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Oil and gas supply tussle clouds Southeast Asia's economic outlook

Depletion fears and local politics make life hard for multinational players

Thailand and Indonesia are reasserting control over their energy resources in the face of domestic political pressures and concerns about depletion.   © Reuters

BANGKOK -- When Saudi Arabia announced on Oct. 3 that it had fully restored crude oil production and capacity to where they were before the devastating drone attacks on its facilities on Sept. 14, countries around the world, especially in Southeast Asia, breathed a sigh of relief.

The attacks temporarily cut Saudi oil output by more than half. But the world's top crude exporter managed to restore production to normal in just three weeks, rather than the several months many predicted.

But the sudden disruption of output, despite being much shorter than feared, has nevertheless sparked fresh tensions in the Middle East and underscored the importance of energy security -- the two main threats to which come from higher prices and supply disruptions.

In 2018, Saudi Arabia exported 7.38 million barrels of crude a day, or 16% of the global total. Asia was by far its biggest customer, gulping down 70% of Saudi exports.

After the attacks, benchmark Dubai Crude briefly rose to around $67 per barrel, but then fell back to the pre-attack level of around $57. Nevertheless, the attack made Southeast Asia keenly aware of the vulnerability of its oil supplies.

The most reliable energy resources are those available within one's own borders. Particularly valuable ones can fuel "resource nationalism," which has been growing in Southeast Asia and inflaming tensions in the Middle East.

The Thai government, for example, is embroiled in a dispute with international oil companies over offshore drilling concessions in the Gulf of Thailand. The dispute centers on who should pay to remove old offshore oil and gas platforms in the Erawan gas field, which is operated by U.S. energy giant Chevron and Japan's Mitsui Oil Exploration. The field will be handed over to Thai state-owned oil company PTT Exploration & Production in April 2022, when their concession expires.

After the government demanded that the Chevron-Mitsui consortium to pay the full cost of decommissioning, estimated at $2.5 billion, the consortium sought arbitration by a Swiss court.

It is estimated that Asia will be able to meet only 63% of its energy needs by 2050.   © Reuters

Under the terms of the contract signed between Chevron-Mitsui and the Thai government in 1971, the oil company was required to cover only the cost of removing disused infrastructure before handing the field over to a new operator.

In 2016, however, the government adopted a new energy ministry ordinance requiring gas field operators to cover the cost of decommissioning all equipment they install once it has reached the end of its service life, regardless of who is using it when it wears out. Under the new rules, Chevron-Mitsui would have to pay to dispose of equipment that PTT inherited.

In August, Chevron-Mitsui responded to Thailand's attempt to retroactively enforce the new ordinance by calling for arbitration, arguing that the original terms of the contract should be honored. Alarmed, the Thai government asked Chevron-Mitsui to suspend the arbitration process. Direct negotiations between the two sides are continuing, for now.

At the end of September, Sontirat Sontijirawong, Thailand's energy minister, said: "I ... believe that we will arrive at the best agreement, while prioritizing Thailand's interests."

Chevron is said to be ratcheting up the pressure by lobbying a senior U.S. administration official due to visit Thailand in early November for the East Asia Summit. The American company will seek arbitration again if Bangkok insists on sticking to its new rules, according to sources.

The Erawan gas field, which entered production in 1981, accounts for over 40% of the country's natural gas production. Chevron first won a concession to operate Erawan for 30 years from 1972 to 2012, then the contract was extended for 10 years. Chevron and Mitsui sought another 10-year extension, but in 2018 the government tendered new bids for Erawan. Although Chevron-Mitsui took part, it was bested by PTT.

PTT underbid the Chevron-Mitsui consortium by more than 30%, raising questions over whether it can be run profitably. Asked how PTT would pull this off, a top company official said the management team would be fired if it did otherwise, hinting at government intervention.

The authorities also seem to have had their thumb on the scale in the bidding for other gas fields in the Gulf of Thailand. The concession for Bongkot, which is run jointly by PTT and France's Total, expires in 2023, but Total did not seek an extension, leaving PTT in charge. The French energy company dropped out because the bid proposed by PTT was too low to be profitable, according to a source in energy industry.

In retrospect, Thailand's sudden move in 2016 to overhaul the decommissioning regulations looks like a first step toward shutting foreign players out of the country's natural resources development.

The policy shift is galling to Chevron and Mitsui, which have been operating in the Gulf of Thailand for four decades. Developing Erawan was a daunting challenge because of the gulf's complex geology, which required the drilling of several thousand of exploratory wells. "We are stunned by how Thailand is trying to kick us out after 40 years," said a senior Mitsui official.

But Thailand is not the only Southeast Asian nation seeking to wrest control over natural resources from foreign companies.

In July 2018, the Indonesian government rejected Chevron's request for a 20-year extension to its long-standing production-sharing agreement in the Rokan Block in Sumatra that is due to expire in 2021. Rokan is of the country's largest oil blocks and the government decided to hand it over to state-owned oil and gas giant Pertamina. Oil deposits were first discovered in the area in 1944 by the Japanese Imperial Army.

In 1963, Caltex, Chevron's forerunner, won the rights to develop Rokan. In the 1990s, the block contributed half of the country's total oil output; it remains an important production area.

Jakarta's reassertion of control over Rokan comes on the heels of Pertamina's January takeover from Total unit E&P Indonesie and Japan's Inpex of Mahakam Block, a major gas block in East Kalimantan Province. With the acquisitions, Pertamina controls 60% of Indonesia's oil and gas production.

The government says the decisions were based purely on commercial and economic considerations but few in the industry accept this claim at face value.

According to Indonesia's constitution, "The land and the waters, as well as the natural riches therein, are to be controlled by the state and to be exploited to the greatest benefit of the people." For decades the country has relied on foreign capital and technology to develop its natural resources. Conservatives say that is unconstitutional.

The moves over the oil concessions smack of election-year politics. President Joko Widodo sought (and won) reelection to a second term in April 2019, seeing off a challenge from Prabowo Subianto, partly by appeasing conservatives on the concessions issue, pundits say.

But the efforts of Thailand and Indonesia to reclaim control over their domestic oil and gas point to fears of resource depletion. The Institute of Energy Economics, Japan, forecasts that Asia will be able to meet only 63% its energy needs by 2050, down from 72% in 2016.

The outlook for the Association of Southeast Asian Nations is even bleaker. The group's energy self-sufficiency is expected to plummet to 66% from 117% over the same period. Energy imports compared to its regional gross domestic product will rise to 5.2% in 2050, up from 0.9%. If ASEAN becomes a net energy importer in the first half of the 2020s as expected, it could hinder economic growth.

Thailand and Indonesia are trying to ensure that their companies get a larger piece of the shrinking energy pie. But the strategy could backfire if it leads to declines in production or investment. And it remains to be seen whether their state-owned energy companies have the expertise to take over from more established international companies.

The latest wave of resource nationalism, like all forms of nationalism, feeds on sentiment rather than reason. It could make Asia more vulnerable to energy crises in the long run.

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