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Fight for Thai gas fields fraught with big economic risks

Botched rights change could choke supplies from sites meeting half of country's demand

A natural gas production facility in the Gulf of Thailand. The country decided to hold an auction for two long-time fields in the region so that it can switch to contracts less favorable for producers.

BANGKOK -- A four-way battle is brewing for two Thai natural gas fields representing roughly half of the country's consumption, but a change in producers could slow supply and damage a thriving industrial sector.

U.S. oil major Chevron has gone on a public relations blitz in local Thai newspapers as it seeks to extend its contract for the Erawan field, where it began production in 1981. Its license for the block expires in 2022. The license for the other field, Bongkot, which is operated by state-owned PTT Exploration and Production, will expire in 2023.

For both fields, new bidders have until Sept. 25 to submit their tenders for rights of up to 30 years, with the winners to be chosen at the end of this year. Three companies are seen competing for the Bongkot rights -- Chevron, PTT Exploration, and United Arab Emirates' Mubadala Petroleum. The same three are seen in the hunt for the Erawan rights with France's Total also in the mix. 

Erawan is currently operated by Chevron and partners including Mitsui Oil Exploration, while PTT Exploration has worked with Total to develop Bongkot. Mubadala would essentially be a new entrant since it has limited experience in the Gulf of Thailand. An official with the Abu Dhabi-based company told local media outlets that it has no concerns in terms of finances, technology or background based on its track record in neighboring Vietnam and Indonesia.

The two blocks account for about half of Thailand's consumption. Domestic gas has supported the country's flourishing industrial sector as fuel for power plants and as a feedstock for chemical products. Thailand was Southeast Asia's third-largest producer of natural gas in 2017, behind Malaysia and Indonesia, but the region's largest consumer.

Reserves in both fields are falling as they age, but are still expected to generate a combined total of around $4.5 billion yen annually based on current prices. Another positive is that the Thai economy, the main buyer, is relatively stable. The fields are attractive to energy companies as virtually the last remaining major gas fields in the country.

Some believe that keeping existing operators is likely the most advantageous option to extend the life of these fields, given the difficulty of gas production in the Gulf of Thailand, which has a geologically complex seabed. Some argue that greater incentives for continuing production should be added to existing contracts. Chevron has dug several thousand wells at Erawan, for example, an extraordinary number even by global standards, and a feat that requires expertise in efficient exploration and extraction.

Untouched reserves are also located in areas where extraction is difficult. Kurujit Nakornthap, executive director of the Petroleum Institute of Thailand, expects the cost associated with each well to rise. Changing operators would require a smooth transfer of production equipment and expertise.

But the government has changed its auction criteria by moving from concession contracts to production-sharing agreements, a decision fueled by resource nationalism. The focal point will thus be whether Mubadala can offer favorable enough terms under the new system to overcome its competitors' experience.

Tenders will be evaluated based on factors such as the price at which the gas is sold to power companies, the lower the better, and the portion of profit shared with the government, the higher the better. The new system will therefore squeeze the winners' bottom lines.

Under a production-sharing agreement, gross profit -- defined as sales minus royalties and operating costs -- is divided between the operator and the government. The government will also only recognize costs up to 50% of sales and, what's more, taxes the company's share of profit.

Production-sharing agreements are widespread in Indonesia and other Southeast Asian countries. Thailand, however, is switching to these less-favorable contracts -- from the vantage point of producers -- roughly 40 years after beginning domestic gas production.

If production under the new operators, however, "the impact will be immeasurable," said Kurujit. Thailand would be forced to import more natural gas and petrochemical feedstock. This could hurt J Asian manufacturers who have built production hubs in the country for its cost competitiveness.

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