, who are demanding the current government step down and reforms to the monarchy. In the energy sector, they are tussling with multinationals.
Chevron has operated the offshore Erawan field, which supplies about 25% of the nation's gas, for nearly 50 years but is due to cede control to PTT Exploration & Production, the Thai national oil company, in April 2022.
The disagreement centers around whether Chevron or Thailand's Department of Mineral Fuels should pay decommissioning costs once the field eventually stops producing in the early 2030s, including for assets that will be given to PTTEP.
Given the strategic importance of the Erawan field to Thailand's energy security, officials hoped for a smooth transition plan up to 2022 to maintain production levels.
However, analysts say a prolonged arbitration process may delay PTTEP's pre-transition efforts at Erawan and is not conducive to effective collaboration.
"Reaching agreement on the transition plan is crucial, to allow PTTEP to begin investing in the project so they can maintain development activity and production," said Andrew Harwood, Asia Pacific research director at Wood Mackenzie, a consultancy.
"Any interruption in drilling or investment can lead to a drop in output, which can be especially challenging to turn around for mature developments," warned Harwood.
Jacqueline Tao, a Southeast Asia gas expert at consultancy IHS Markit, also said the disagreements could trigger a steeper-than-expected drop in production once PTTEP starts managing the field.
The disagreement over Erawan has its origins in a Thai law passed in 2016 that instructs operators to pay the cost of decommissioning equipment they have installed, including those transferred to the next operator. The law is retroactive, meaning it would have a material impact on Chevron's contract, signed in 1971.
After the government asked Chevron to make financial guarantees for full decommissioning costs -- estimated at around $2 billion -- for the field, the U.S. oil major briefly called for arbitration proceedings in 2019 to make its case.
Chevron suspended the process in September 2019, after Sontirat Sontijirawong became Thailand's energy minister, and sought to negotiate a solution. But with the parties failing to reach agreement on decommissioning liabilities, Chevron restarted arbitration on Oct. 3. The proceedings are due to be held in Switzerland.
So far, Thailand has decided to transfer 142 offshore platforms to PTTEP, with Chevron committing to removing 49 platforms at its own expense before its contract expires. Japan's Mitsui Oil Exploration is a partner of Chevron at Erawan.
The need for a smooth handover between concessionaires is especially acute in the Gulf of Thailand, where gas deposits are found in relatively small pockets. Every year hundreds of wells need to be drilled across the Erawan field to maintain output.
If drilling intensity falls, which is already happening at Erawan, it will become increasingly difficult to maintain production without significantly increasing investment. In some instances, reservoir pressure can drop drastically as well, creating flow issues that could destroy the reservoir.
At Indonesia's legacy Mahakam field, formerly operated by French major Total, investment in drilling fell sharply ahead of a handover to national oil company Pertamina in 2018. As a result, the reservoir was damaged and production plummeted, said Chris Howells, a geologist and Southeast Asian upstream expert.
Output is already slipping at Erawan as investment is scaled back ahead of the contract's expiration. Average daily gas production at Erawan is down nearly 8% this year compared with 2019, government data shows.
From January to September, gas production has averaged around 1.2 billion cubic feet per day, but sources close to the project expect it will drop to 1 billion cubic feet per day as fewer wells are drilled.
PTTEP can learn from Pertamina's efforts to avoid a repeat of the missteps at Mahakam, said Readul Islam, an Asia upstream specialist at consultancy Rystad Energy.
In September, Pertamina signed a deal with Chevron to accelerate drilling at its aging Rokan field in Indonesia to maintain production levels ahead of contract expiry in 2021. Chevron will spend around $150 million to drill 118 wells and will be reimbursed for the investment at the end of its term. PTTEP should consider similar options at Erawan, added Islam.
"A win-win transition agreement would provide for Chevron's exit with a minimum of outstanding liabilities, and enable PTTEP to ensure continuity of investment and development activity," said Harwood.
A source at Chevron-Mitsui said PTTEP had wanted to drill using existing equipment at its own expense ahead of the transfer of the field. But Chevron-Mitsui rejected the offer because of the risk of an accident while the field was still under its control.
Following the restart of arbitration, Supattanapong Punmeechaow, Thailand's current energy minister, told local media the government plans to import more liquefied natural gas to make up for any production disruption at Erawan if the dispute drags on.
Thailand has ample LNG import capacity, said Tao. But this would make gas more costly in Thailand after the Erawan handover, as domestic gas is expected to be cheaper than LNG, she warned.
Moreover, Erawan not only supplies gas for power plants, but also the Thai petrochemical industry in Rayon Province, which is a major user of liquids extracted from the gas.
While imported LNG can replace the gas used for power generation, the petrochemical industry could face a shortage if the gas from Erawan stops flowing.
Additional reporting by Nikkei staff writer Yohei Muramatsu in Bangkok.