Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam ESM236 ANK~~~~~~~~~ '3 - a- Energy Sector Management Assistance Programme m .Zz AA A A 1 Report i236/01 February 2001 JOINT UNDP / WORLD BANK ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP) PURPOSE The Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) is a special global technical assistance program run as part of the World Bank's Energy, Mining and Telecommunications Department. ESMAP provides advice to governments on sustainable energy development. Established with the support of UNDP and bilateral official donors in 1983, it focuses on the role of energy in the development process with the objective of contributing to poverty alleviation, improving living conditions and preserving the environment in developing countries and transition economies. ESMAP centers its interventions on three priority areas: sector reform and restructuring; access to modern energy for the poorest; and promotion of sustainable energy practices. GOVERNANCE AND OPERATIONS ESMAP is governed by a Consultative Group (ESMAP CG) composed of representatives of the UNDP and World Bank, other donors, and development experts from regions benefiting from ESMAP's assistance. The ESMAP CG is chaired by a World Bank Vice President, and advised by a Technical Advisory Group (TAG) of four independent energy experts that reviews the Programme's strategic agenda, its work plan, and its achievements. ESMAP relies on a cadre of engineers, energy planners, and economists from the World Bank to conduct its activities under the guidance of the Manager of ESMAP, responsible for administering the Programme. FUNDING ESMAP is a cooperative effort supported over the years by the World Bank, the UNDP and other United Nations agencies, the European Union, the Organization of American States (OAS), the Latin American Energy Organization (OLADE), and public and private donors from countries including Australia, Belgium, Canada, Denmark, Germany, Finland, France, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Sweden, Switzerland, the United Kingdom, and the United States of America. FURTHER INFORMATION An up-to-date listing of completed ESMAP projects is appended to this report. For further information, a copy of the ESMAP Annual Report, or copies of project reports, contact: ESMAP c/o Energy, Mining and Telecommunications Department The World Bank 1818 H Street, NW Washington, DC 20433 U.S.A. Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam February 2001 Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) Copyright C 1999 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing February 2001 ESMAP Reports are published to communicate the results of the ESMAP's work to the development community with the least possible delay. The typescript of the paper therefore has not been prepared in accordance with the procedures appropriate to formal documents. Some sources cited in this paper may be informal documents that are not readily available. 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Contents Contents .................................................. iii Acknowledgment .................................................. vii Preface .................................................. viii Executive Summary ...................................................1 Existing Contracts .................................................2 New Contracts .................................................2 Gas Terms .................................................3 Other Petroleum Issues ..................................................3 Vietnam's Upstream Oil and Gas Sector ...................................................5 Pricing and Fiscal Systems ..................................................5 Hydrocarbon Reserves ..................................................6 Discovered potential has not been fully appraised ...............................7 Undiscovered potential merits exploration ...........................................8 Hydrocarbon Production and Markets ..................................................9 Bach Ho provides most current production ..........................................9 Potential production is uncertain but promising ...................................9 Markets for oil and gas ................................................ 10 Priority should be given to developing gas resources ........................... 12 Investment Requirements over the Next Ten Years ......................................... 12 Are Vietnam's Oil Contracts Competitive? .................................................. 15 Terms under Tax-Included Contracts ................................................ 15 Terms under Tax-Separate Contracts ................................................. 15 A Model of Exploration Prospects ................................................ 16 Price Sensitivity Analysis for Contracts in Vietnam ........................................ 16 Price Sensitivity Analysis for Contracts Elsewhere .......................................... 19 Indonesia and Thailand ................................................1 9 Other offshore areas ................................................ 19 Comparison with others at high oil prices ............................................ 20 iii The likely effect on Vietnam ....................................................... 20 Features-and failings-of Vietnam's production sharing contracts ... 20 Oil and gas prices ....................................................... 21 Field size ....................................................... 22 Well productivity ....................................................... 22 Well depth ....................................................... 22 Water depth ....................................................... 23 Quality of oil or gas produced and of reservoir drive mechanisms ...... 23 Summary ....................................................... 23 Implications for Administrative Costs of Low Oil Prices ................................ 24 Impact of price declines on the petroleum industry .............................. 24 Impact of price declines on government regulations and contracts ...... 25 Bid award process ....................................................... 25 Work units ....................................................... 26 Options for Adjusting Fiscal Terms .............................................................. 27 Adjusting Existing Contracts to Reflect Low Oil Prices .................................. 27 Defining Marginal Field Conditions and Difficult Economic Circumstances ............................................................ 30 Marginal field conditions ............................................................. 30 Marginal field conditions-and difficult economic circumstances ...... 30 Defining Possible Future Contracts under Easy Circumstances ....................... 31 Changes that can be implemented without amending the Petroleum Law or the decree implementing it ................................................... 31 Changes that would require amending the decree ................................ 35 Potential Enhancements to Make Oil and Gas Contracts Even More Flexible ....................................................... 37 Uplifts ....................................................... 38 R-factors and rate of return sliding scales for profit oil ........................ 38 Allowances ....................................................... 39 Profit oil or gas based on cumulative production ................................. 39 Deemed interest ....................................................... 39 Gas Terms ...... 41 Alternative Strategies for Gas Prices and Fiscal Systems ................................ 41 iv Packages ..................................................... 41 Government price fixing ..................................................... 42 New Terms for Gas ..................................................... 43 The international situation ..................................................... 43 Methods to introduce more attractive fiscal terms for gas .................... 43 Suggested terms for gas in Vietnam for easy areas .............................. 44 Possible future modifications ..................................................... 47 Other Issues ............................................................ 49 Joint Venture Contracts and Production Sharing Contracts ............................. 49 Value Added Tax ........................................................... 50 General structure of the Value Added Tax Law ................................... 50 Impact on exploration and development ............................................... 50 Impact on production ........................................................... 50 Impact on own use of oil and gas .......................................................... 51 Impact on refining ........................................................... 52 Unitization ........................................................... 52 Annex 1: Overview of Competitive Situation for Oil in Vietnam-Oil Prices at $12-30 a Barrel ............................................................ 55 Annex 2: Petroleum Law and Implementing Decree ........................................... 57 Annex 3: Prime Minister's Decision of 7 November 1998 .83 Tables Table 1.1 Potential Hydrocarbon Reserves. 8 Table 1.2 Upstream Oil and Gas Investments over the Next Ten Years .13 Table 2.1 Rate of Return to Current Oil Contracts .17 Table 2.2 Undiscounted Government Take from Current Oil Contracts .16 Table 3.1 Overview of Competitive Situation in Vietnam-Rate of Return. Based on Constant 1998 U.S. Dollars .29 Table 3.2 Overview of Competitive Situation in Vietnam-Undiscounted Government Take in Constant 1998 U.S. Dollars ......................... 29 Table 3.3 Profit Oil Sharing .32 v Table 4.1 Profit Gas Sharing ............................................ 46 Figures Figure 1.1 There is a Close Link between Discovered Reserves and Exploration ... Drilling .7 Figure 1.2 Oil Production from the Cuu Long Basin Should Peak Early in the New Century ............................................ 10 Figure 1.3 Nam Con Son and Cuu Long Show Great Potential for Gas.. Production ............................................ 11 Boxes Box 1.1 The Petroleum Law .............................................6 vi Acknowledgment At the request of the government of the Socialist Republic of Vietnam Oil and Gas Corporation (Petrovietnam), the Energy Sector Management Assistance Programme (ESMAP) prepared this report as part of the project "Reservoir Management and Upstream Fiscal Systems"; the purpose of the report is to assist the government in defining measures to enhance oil and gas exploration and production through technical and fiscal incentives. The analyses were prepared during a mission to Vietnam in January 1999 that comprised Bent Svensson (team leader) and Pedro van Meurs (consultant). The Canadian International Development Agency (CIDA) has provided financing to the project. Chapter 1 is based on "Fueling Vietnam's Development-New Challenges for the Energy Sector," World Bank, 1999. Moiffak Hassan (consultant) provided input to this chapter. The report was reviewed by Peter D. Thomson (ECSEG) and Charles P. McPherson (COCPO). ESMAP is grateful for the valuable assistance it received from the Vietnamese government and Petrovietnam and the World Bank in Vietnam, in particular Anil Malhotra, Nguyet Anh Pham, and Thuy Anh Nguyen. vii Preface In late 1998, international oil prices fell to their lowest level in a decade and Vietnam envisioned problems in sustaining its current activity level in the oil and gas sector. The government of Vietnam and Petrovietnam requested technical assistance from ESMAP to evaluate the upstream petroleum fiscal system and compare its competitiveness with that of other countries to analyze whether Vietnam's oil contracts are following international best practice. The request also included an evaluation of options for more flexible gas terms in production sharing contracts and fiscal incentives for oil and gas development of economically marginal fields. The analyses were prepared during a mission to Vietnam in January 1999 and the results were presented at a workshop at the end of the mission. The draft report was finalized in March 1999. Publication of the report was delayed due to discussions about how to present issues that were related to private petroleum contracts. Since the report was prepared, oil prices have risen to $30-35 per barrel. Therefore, the issues specifically relating to low prices are solved for the time being. Analyses of how Vietnamese petroleum contracts adjust to higher oil prices have been added. The conclusion is that no special problems occur in the Vietnamese contracts' adaptation to high oil prices. In a time of fluctuating oil prices measures should be taken to improve the adaptation to both high and low oil prices and the report focuses on how petroleum fiscal policies should be adjusted to accommodate fluctuating oil prices. Many of the fiscal aspects of the petroleum contracts are defined in the Petroleum Law and its implementation decree. This report points out some of these issues and recommends options for change. The work on petroleum fiscal systems convinced the government that the Petroleum Law should be revised to become a modem legal framework for petroleum activities and to attract investments in the sector. The government requested ESMAP assistance to revise the Petroleum Law and this project started later in 1999. The Petroleum Law was amended in June 2000 and the implementation decree in October 2000. The current report only refers to the original Petroleum Law. Important revisions have been included in the amendment of the Petroleum Law, such as improved gas marketing opportunities. A later report will discuss the revisions and evaluate the total fiscal package. viii I Executive Summary I. Vietnam's continental shelf remains largely unexplored relative to those of its neighbors, including China, Indonesia, Malaysia, and Thailand. Petrovietnam has made intense efforts to attract international oil companies to explore the country's sedimentary basins, and recent discoveries of commercial quantities of oil and gas have revived interest in exploration. Development of Vietnam's oil and gas resources can attract foreign investment and meet future energy demand. Crude oil exports are already the country's largest foreign exchange earner, and natural gas reserves provide an environmentally clean way to meet domestic energy needs and could lead to exports. 2. To fulfill the promise of its oil and gas resources, however, Vietnam must provide the right framework for private sector development. Fiscal incentives-such as acceptable fiscal terms in production sharing contracts-are needed to encourage hydrocarbon exploration and production. An efficient, transparent system is needed to oversee contracts and award acreage for exploration. And gas pricing policy must be made clear and consistent, and include special provision for marginal fields. 3. When the price of oil dropped to $12 a barrel in 1998 many fields became noneconomic and this had a serious effect on Vietnam's ability to attract petroleum investment. One of the main obstacles to investment is the lack of flexibility in fiscal provisions. Unlike petroleum contracts in other parts of the world, Vietnam's do not balance the government's take with the contractor's share at lower prices. This report analyses how Vietnamese petroleum contracts adjust to both higher and lower oil prices and explains options for improving the ability to deal with price fluctuations under existing contracts, proposes modifications to those contracts, and provides options for new contracts. 4. Vietnam has developed a variety of contractual models to explore and develop its petroleum resources. The first model was a joint venture. Petrovietnam then developed standard terms for production sharing contracts under which it paid corporate income tax and other taxes on behalf of the contractor. Thus this report refers to this arrangement as a tax-included contract. The subsequent Petroleum Law required contractors to pay certain taxes and royalties. Such contracts are called tax-separate contracts. In recent years Petrovietnam has also considered new types of joint venture contracts. 5. Vietnam's typical contractual terms lead to the following conclusions: Vietnam deals effectively with variations in economic conditions resulting from water depth. Vietnam deals ineffectively with field sizes, essentially creating a situation where small fields remain uneconomic. Vietnam does not deal specifically with variations in economic conditions. In fact, by using low cost limits, Vietnam strongly discourages the 1 2 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam development of fields that have low well productivity, deep wells, or high facility costs. * Vietnam deals well with high oil prices but does not deal effectively with low oil prices, so oil fields quickly become uneconomic when oil prices are low. 6. The government and Petrovietnam should engage in an early dialogue with the industry on the need for change and the best ways to achieve it. The proposals in this report for changes to the fiscal system should be presented to the industry to gauge its reaction and ensure that the changes will fulfill their objective to stimulate upstream investments. 7. Four key factors come into play in the decision process that investors undertake in petroleum investments: geology, geography, geopolitics, and investment climate. Host governments can do nothing about geology and geography. They cannot control the geopolitical environment. However, they do control the investment climate and therefore this is an important factor to be considered in the competition among governments for access to investment capital. Existing Contracts 8. The main recommendations for oil involve adjusting existing contracts to fluctuating oil prices. Existing contracts are not economic at low oil prices. It is recommended that a sliding scale cost limit be introduced so that that approximately the same amount of costs can be recovered regardless of whether oil costs $20 a barrel or $10 a barrel. For instance, with a cost limit of 35 percent at $20 a barrel, costs up to $7 a barrel can be recovered. At $10 a barrel, too, costs up to $7 a barrel should be recovered. New Contracts 9. If a situation of low oil prices were sustained for a long time it is unlikely that much incremental exploratory drilling of new oil prospects in existing contracts would occur or that new contracts would be concluded in Vietnam under the terms and conditions of the two target contracts. If Vietnam wants to maintain adequate activity, new contracts should be adjusted to broaden the scope of resource development to a wider range of petroleum resources. This means that contracts will have to be made more sensitive and sophisticated to deal with a wider range of economic circumstances and oil prices. 10. The recommendations are based on three principles: maintaining (to the degree possible) contracts that are easy to administer; making only modest changes to tax-separate contracts; and keeping production sharing as the primary model. While Vietnam could pursue joint ventures, they are not recommended as the primary model because of the high costs of capital required for Vietnam. 11. It is also recommended that future contracts be made more flexible. In addition to introducing a sliding scale cost limit, signature bonuses should be reduced and profit oil sharing should be adjusted to make small fields more attractive. Production 2 Executive Summary 3 bonuses and royalties should not change. Tax calculation methods should change, however, including the calculation of the corporate tax on a general application basis. Finally, the 15 percent participation rate set by Petrovietnam on a carried basis could be maintained. Gas Terms 12. Vietnam needs to develop gas reserves and should follow the general international approach of supporting gas development through a fiscal system that is more attractive to investors-that is, one with a smaller government take than for oil. Some of the recommendations for gas are the same as those for oil. These include continuing with production sharing contracts, keeping royalties at current levels, and lowering signature bonuses. In addition, cost gas limits should be higher than cost oil limits because in the first phase of a field's development, costs as a percentage of revenues are usually higher for gas than for oil. On the sharing of profit gas, it is recommended that gas be made more attractive than oil. To make gas exploration more attractive, carried interest should not be applied to gas or gas-condense projects. 13. The report also notes other enhancements that could make oil and gas contracts even more flexible. These include uplifts, rate of return sliding scales, and formulas based on cumulative production. However, such enhancements do not seem necessary to achieve the desired results. Other Petroleum Issues 14. Finally, the report discusses other issues that affect investors' evaluation of the fiscal system-particularly the value added tax and unitization. I Vietnam's Upstream Oil and Gas Sector 1.1 Vietnam's continental shelf remains largely unexplored relative to those of its neighbors, including China, Indonesia, Malaysia, and Thailand. Petrovietnam has made intense efforts to attract international oil companies to explore the country's sedimentary basins, and recent discoveries of commercial quantities of oil and gas have revived interest in exploration. Vietnam's oil and gas resources can help attract foreign investment and meet future energy demand. Crude oil exports are already the country's largest foreign exchange earner, and natural gas reserves provide an environmentally clean way to meet domestic energy needs and could lead to exports. 1.2 To fulfill the promise of its oil and gas resources, however, Vietnam must provide the right framework for private sector development (box 1.1). Fiscal incentives- such as acceptable fiscal terms in production sharing contracts-are needed to encourage hydrocarbon exploration and production. An efficient, transparent system is needed to oversee contracts and award acreage for exploration. And gas pricing policy must be made clear and consistent, and include special provision for marginal fields. Pricing and Fiscal Systems 1.3 The perceived potential of different oil and gas basins helps determine appropriate terms for exploration contracts. When considering investment in Vietnam, international oil companies compare investment in that country with opportunities elsewhere in the world. In the case of gas they compare it with investments in other Southeast Asian countries. At this stage Vietnam cannot compete directly with its neighbors, which have much larger gas reserves and markets. 1.4 Still, Vietnam needs to develop competitive policies and fiscal terms to make itself attractive relative to countries with similar investment opportunities. To that end, in November 1998 the government improved fiscal incentives-including tax breaks-to encourage foreign investments in exploration in high-cost and technologically difficult areas. 5 6 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam Box 1.1 The Petroleum Law Vietnam's Petroleum Law was passed in 1993, and a follow-up implementation decree was passed in December 1996 (annex 2).N The law and decree cover petroleum exploration, development, and production. They do not cover main transmission pipelines; they only cover pipelines to the point of delivery to a main transmission line. The law deals only with the upstream oil and gas industry; no mention is made of downstream operations such as gas processing and distribution and retailing of petroleum products and liquefied petroleum gas. All upstream oil and gas activities on behalf of the state are assigned exclusively to Petrovietnam, the state enterprise responsible for conducting petroleum operations and entering into petroleum contracts with organizations and individuals. Petroleum contracts can be production shanrng contracts, joint venture contracts, or other forms, and the law specifies model contract provisions. The law and decree also specify rights and obligations of the contractors, as well as royalties, taxes, and fees. Winning bidders for exploration blocks sign contracts with Petrovietnam, subject to the approval and issue of licenses by the Ministry of Planning and Investment. Then Petrovietnam, which had been acting as the ministry's technical agent during bidding, block awarding, and contract negotiation, takes over administration of the petroleum contract. The law assigns many tasks to Petrovietnam-supervising contractors, receiving operational data, making periodic reports, monitoring compliance with the work programs specified in contracts, and planning development and production after commercial discoveries. 1.5 Most production sharing agreements in Vietnam were formulated with a view to oil exploration, and in most cases they do not cover natural gas production. Gas clauses are negotiated every time a new field goes onstream. The long-term development of the gas industry will be slowed if lengthy negotiations are needed every time a new field goes onstream, and investors will demand higher returns because of the uncertainty. Hydrocarbon Reserves 1.6 Vietnam has nine onshore and offshore basins. Significant discoveries of oil and gas have been made in five: Cuu Long, Nam Con Son, Malay-Thu Chu, Song Hong, and Hanoi Trough. The size and nature of the hydrocarbon discoveries suggest that the Cuu Long, Namn Con Son, and Malay-Thu Chu basins contain most of Vietnam's hydrocarbon potential. Still, the remaining basins may also hold commercial quantities of hydrocarbons; exploration has been too limited to gauge their potential. 1.7 Since the early 1970s the accretion of hydrocarbon reserves has been directly proportional to the number of exploration wells drilled (figure 1.1). For each exploration well drilled, an average of 27 million barrels of oil equivalent has been discovered. This trend is expected to continue over the next few years, given low exploration coverage and the opening of new blocks in deepwater areas. A revision to the Petroleum Law was approved by the National Assembly, June 2000. A later report will discuss these changes. Vietnam's Upstream Oil and Gas Sector 7 Figure 1.1 There is a Close Link between Discovered Reserves and Exploration Drilling 3500 3000 2500 Mboe2000 1500 1000 4. 500 -- 0 - " l l l l 0 20 40 60 80 100 120 140 Exploration wells Discovered potential has not been fully appraised 1.8 All the discoveries in the Cuu Long basin have been oil, while those in the Nam Con Son and Malay-Thu Chu basins have been mostly gas (some of it containing high levels of liquids) and oil. In terms of barrels of oil equivalent, discovered reserves of oil exceed those of gas, so it would be incorrect to classify Vietnam as a gas province. Most of the discoveries are single-well accumulations or are not fully appraised. Thus there is considerable uncertainty in the resource estimates communicated by operators, particularly for discoveries considered marginal at the current state of market and infrastructure availability. 1.9 The discovered fields in the Cuu Long and Nam Con Son basins potentially contain 2,000 million barrels of oil and 230 billion cubic meters of gas, of which about 60 billion cubic meters is associated gas from the Cuu Long basin (table 1.1 shows the remaining reserves).° These figures are likely to change because some of the main oil and gas discoveries are still at an early stage of appraisal. Proven oil reserves are about half of their potential, and proven gas reserves are about one-third. The Bach Ho, Dai Hung, and Rang Dong fields account for most of the proven oil reserves, and Lan Tay, Lan Do, and Bach Ho (associated gas) contain most of the proven gas reserves. 2 According to Petrovietnam, aggregate reserves in July 1997 (with 90 percent probability) were 630 million cubic meters of oil, 130 billion cubic meters of associated gas, 910 billion cubic meters of nonassociated gas, and 150 million cubic meters of condensates. Petrovietnam did not, however, provide Bank staff with the data required to verify this information. 8 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam Table 1.1 Potential Hydrocarbon Reserves Liquids Gas (millions of barrels) (billions of cubic meters) Basin Oil Condensate Associated Nonassociated Nam Con Son 150 205 4 158 Cuu Long 1,300 40 Malay 70 13 Song Hong 200 a Other 2 Total 1,520 205 57 360 Note. Remaining discovered potential reserves as of December 31, 1997. a. This gas has a high carbon dioxide content (more than 75 percent). Source: World Bank staff estimates and Petrovietnam. Undiscovered potential merits exploration 1.10 Accurate assessment of Vietnam's undiscovered hydrocarbon potential is not possible because exploration has been limited in all the basins. Most blocks in the Song Hong basin and Red River delta, for example, are considered frontier acreage. Nonetheless, preliminary analysis of the hydrocarbon potential of the Nam Con Son and Song Hong basins was made based on the country's geology and exploration history, and on the size and nature of discoveries made to date. The analysis indicates that future oil and gas discoveries in the Nam Con Son and Song Hong basins will most likely have a reserve potential of some 520 million barrels of oil and 355 billion cubic meters of gas, in addition to the already discovered reserves. Gas from the Song Hong basin will likely contain a high percentage of carbon dioxide, requiring much higher development costs. 1.11 Between 80 and 100 wildcat wells will be needed to discover the potential. Recent operations in the two basins suggest that such an exploration program would cost about $1 billion. These wells could be drilled over a period of seven years if the pace of development in the beginning of the 1990s up to around 1997 were continued. An additional estimated $8 billion would be needed to cover the development of fields and infrastructure. While nonassociated gas reserves of at least 50 billion cubic meters have been proven in the Nam Con Son basin, total potential resources remain uncertain. Only one-third of an estimated 1,300 billion cubic meters of gas resources have been discovered, and most of these are still unproven. Converting potential gas resources to proven reserves that can be exploited economically requires a major exploration and appraisal program-a program supported by government policy. 1.12 What is needed to enhance discoveries? Internationally acceptable fiscal terms in production sharing contracts. An efficient, transparent system for the award and operation of contracts. A well-planned promotion campaign and a transparent award system. Exploration of 20 new wells a year. A policy directive requiring installation of a gas transport system to markets and open access to producers. And a clear, consistent gas pricing policy. Vietnam's Upstream Oil and Gas Sector 9 Hydrocarbon Production and Markets 1.13 Most hydrocarbon production in Vietnam comes from the Bach Ho field, which is operated by Vietsovpetro. Other sources of oil production are the Dai Hung, Rang Dong, and Ruby fields and a small structure in the Malay-Thu Chu basin. Bach Ho provides most current production 1.14 Bach Ho is offshore in the Cuu Long basin, about 120 kilometers southeast of Vung Tau. It is the largest hydrocarbon accumulation discovered so far, with potential oil reserves of more than 900 million barrels. The field was brought onstream in 1986 and has produced 355 million barrels of oil and 8.7 billion cubic meters of raw gas. Daily production from the field is 160,000 barrels of oil and 3.8 million cubic meters of associated gas. 1.15 Part of the gas from the field is used to generate power in Ba Ria and Phu My through a 16-inch pipeline operated by Petrovietnam. The rest of the gas from the field is being flared. A central compressor platform was completed in 1998, extending the transmission capacity of the pipeline to about 1.5 billion cubic meters a year. Oil and gas production from Bach Ho is expected to be maintained until 2001 but will then decline gradually. Potential production is uncertain but promising 1.16 Future oil and gas production from discovered fields is estimated based on the reserves data and development schedules provided by various operators and Petrovietnam. Thus projections carry significant uncertainty because a number of fields are still at an early stage of appraisal. Preliminary analysis indicates, however, that oil production from the Cuu Long basin will peak at 125 million barrels a year in 2001-02 as Rang Dong, Ruby, and other fields go onstream (figure 1.2). Production from these fields is expected to be relatively stable until 2005 and decline thereafter, to 43 million barrels in 2010. 10 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam Figure 1.2 Oil Production from the Cuu Long Basin Should Peak Early in the New Century (Millions of Barrels) 120 0- 40.0 20.0- 40.0- 199 99 201 203 205 207 2b09 2 11 203 215 |EBach Ho ER Dong CRuby E3Others 1.17 Most associated gas production will come from the Cuu Long basin as well (figure 1.3). Annual production will increase from about 1.4 billion cubic meters in 1998 to more than 3.0 billion cubic meters in 2001-02. After that, associated gas production from the Cuu Long basin will fall to about 1.0 billion cubic meters by 2010. Projected associated gas production is estimated potential; delivering these resources will require significant additional investment in offshore structures, compression, and pipelines. 1.18 The production potential of nonassociated gas from fields in the Nam Con Son basin was estimated for structures in blocks 5.2 and 6.1, essentially from discoveries made on British Petroleum, Oil and Natural Gas Corporation of India, and Statoil acreage (Lan Tay, Lan Do, Hai Thach). Assuming a normal rhythm of depletion, production of nonassociated gas from these blocks could reach 4.5 billion cubic meters a year for about 15 years (see figure 1.3). Actual production will depend on the demand. Potential production from all discovered fields, including Rong Doi and Moc Tinh in the same basin and from the Malay-Thu Chu basin, is much higher. 1.19 Gas production potential from future discoveries is obviously speculative. It will depend on how the domestic demand for gas develops, the pace of exploration, and on how soon future discoveries are developed and brought onstreamn. Markets for oil and gas 1.20 The significant nonassociated gas discoveries in the Nam Con Son basin give the government an opportunity to develop a new industry based on gas. Associated gas from the Bach Ho field is produced by Vietsovpetro. Petrovietnam receives the gas offshore at no cost and transports it onshore through its pipeline, and the gas is consumed in the Ba Ria and Phu My 2.1 power plants. Nonassociated gas production in the Nam Vietnam's Upstream Oil and Gas Sector 11 Con Son basin is planned by the private sector (Oil and Natural Gas Corporation of India, British Petroleum/Amoco, Statoil). A consortium of producers and Petrovietnam plans to transport the gas through a pipeline and process it at an onshore delivery point. Contracts for development and transportation have been under negotiation for some years and included negotiation of a gas clause in the production sharing contractp. Petrovietnam is planning a gas distribution center to receive and distribute the gas at the Phu My power plant and a pipeline to extend gas distribution to Ho Chi Minh City. Plans are also being considered for a project based on the discoveries in the Malay-Thu Chu basin. Figure 1.3 Nam Con Son and Cuu Long Show Great Potential for Gas Production (Billions of Cubic Meters) 8 EBlock 5 2 7 - Block 6 1 0Other 6 MR u by DRang Dong 2 0 Note: Blocks 5.2 and 6.1 are in the Nam Con Son basin; the remaining fields are in the Cuu Long basin. 1.21 To initiate and develop the gas market, in 1996 the government made Petrovietnam the exclusive gas trader. But sustainable development of the country's gas resources will require an appropriate gas policy and industry structure. 1.22 Over the short and medium term the power sector will be the main market for gas in Vietnam. Associated gas from Bach Ho is consumed in the Ba Ria and Phu My 2.1 power plants. Most nonassociated gas from block 6.1 will be used for power generation as well, in the Phu My 1, 2, and 3 power plants. Subsequent phases of gas market development will also focus on demand from the power sector. Gas demand for power generation is projected to reach 3.0-4.5 Bcm in 2005 and 8-9 Bcm in 2015. 1.23 In addition to the planned uses for gas in electricity generation-including use in existing power plants, replacing fuel oil with a potential 0.5 billion cubic meters a 3A memorandum of understanding was signed in April 1999 between BP/Amoco, Statoil, the Oil and Natural Gas Corporation of India, and Petrovietnam. 12 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam year-there is a market for gas in industry. Plans for fertilizer and methanol production, among other industrial uses, have surfaced. Such industries could consume an additional 1.5-2.0 billion cubic meters of gas each year. Moreover, there is potential demand in industries located near the planned extension of the gas transmission and distribution system beyond Phu My and toward Ho Chi Minh City. This demand, now being analyzed by Petrovietnam's gas company, is estimated at 0.7 billion cubic meters. Thus there is considerable potential for gas market growth. Priority should be given to developing gas resources 1.24 The proven and probable associated and nonassociated gas reserves from the Nam Con Son and Cuu Long basins are estimated at 140-170 billion cubic meters and, if fully developed, would have production capacity of 7-8 billion cubic meters a year. Such capacity would be sufficient to meet the projected demand in the south for at least the next ten years while appraisal of other discovered but unproven reserves and exploration for new resources continue. 1.25 Development of gas from the two basins must be integrated and balanced to ensure that the required gas is delivered and to avoid excessive flaring of associated gas. Although the projected production of associated gas is significant, it does not provide sufficient guarantee of long-term regular supplies. This is because associated gas production is tied to oil production, and part of the gas will likely need to be reinjected to enhance the recovery of oil. A balance between supply and demand has been worked out based on the most likely projection of gas demand and assuming that the deliverability of associated gas from the Cuu Long basin is not constrained by infrastructure availability. 1.26 Priority has been given to developing nonassociated gas from Lan Tay and Lan Do-which account for most of the proven reserves in the Nam Con Son basin-as more gas supply is needed to meet demand. Both structures offer readily deliverable reserves and low field development costs. Developing these structures would lay the foundation for exploiting other gas resources in the basin. Comparable production potential is expected from unproven discovered reserves in nearby structures, now under appraisal. 1.27 Recent discoveries in the Malay-Thu Chu basin have raised optimism about future gas production in this basin. There have been no commercial discoveries in the Song Hong basin, however, and future gas production there will depend on the pace of exploration activities. This, in turn, will be determined largely by international perceptions of deeper horizons and market opportunities for gas. The slow pace of exploration and limited interest of international oil companies suggest that gas supply from the Song Hong basin is unlikely in the next ten years. Investment Requirements over the Next Ten Years 1.28 The fiscal system needs to be adjusted to attract foreign investment in developing hydrocarbon resources. Table 1.2 shows estimated costs, over the next ten years, of developing known resources and of drilling about 90 exploration wells needed to discover the speculative potential. Recent operations in the two basins suggest that Vietnam's Upstream Oil and Gas Sector 13 such an exploration program would cost more than $950 million. The wells could be drilled over the next seven years if the pace of development of 1990-96 were continued. An additional $7,800 million would be required to cover the development of fields and infrastructure. Table 1.2 Upstream Oil and Gas Investments over the Next Ten Years (Millions of U.S. Dollars) Investment Cost Developing known discoveries of nonassociated gas 865 Developing known discoveries of associated gas 500 Exploring speculative resources (drilling and seismic) 950 Developing new discoveries 7,800 Total 10,115 Note. Cost estimates are as of October 1997. Source: World Bank staff estimates 2 Are Vietnam's Oil Contracts Competitive? 2.1 Vietnam has developed a variety of contractual models to explore and develop its petroleum resources. The first concept was a joint venture on the basis of which the Vietsovpetro agreement was established. 2.2 . Petrovietnam then developed standard terms for production sharing contracts. Under such contracts the corporate income tax and other taxes are covered by Petrovietnam's share of profit oil and profit gas-that is, Petrovietnam pays the taxes on behalf of the contractor. Thus this report refers to this type of contract as a "tax-included" contract. 2.3 The subsequent Petroleum Law requires contractors to pay certain taxes and royalties. As a result, Petrovietnam is considering removing these components from its share of oil and gas profits to avoid having its obligations to the state exceed the share that Petrovietnam receives. These type of contracts are called "tax-separate" contracts. 2.4 In recent years Petrovietnam has also considered new types of joint venture contracts. Terms under Tax-included Contracts 2.5 Each contract for oil and gas is negotiated individually, so contract terms vary. However, the common feature of these contracts is that the corporate income tax and the royalties are paid by Petrovietnam on behalf of the contractor. Terms under Tax-Separate Contracts 2.6 The terms for tax-separate contracts are similar to those for tax-included contracts. However, as prescribed by the decree implementing the Petroleum Law (see annex 2), royalties are paid directly by contractors, as are profits taxes (based on the income earned by contractors). With the break-out of the taxes, Petrovietnam's share of profit oil and profit gas should be reduced to achieve the same government take. 2.7 Taxes are calculated on a ring-fenced basis-that is, separately for each contract, even in cases where a contractor has several contracts-in the same manner as the profit oil share. The same cost oil and cost gas limits are applied. The tax is therefore 15 16 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam merely an additional profit oil or profit gas share expressed as tax in cash rather than in oil or gas. This setup is costly for contractors, so a different configuration is needed. 2.8 The global decline in oil prices in the fall of 1998 severely impaired oil- producing countries' ability to continue upstream petroleum operations and maintain their competitive positions. Is Vietnam competitive in such an environment? A Model of Exploration Prospects 2.9 To answer that question, an economic evaluation of Vietnam's economic conditions and competitive position relative to other jurisdictions with major offshore petroleum operations was made. The prices used were in the range of $12 to $30 a barrel for West Texas Intermediate (WTI). The model of Vietnam's oil exploration prospects was developed with the help of Petrovietnam. 2.10 The model assumed that exploration would occur in water that is 100 meters deep and that reservoirs would be 2,000 meters deep. The model also assumed that exploration wells would have a 25 percent chance of success. Where wells are successful, field sizes could be 50 million barrels, 150 million barrels, or 300 million barrels. Under the model, well productivity ranges from 1,000 barrels of oil per day for the 50 million barrel field to 1,500 barrels per day for the 300 million barrel field. 2.11 Capital and operating costs (in constant dollars) are assumed to be $7.43 a barrel for the 50 million barrel field, $5.18 a barrel for the 150 million barrel field, and $4.32 a barrel for the 300 million barrel field. These exploration prospects relied on fairly generous assumptions about costs and risks. Most actual exploration prospects would be less attractive in terms of costs, technical conditions, and risks. Price Sensitivity Analysis for Contracts in Vietnam Low to medium oil prices 2.12 The economic results of four different production sharing contracts for the exploration model are shown in tables 2.1 and 2.2. It should be noted that the economic results depend very much on the detailed contractual terms. The contracts vary considerably from block to block. However, the overall structure of the contract is the same. Therefore, the economic results are only relevant with respect to the structural implications and are not relevant with respect to the absolute comparative results. Vietnam's tax-included contracts would be attractive at oil prices of $20 a barrel. The real rate of return, not adjusted for risk, ranges from 14.4 percent for the 50 million barrel field to 23.2 percent for the 300 million barrel field. The risk-adjusted real rate of return for the exploration prospect as a whole (including the dry hole) is 13.9 percent. This is a modest-but for some investors, acceptable-rate of return. Are Vietnam's Oil Contracts Competitive? 17 Table 2.1 Rate of Return to Current Oil Contracts Oil price (Sper 20 20 20 20 16 16 16 16 12 12 12 12 barrel)* Field size 50 MM 150 MM 300 MM EMV 50 MM 150 MM 300 MM EMV 50 MM 150 MM 300 MM EMV No govemment 37.7% 46.3% 49.2% 38.0% 29.1% 37.9% 41.1% 31.2% 18 4% 27.7% 31.5% 22.7% Vietnam-tax 144% 21.4% 23.2% 13.9% 7.7% 16.1% 182% 97% NEG 8.6% 12.1% 4.0% included Vietnam-nosign 16.9% 23.% 243% 17.8% 9.5% 17.3% 19.1% 12.8% NEG 94% 12.7% 6.2% bonus Vietnam-tax separate 8.2% 14.5% 16 3% 9.4% 1 0% 9 8% 12.0% 5 2% NEG 2 7% 6.7% NEG Thailand-Gulf 16.2% 17.3% 17 5% 13 7% 12.6% 14.3% 14.6% 10.9% 7 3% 10.6% 11.2% 7.4% China-offshore 24.% 30.8% 32.5% 22.8% 17.8% 24.7% 26.7% 18.1% 10.0% 17.3% 19.7% 12.2% Indonesia-incentive 11.3% 17.2% 19.9% 12.8% 7.7% 13.2% 15.9% 9.5% 36% 8.6% 11.2% 5.6% terms U.K -offshore 29 9% 37.8% 40 7% 30 7% 22.5% 30.5% 33.8% 24.7% 13.5% 21 9% 25.5% 17 5% Norway 13.2% 19.3% 21.5% 14.9% 9.0% 15.0% 17.4% 11.2% 4 7% 10.3% 12.6% 7.1% U.S -GulfofMexico 22.7% 30.1% 33.3% 21.4% 164% 23 8% 27.2% 16.6% 8.3% 16.1% 19.7% 105% <400m Note: Based on constant 1998 U.S. dollars. Table 2.2 Undiscounted Government Take from Current Oil Contracts Oil price ($per 20 20 20 20 16 16 16 16 12 12 12 12 barrel). Field size 50MM 150MM 300MM EMV 50MM 150MM 300 MM EMV 50MM 150 MM 300MM EMV No govemment 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0 0% 0.0% 0.0% 0.0% Vietnam-tax included 71.4% 69.5% 71.3% 73.6% 80.5% 70.7% 72.0% 77.0% 108.1% 77.7% 74.0% 86.5% Vietnam-no sign 69 8% 69.0% 71.1% 71 5% 78.2% 70.1% 71.8% 74.0% 103.7% 76.7% 73.6% 81.7% bonus Vietnam-tax separate 84.1% 79.7% 80.2% 82.9% 96.9% 81.6% 81.4% 87.0% 135.9% 94.2% 88 0% 101.4% Thailand-Gulf 71 4% 79 7% 82 8% 81.1% 69.9% 78.0% 81.6% 80.2% 70.7% 75.9% 80.0% 80.1% China-offshore 72 3% 73.2% 75 0% 74 6% 73.1% 73 5% 75.3% 75.3% 75.6% 74.3% 75.8% 76 9% Indonesia-incentive 81.0% 80.6% 80.4% 82 1% 82.1% 81 0% 80.6% 83.1% 85.1% 81.9% 81.0% 85.3% terms U.K.-offshore 32 7% 31.8% 31 6% 32 4% 33.5% 32.1% 31.8% 33.0% 35.8% 32 8% 32 2% 34.3% Norway 85 7% 84.7% 84.6% 85.7% 86.6% 84.8% 84.7% 86.3% 87.9% 84 9% 84 7% 87.2% U.S -GulfofMexico 49.1% 49.0% 48.7% 51.2% 52.4% 50.7% 49.9% 53.8% 61.5% 54.3% 52.4% 59.7% <400m Note. Based on constant 1998 U.S. dollars. Includes participation. 2.13 Vietnam's tax-separate contracts, by contrast, would offer only marginal returns at oil prices of $20 a barrel. The risk-adjusted real rate of return would be just 9.4 percent. Thus these terms would only be economical if prospects were better than the exploration prospects used in the analysis. 2.14 When oil costs $16 a barrel, returns on tax-included contracts become marginal and those on tax-separate contracts become uneconomic. And when oil costs $12 a barrel, both contracts become uneconomic. Thus it is unlikely that new contracts would be concluded in Vietnam under the terms and conditions of the two model exploration contracts if oil cost $12-16 a barrel. However, contracts with better terms may be attractive. 2.15 Large bonuses have a significant effect on the economics of exploration activities. Thus the model tax-included contract was also analyzed with the signature 18 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam bonus set at zero. Under this arrangement the risk-adjusted real rate of return increases considerably. 2.16 Contractors operating in Vietnam with signed contracts have already paid the signature bonus; thus it is a sunk cost. Thus the forward economics for contractors with tax-included contracts-which still account for most contracts-would be simulated by contracts that do not involve a signature bonus. The forward economics of this contract would be modestly attractive if oil cost $16 a barrel. At $12 a barrel, however, the target prospect remains uneconomic. Thus it is unlikely that much new exploratory drilling would occur under existing contracts if oil cost $12 a barrel based on the contractual terms that were analyzed. Exploration would only be viable for much better prospects under much better terms. 2.17 A "no government" case is included in the analysis to evaluate underlying economic conditions in Vietnam. This case offers the same prospects as the others but does not involve contractors making any payments to government. The risk-adjusted real rate of return of the no-government case is a very attractive 22.7 percent even when oil costs just $12 a barrel (see table 2.1). This finding suggests that the lack of incremental exploratory drilling is primarily due to unfavorable contract terms and conditions. High oil prices 2.18 Although the report is focusing on the fiscal systems' adaptation to lower oil prices (which was the reason for the initiation of the study), the same four production sharing contracts were evaluated against higher oil prices, $25 and $30 a barrel. The results are shown in annex 1. As would be expected, both the rate of return to investor and the government take increase with high oil prices, indicating that the increased profit is shared between the government and the investor. In the tax-included contracts the real rate of return to investors ranges from 20 percent for the 50 million barrel field at $25 a barrel oil prices to 33 percent for the 300 million barrel field at $30 a barrel. The government take is between 69.5 percent and 70.6 percent for the same fields (without risk adjustment). 2.19 For the tax-separate contract the rate of return for investors ranges between 13.3 percent and 25.1 percent, while the government take is about 80 percent for all field sizes. At both $25 and $30 a barrel the government take for the small fields (50 million barrel case) is higher than for larger fields (100 and 150 million barrel cases) due to the signature bonus. 2.20 In conclusion, no special problems occur in the Vietnamese contracts' adaptation to high oil prices: they are more attractive to investors and create a higher government take, indicating that the increased profit is shared between the government and the investor. Are Vietnam's Oil Contracts Competitive? 19 Price Sensitivity Analysis for Contracts Elsewhere 2.21 Tables 2.1 and 2.2 also include the economics of the exploration model if terms used in other countries were applied in Vietnam. Indonesia and Thailand 2.22 At $20 a barrel, the risk-adjusted rate of return on the model for Vietnam's tax-included contract is similar to those for Indonesia and Thailand. The terms for Vietnam's tax-separate contract are tougher than those of the other two countries. This finding indicates that until oil prices fell in 1998, Vietnam was generally competitive with Indonesia and Thailand (assuming similar quality prospects). 2.23 Vietnam's rating relative to Indonesia and Thailand deteriorates with lower oil prices. At lower prices, the risk-adjusted real rate of return under Thai terms is higher than under Vietnamese terms-indicating that Thai terms are inherently more adaptive to lower prices. The same is true, though to a lesser extent, for Indonesian terms. 2.24 Vietnam's returns deteriorate more rapidly primarily because of the rapidly declining economics under the 50 million barrel case. The rapidly declining economics of the 50 million barrel case is caused by the low cost recovery limit-35 percent-for cost oil. A cost oil limit of 35 percent for oil priced at $20 a barrel means $7 a barrel. A 35 percent limit on cost recovery for cost oil at $12 a barrel is just $4.20 a barrel. Because oil from the 50 million barrel field costs $7.43 a barrel to produce, the costs are not fully recovered at $20 a barrel. And at lower prices the problem becomes much worse. 2.25 This problem can be studied by analyzing the undiscounted government take in table 2.2. At lower prices, the government take increases sharply for the 50 million barrel field. The smaller the field, the larger the relative government take. The same applies to the overall government take: it goes up with lower prices. This is the main reason Vietnam's oil contracts become much less attractive than those of Indonesia and Thailand. 2.26 Similar cost recovery problems do not occur in Indonesia and Thailand. At lower prices, the Thai govermment's revenue declines slightly instead of increasing. Thus the Thai terms self-adjust to lower prices. In Indonesia the government take remains largely the same at different prices. Thus the government take is not self-adjusting, but it is also not harmful (as in Vietnam). Other offshore areas 2.27 Tables 2.1 and 2.2 also compare Vietnam's prospects with other important offshore areas, including those of China, Norway, the United Kingdom, and the Gulf of Mexico. These other fiscal systems are much more robust in terms of lower prices. In some cases this occurs because of the lower government take; in other cases it occurs because the increase in government take with lower prices is not as pronounced as it is in Vietnam. If Vietnam would apply Chinese, British, or even U.S. terms to its offshore 20 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam production, the model target prospect would remain economic even if oil cost $12 a barrel. Comparison with others at high oil prices 2.28 At high oil prices the risk-adjusted real rate of return for tax-included contracts is higher in Vietnamese contracts than it is for Thai and Indonesian contracts. As would be expected, the government take in the Vietnamese contracts therefore is lower than in other areas. The Vietnamese tax-separate contracts, however, are still tougher at higher oil prices. The fiscal terms from other countries shown in annex 1 are more generous for the investors at higher oil prices with the exception of Norway, which allows a rate of return similar to Vietnam's tax-included contracts but has a higher government take due to state participation. The likely effect on Vietnam 2.29 The regressive nature of Vietnam's contract terms-and the fact that terms in other areas are less regressive or provide for a smaller government take-means that Vietnam is much less competitive than other counties at lower oil prices while the Vietnamese contract terms are more comparable to those of other countries at high oil prices. Thus oil companies will tend to invest in other countries over Vietnam during periods of low oil prices. Features-and failings-of Vietnam's production sharing contracts 2.30 Vietnam's tax-included contracts offer benefits for a country starting to engage in upstream oil and gas activities with foreign oil companies. These contracts are administratively simple and easy to implement. The basic contract is based primarily on a sliding scale-based on production-with a low cost limit. The cost control and verification operations of international oil companies are typically the most difficult part of a contract to administer. Still, the low cost limit ensures that even if a contract is poorly administered, the government still receives most of what it is due. 2.31 The cost oil limit also offers the advantage of income predictability-and Petrovietnam's income primarily depends on the price of oil. Thus, based on a specific assumption about the price of oil, the company's income stream is fairly easy to predict. This is another major advantage for a state company entering major offshore operations. 2.32 At the same time, tax-included contracts provide fiscal stability for investors. This is extremely important for investors because Vietnam is still gaining experience with suitable tax systems. For all these reasons, tax-included contracts were a good model for Vietnam to use in starting offshore operations. 2.33 One of the main problems with tax-included contracts, however, is that Petrovietnam is responsible for paying a number of taxes on behalf of the contractor to the government of Vietnam. In some cases these payments exceed the income flow from the contractor to Petrovietnam, placing Petrovietnam in a deficit position. The payments to the government include the contractor's royalties, export tax, and corporate income Are Vietnam's Oil Contracts Competitive? 21 tax. Petrovietnam has tried to address this issue by breaking out these items in the contract and making the contractor directly responsible for the payments. 2.34 Administering the royalty and export taxes is relatively easy. Administering the corporate income tax is more complex because it requires considerable knowledge from the administrators of petroleum operations. It also involves many issues that go beyond the administration of a profit oil share. 2.35 Petrovietnam and the government have tried to maintain the simplicity of tax-included contracts by simply calculating the corporate income tax on the same basis as the profit oil share-meaning that the corporate income tax is subject to the same cost limit as the profit oil share. This approach is possible because the tax calculation for each contract area is ring-fenced, so there is no difference between the areas used to allocate costs for cost oil and for taxation. 2.36 The way the corporate income tax is calculated creates possible tax creditability problems, however. Under certain circumstances all costs may not be recoverable, and signature loans and interest on loans are not deductible. This setup creates tax creditability problems in the home countries of the oil companies because it can be argued that the corporate income tax is no longer a tax on net income, since not all costs are deductible. As a result, international oil companies pay more tax than they should relative to Vietnam. 2.37 Tax-separate contracts are also administratively simple and allow for predictable income flows. However, the exclusion of the corporate income tax, royalties, and export tax significantly increases the fiscal risk to the contractor. 2.38 Selecting a contract model that is easy to administer can cause such contracts to be ineffective in dealing with a wide range of economic and technical factors. Such contracts are implicitly based on the assumption that the size of the oil field is the main factor affecting the economics of petroleum operations. Thus these contracts include the sliding scale based on daily production. But while field size has an important influence on the economics of an oil or gas field, many other factors also play a role. Oil and gas prices 2.39 Vietnam's petroleum contracts do not include provisions that are sensitive to movements in oil and gas prices. Thus, if the price of oil drops, the contracts quickly become uneconomic (see above). 2.40 Other fiscal systems are much more sensitive to changes in oil prices. Some contracts include self-adjusting mechanisms with respect to price. For instance, the payments required under Thailand's Special Remuneratory Benefit profit share are directly related to price movements. At low prices, the profit share automatically becomes zero. 22 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam Field size 2.41 Under Vietnam's petroleum contracts the size of the field is the only sliding scale affecting payments to government. But as noted, the typical Vietnamese sliding scale is not very sensitive to the changing profitability with field size. As a result, small fields remain largely uneconomic-while on large fields the government take is around the same level for all fields when oil prices are high. 2.42 The steps of the sliding scale are not sensitive enough. The first step of 0- 25,000 barrels per day is too large. It would be better to have a much lower first step- such as up to 5,000, 10,000, or 12,500 barrels per day. The percentage for profit oil on the first step is too high, and the percentage increases toward higher levels are too slow. A scale that slides over a wider range would encourage exploration and development over a wider range of field sizes. Well productivity 2.43 Vietnam's petroleum contracts do not include features that focus on well productivity-a shortcoming that affects profitability. An offshore well may produce from 200 to 10,000 barrels per day. Because drilling costs and well maintenance costs are essentially the same whether the well produces 200 or 10,000 barrels per day, the well costs a barrel could vary by a factor of 50. 2.44 The low cost recovery limit (35 percent) essentially prevents fields with low well productivity from being developed. The economics of tables 2.1 and 2.2 were based on well productivity of 1,000 to 1,500 barrels per day. If well productivity of 500 barrels per day had been used, the fields would have been uneconomic. 2.45 Because a significant share of the petroleum resource potential of any nation consists of reservoirs with relatively low well productivity, Vietnam's terms make this part of its resource potential uneconomic. Other nations automatically adjust for low well productivity. As noted, Thailand's Special Remuneratory Benefit is not payable when well productivity is low. China's production sharing contracts include a specific deemed interest feature that automatically lowers the profit oil share when well productivity is low. Well depth 2.46 Vietnam's contracts do not include features that are sensitive to well depth. Again, this is an important feature that affects profitability. Well costs increase exponentially with well depth. 2.47 Vietnam could have considerable petroleum potential in deeper formations of, say, 3,000 meters. In fact, current production from the White Tiger and Great Bear fields is from such deeper formations. 2.48 The economics of tables 2.1 and 2.2 were based on fields 2,000 meters deep. If the same analysis had been made for fields 3,000 meters deep, the fields would Are Vietnam's Oil Contracts Competitive? 23 have been uneconomic. Thus, Vietnam's terms make a large share of the deeper resource potential uneconomic. Water depth 2.49 Water depth also affects offshore economics. As a result many countries- Indonesia, Malaysia, Thailand, the United States-adjust fiscal terms for water depth. 2.50 The prime minister's decision of 7 November 1998 introduced the same concept in Vietnam (annex 3). This decision lowered the tax rate to 32 percent for deepwater areas and set a cost limit of 70 percent. Royalties are already sensitive to water depth. This decision is an adequate response to the water depth issue. Quality of oil or gas produced and of reservoir drive mechanisms 2.51 The quality of the oil or gas being produced and of reservoir drive mechanisms can have an important effect on the economics of an operation. Poor-quality oil or gas or poor natural water drive conditions make platform and facility costs much higher than when oil, gas, or reservoirs are of high quality. 2.52 Oil is considered to be of poor quality when it is heavy or has a high sulfur content. Heavy oil is typically considered that with a specific gravity higher than 0.9. Poor-quality gas is gas with a high content of carbon dioxide, sulfur, or other impurities. Many gas reservoirs in Vietnam produce gas with a high carbon dioxide content. 2.53 Around the world, there are few quality reservoirs outside the Middle East. Most reservoirs require water injection or gas injection to maintain reservoir pressure. This is also the case in Vietnam. 2.54 Most counties use the tax system to adjust for higher facility costs. That is, taxes are lower when facility costs are higher. The low cost limit (35 percent) used in Vietnam's tax system essentially creates a situation where fields with high facility costs become uneconomic. 2.55 Other countries also sometimes provide special incentives when facility costs are high, to encourage maximum recovery of the reservoirs and development of the widest possible range of fields. Indonesia and Norway use special uplifts for high facility costs, and China uses the deemed interest feature for the same purpose. Summary 2.56 Vietnam's typical contractual terms-presented for this analysis by Petrovietnam-lead to the following conclusions: * Vietnam deals effectively with variations in economic conditions resulting from water depth. Vietnam deals ineffectively with field sizes, essentially creating a situation where small fields remain uneconomic. 24 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam * Vietnam does not deal specifically with variations in economic conditions. In fact, by using low cost limits, Vietnam strongly discourages the development of fields that have low well productivity, deep wells, or high facility costs. In this respect it would be worthwhile to better define the prime minister's November 1998 decision (see annex 3). * Vietnam does not deal effectively with oil price fluctuation, so oil fields quickly become uneconomic when oil prices are low. 2.57 The second and third points above have extremely important implications. Even at $20 a barrel, Vietnam would not be encouraging development of much of its petroleum potential. A large portion of Vietnam's petroleum potential involves small fields with low well productivity, deep wells, or high facility costs. 2.58 In this respect Vietnam's fiscal policy is radically different from that of China, Indonesia, Thailand, and many other countries. Other countries use fiscal models that encourage the development of a much wider range of their resource potential. Thus in Vietnam, even at $20 a barrel, offshore activity can be expected to be much lower than that of its neighbors and many other countries facing similar circumstances. 2.59 To at least maintain its competitive position with other countries, Vietnam should take short-term steps to adjust existing contracts to accommodate for oil price fluctuation. For new contracts, if Vietnam wants to keep activity at an adequate level, the policy of maintaining easy-to-administer contracts should be adjusted to broaden the scope of petroleum resource development. Contracts will have to become more sensitive and sophisticated in order to deal with a wider range of economic circumstances, as well as oil price fluctuation. Implications for Administrative Costs of Low Oil Prices Impact of price declines on the petroleum industry 2.60 The systematic real drop in oil prices from the early 1980s to 1999 dramatically changed the petroleum business. The main strategy for petroleum companies to survive in that environment has been to dramatically cut costs. Costs can be cut in many ways. 2.61 Oil companies have focused on cutting overhead and management costs, with many slimming their staffs to less than half of what they were just 15 years ago. Smaller staffs mean that companies no longer have the personnel to amply evaluate new investment opportunities or engage in lengthy negotiations for small or high-risk investments or operations. 2.62 An important factor in lowering offshore costs is the need to significantly shorten the development time required between the first discovery of oil and gas and the start of production. Developing a commercial field for production used to take as long as Are Vietnam's Oil Contracts Competitive? 25 five years. Today, however, many companies have shortened this time to a matter of months based on floating production facilities. 2.63 This change has created a trend toward lower ratios of reserves to production. In the past it was not uncommon for companies to have 15 years of oil and gas production in terms of reserves. Today this has often been cut to just eight years. Impact of price declines on government regulations and contracts 2.64 The need to dramatically cut costs and shorten offshore development time has strongly influenced how companies evaluate regulations and contracts. In addition to fiscal terms, it is now of crucial importance for oil companies to select countries for investment where companies are permitted and encouraged to operate on a low-cost basis. As a result, companies strongly favor countries that offer: * Transparent decisionmaking * Simple exploration acreage award systems, preferably based on "one criterion" bidding * Minimum bureaucratic discretion, because such discretion causes time delays * Minimum procedural steps to reach commercial production * Modest information requirements and paperwork * Maximum flexibility in company decisionmaking. Bid award process 2.65 The bid award process is an important yardstick by which companies judge government administration. Tables 2.1 and 2.2 show the enormous impact of a $10 million bonus on the ultimate rate of return. 2.66 This impact is even more important for upfront negotiation and evaluation costs. Because companies only sign up for a fraction of the blocks they evaluate, upfront costs have a multiplier effect on the overall rate of return. Spending just $0.5 million per block evaluated may translate into $2 million per block granted if a company accepts only one in four blocks. 2.67 Thus higher upfront costs have a severe impact on project economics and corporate performance. It is for this reason that over the past ten years governments have increasingly adopted simple and transparent bid processes. Such processes involve: . Well-defined single contract areas (which could consist of various parcels), because offering proposals for multiple contract areas always requires negotiation. Well-defined single criterion bids, which allow the government to select the winning bidder immediately after bids are closed. Single criterion bids can be based on bonus bids, percentage factor bids (adjusting a sliding 26 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam scale profit oil with a specific percentage), royalty bids, work unit bids, or work amount bids. * A well-designed model contract with only a single "blank" to be bid. * Detailed and open bid procedures. * Where appropriate, a transparent prequalification procedure. * Equal access to information. * Reasonable time sequences that permit a fair evaluation and process on the part of bidders. The more Vietnam is able to move toward this type of bid award process, the more the upfront costs of investors will be reduced and the more Vietnam will be able to generate interest in exploring its petroleum potential. Moreover, a simple bid award process would considerably lower Petrovietnam's costs. Work units 2.68 A recent development is the application of "work units" during the bid process and for defining work obligations in a contract. Exploration commitments are usually stipulated in a contract based on minimum expenditure amounts or specific minimum programs (in terms of line-kilometers of seismic surveys or the drilling of wells to a specific depth). Work commitments in terms of minimum expenditure amounts are often difficult to verify because of the problems inherent in verifying exploration costs. Work commitments in terms of specific minimum programs are often difficult to define in a contract because at the time the contract is signed not enough may be known about the geology to design a specific program. 2.69 Under the work unit system, exploration commitments in the contract are stipulated in work units. This system solves the difficulties inherent in minimum expenditure systems and minimum work systems. 2.70 To implement a work unit system, a table of work units based on the approximate costs of certain exploration activities is developed. For instance, one line- kilometer of seismic surveys could be one work unit. For exploration wells, work units are determined based on a sliding scale relating the work units to the depth of the well. Based on this table, the phases of the exploration program can simply define the number of work units to be executed in each phase. Operators have full flexibility to implement the work program as they desire as long as they comply with the minimum number of work units. During the bidding process the winning bid is the one with the most work units for the first phase of exploration. 2.71 Each work unit has a specific value attached to it. If a work unit has not been performed during a phase of the contract, the operator must pay (as a penalty) the work unit that was not executed. 3 Options for Adjusting Fiscal Terms 3.1 This chapter explores ways of adjusting Vietnam's fiscal system to make it more competitive and more attractive to investment from international oil companies. Adjusting Existing Contracts to Reflect Low Oil Prices 3.2 Existing contracts that are similar to those considered in this analysis are not economically viable when oil prices are low. Thus a simple, modest, and equal adjustment should be made to all contracts to accommodate fluctuating oil prices. 3.3 The cost limit is the main factor requiring adjustment. The prime minister's November 1998 decision on difficult areas allowed the cost limit to be set at 70 percent. But at $10 a barrel, all of Vietnam's offshore areas can be considered difficult. Thus, one option is to introduce a sliding scale cost limit based on the oil price. All contracts could be easily adjusted using the following formula: ACL = CCL + (70 percent - CCL) * AF AF = (Max Price - Market Price)/(Min Price) 3.4 Here ACL means the adjusted cost limit; CCL means the cost limit in the contract not exceeding 70 percent; AF means the adjustment factor, which cannot be less than 0 or more than 1; Max Price means a WTI price of $20, adjusted for inflation; Market Price means the average price of WTI during the previous quarter, and Min Price means a WTI price of $10, adjusted for inflation. 3.5 For example, assume that the price of WTI is $20 a barrel. In this case AF is 0. Assume that the CCL is 35 percent in the contract. This means that at $20 a barrel the 35 percent cost limit in the contract simply stays at 35 percent. If the price of WTI is higher than $20, AF is 0 and the cost limit stays at 35 percent. 3.6 Now assume that the price of WTI is $10 a barrel and the cost limit in the contract is 40 percent. In this case AF equals 1. The cost limit automatically becomes the maximum cost limit of 70 percent. 27 28 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam 3.7 Finally, assume that the price of WTI is $12 a barrel and the cost limit is 35 percent. In this case AF equals 0.8. The cost limit is now increased by 28 percentage points, to 63 percent. 3.8 If the contract already has a cost limit of 70 percent, then the formula has no effect. 3.9 The overall reason for adjusting the cost limit is that approximately the same amount of costs can be recovered whether the price is $20 a barrel or $10 a barrel. For instance, with a cost limit of 35 percent at $20 a barrel, costs up to $7 a barrel can be recovered. At $10 a barrel, too, costs up to $7 a barrel can be recovered. 3.10 The economic effect of this measure can be seen in tables 3.1 and 3.2 (under "Suggestions for adjustment to current contracts"). The "Vietnam-tax included" contract now becomes "Vietnam-tax inc-WTI adj." This contract retains Vietnam's competitive parity with Thailand and improves it slightly relative to Indonesia. Therefore this formula would broadly achieve the objective of maintaining the competitiveness of Vietnam. 3.11 The economic impact on the "Vietnam-tax separate" contract can be seen under "Vietnam-tax sep-WTI adj." This contract was already uncompetitive at $20 a barrel. With the adjustment, the contract at least does not become less competitive at lower oil prices relative to Indonesia and Thailand. 3.12 With such adjustments, companies would no longer have an incentive to move investments from Vietnam to other countries in the region. 3.13 Vietnam would still be less attractive than, for instance, U.K. offshore. However, companies that signed contracts in Vietnam under the $20 a barrel scenarios did so accepting a higher government take relative to other countries. This was presumably done because Vietnam's resource potential was perceived to be more attractive. This differential is simply being maintained. 3.14 The WTI adjustment formula could be applied as a simple amendment to each contract. Nothing in the Petroleum Law or other regulations prevents such an amendment. Since cost oil and profit oil are determined each quarter, the formula could be based on the price conditions of the previous quarter. In this way the adjusted cost limit could be determined for the quarter under consideration. 3.15 The procedure would be simple. Petrovietnam could simply, for a limited period, offer contractors the opportunity to adjust all contracts based on a standard amendment clause. Companies could choose whether to accept this clause. Petrovietnam would not renegotiate contracts or amend other parts of them. Options for Adjusting Fiscal Terrns 29 Table 3.1 Overview of Competitive Situation in Vietnam-Rate of Return Based on Constant 1998 U.S. Dollars Comparison for oil Price ($per barrel) 20 20 20 20 16 16 16 16 12 12 12 12 Field size 50MM 150MM 300 EMV 50 150 300 EMV 50 150 300 EMV MM MM MM MM MM MM MM No govemment 377% 46.3% 49.2% 38.0% 29.1% 37.9% 41.1% 31.2% 18.4% 27.7% 31.5% 22.7% Vietnam-tax included 14.4% 21.4% 23.2% 13.9% 7.7% 16.1% 18 2% 9.7% NEG 8.6% 12.1% 4.0% Vietnam-no sign bonus 16.9% 23 % 24.3% 17.8% 9.5% 17.3% 19.1% 12.8% NEG 9 4% 12.7% 6.2% Vietnam-tax separate 8.2% 14.5% 16.3% 9.4% 1.0% 9.8% 12.0% 5.2% NEG 2.7% 6.7% NEG Thailand-Gulf 16.2% 17 3% 17.5% 13.7% 12.6% 14.3% 14.6% 10.9% 7 3% 10.6% 11.2% 7 4% China-offshore 24% 308% 325% 22.8% 17.8% 24.7% 26.7% 18.1% 10.0% 17.3% 19.7% 12.2% Indonesia-incentive terms 113% 172% 19.9% 12 8% 7.7% 13.2% 15.9% 9.5% 3.6% 8.6% 11.2% 5.6% U.K -offshore 29.9% 37.8% 40.7% 30.7% 22 5% 30.5% 33.8% 24.7% 13 5% 21 9% 25.5% 17.5% Norway 13.2% 193% 21.5% 14.9% 90% 15.0% 174% 112% 47% 10.3% 12.6% 7 1% U.S.-Gulfof Mexico 22.7% 30 1% 33 3% 21.4% 16.4% 23.8% 27.2% 16.6% 8.3% 16.1% 19.7% 10.5% <400m Suggestionsfor adjustment to current contracts Vietnam-tax inc-WTI adj 14.4% 21.4% 23.2% 13.9% 10.5% 17.2% 19.1% 10.5% 4 7% 11.6% 13.8% 6.1% Vietnam-tax sep-WTI adj 8.2% 14 5% 16.3% 9.4% 4.8% 10.9% 12.9% 6 3% 0.0% 6.1% 8.3% 2.2% Suggestion for new contracts Vietnam-tax adj-WTI adj 162% 18.9% 18.8% 13.4% 12.3% 15.8% 16.1% 10.8% 6.3% 11.0% 119% 67% Comparison for gas Price (S per mcf) 2.00 2 00 2.00 2.00 1.60 1.60 1 60 1.60 1.20 1 20 1.20 1 20 Field size 0 5 1 TCF 2 TCF EMV 0.5 1 TCF 2 TCF EMV 0.5 1 TCF 2 TCF EMV TCF TCF TCF Vietnam-tax included 13.8% 24.3% 26.2% 14.7% 7 6% 17.7% 20.3% 10.2% NEG 10.4% 13.6% 4.6% Vietnam-proposed 16 1% 25.4% 26.0% 15.6% 11.4% 20.7% 22.0% 12.4% 4.7% 14.4% 16.5% 7.8% Table 3.2 Overview of Competitive Situation in Vietnam-Undiscounted Government Take in Constant 1998 U.S. Dollars Comparison for oil Price (S per barrel) 20 20 20 20 16 16 16 16 12 12 12 12 Field size 50 MM 150 MM 300 MM EMV 50 150 300 EMV 50 MM 150 300 EMV MM MM MM MM MM No govemment 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0 0% 0.0% 0.0% Vietnam-tax included 71.4% 69.5% 71.3% 73.6% 80.5% 70.7% 72.0% 77.0% 108.1% 77.7% 74.0% 86.5% Vietnam-no signbonus 69 8% 690% 71 1% 71.5% 78 2% 70 1% 71.8% 74.0% 103.7% 76.7% 73.6% 81.7% Vietnam-tax separate 84.1% 79.7% 80.2% 82.9% 96.9% 81.6% 81.4% 87.0% 135.9% 942% 88.0% 101.4% Thailand-Gulf 71.4% 79.7% 82.8% 81.1% 69.9% 78.0% 81.6% 80.2% 70.7% 75.9% 80.0% 80.1% China-offshore 72.3% 73.2% 75.0% 74.6% 73.1% 73.5% 75.3% 75.3% 75.6% 74.3% 75.8% 76.9% Indonesia-incentive 810% 80.6% 80.4% 82.1% 82 1% 81.0% 80.6% 83 1% 85.1% 81.9% 81.0% 85.3% terms U.K -offshore 32.7% 31.8% 31.6% 32.4% 335% 32.1% 31.8% 33.0% 35.8% 32.8% 32.2% 34.3% Norway 85.7% 84.7% 84.6% 85.7% 86.6% 84.8% 84.7% 86.3% 87.9% 84.9% 84.7% 87.2% U.S.-Gulf of Mexico 49.1% 49.0% 48.7% 51.2% 52.4% 50.7% 49.9% 53.8% 61.5% 54.3% 52.4% 597% <400m Suggestionsfor adjustment to current contracts Vietnam-tax inc-WTI 71.4% 69.5% 71.3% 73.6% 73.5% 70.3% 71.9% 75.6% 79.9% 72.3% 73.1% 80.2% adj Vietnam-tax sep-WTI 84.1% 79.7% 80.2% 82.9% 90.0% 84.9% 84.9% 88.9% 99.9% 88.3% 87.1% 94.5% adj Suggestionfor new contracts Vietnam-tax adj-WTI 737% 78 1% 817% 810% 719% 75.8% 799% 79.9% 75.4% 75.1% 78.9% 81.2% adj Comparison for gas Price (S per mcj) 2 00 2.00 2.00 2.00 1.60 1.60 1.60 160 120 1.20 1.20 1.20 Field size 05 1 TCF 2 TCF EMV 0.5 1 TCF 2 TCF EMV 0.5 1 TCF 2 TCF EMV TCF TCF TCF Vietnam-tax included 53.2% 51.7% 54.5% 55.9% 66.5% 52.8% 55.1% 60.9% 109.0% 55.1% 56.2% 707% Vietnam-proposed 56.7% 57.2% 61.6% 61.2% 51.6% 51.3% 56.2% 56.5% 52.4% 45.8% 51.0% 54.4% 30 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam Defining Marginal Field Conditions and Difficult Economic Circumstances Marginal field conditions 3.16 The prime minister's November 1998 decision is of fundamental importance for the development of a wide range of marginal oil and gas fields. The decision should, however, define in more detail the concept of an "area of specially difficult geography, economy and technology" (annex 3, Article 1, sub 3). This concept should be applied in all cases where one of the following circumstances occurs: * Reservoir depth. Incentives should apply to oil and gas reservoirs in which the top of the producing reservoir is at least 2,500 meters below sea level. * Well productivity. Oil and gas fields that have low well productivity create especially difficult technical conditions. Average well productivity should be determined for these fields based on the total production of such fields divided by the number of active wells in such fields. Active wells are those that are involved in regular commercial production or that are regularly used for water injection or gas injection. For onshore areas, fields that produce less than 100 barrels per day equivalent should qualify as especially difficult. For offshore areas, fields that produce less than 500 barrels per day equivalent would also qualify. The equivalency of oil and gas can be determined on the basis of 10,000 cubic feet of gas per barrel of oil. v Low gas quality. Gas fields that produce low-quality gas should qualify for the incentives. Low-quality gas has more than 5 percent carbon dioxide, more than 1 percent sulfur, or more than 15 percent nitrogen. * Low oil quality. Heavy oil fields should qualify for the incentives. As noted, oil is typically considered heavy if it has a specific gravity of more than 0.9. v High-risk exploration. Any area that would represent high-risk exploration. Typically, these are any areas that are 25 kilometers or more from existing production. The geological risk rapidly increases for targets that are more distant from existing discoveries. At about 25 kilometers, one is typically outside the radius of prospects that can be characterized as satellite fields or "sister" structures of the original discovery. Therefore, these targets are usually high-risk. Any block outside such a radius should be an "incentive area." Marginal field conditions-and difficult economic circumstances 3.17 Where contract areas produce partially marginal oil and gas as well as partially economic oil and gas, the benefits provided under the November 1998 decision of the prime minister should be applied on a weighted average basis, based on the gross value of the marginal production and economic production. 3.18 Well productivity would typically decline toward the end of the field life. Thus the cost limit would be increased once the 500 barrels of oil per day limit was Options for Adjusting Fiscal Terms 31 reached. This approach would ensure that the reservoir would continue to produce oil even when costs are high. Defining Possible Future Contracts under Easy Circumstances Changes that can be implemented without amending the Petroleum Law or the decree implementing it 3.19 New contracts should be made more responsive to oil and gas prices, field size, well productivity, well depth, water depth, and the quality of the oil or gas produced and of the reservoir drive mechanism. Modest changes to Vietnam's tax-separate contracts could make them more effective in dealing with a wider range of petroleum resources. Such changes can be made within the framework of the Petroleum Law and the decree implementing the law. 3.20 The suggestions that follow are based on three principles: * Maintaining, to the degree possible, contracts that are easy to administer - Making changes to the concept of tax-separate contracts that are as modest as possible - Maintaining the production sharing concept as the primary model. 3.21 Although more profound changes could be recommended, they do not seem necessary to achieve desirable results. And while it is possible for Vietnam to pursue joint ventures, they are not recommended as a primary model, for reasons explained later. 3.22 A new contract outline could address the following elements. 3.23 Signature bonuses. Vietnam should be careful with signature bonuses, because such bonuses have a sizable effect on the risk-adjusted real rate of return of exploration prospects. This is because such bonuses need to be paid on the first day of the contract-before it is known whether a commercial discovery can be made. 3.24 Table 3.1 shows the effect of a $10 million bonus. At $20 a barrel such a bonus lowers the risk-adjusted real rate of return of the exploration prospect by nearly 4 percentage points-a massive reduction in profitability. Yet with a 150 million barrel discovery, a $10 million bonus costs just $0.067 a barrel. 3.25 Still, high bonuses make it impossible to secure a high government take from large discoveries. Companies resist providing an adequate profit oil share because the bonus has already lowered their rate of return too much. For these reasons, large bonuses are an inefficient mechanism for optimizing government income from upstream petroleum operations. It is strongly recommended that signature bonuses be limited to- at most-$3 million. 32 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam 3.26 Production bonuses. Current production bonuses are economically acceptable. No change is required in this fiscal component. 3.27 Royalties. The royalties provided for in chapter V of the decree regulating the Petroleum Law are adequate. No change is required in these royalties. 3.28 Production sharing. The overall concept of a production sharing contract should be maintained as well. 3.29 Cost oil. The general concept of a cost oil limit is acceptable and can be maintained. Cost oil limits ranging from 35 percent to 70 percent are economically acceptable. The concept of recovering cost oil based on costs as expensed is also adequate. 3.30 It is, however, strongly recommended that future contracts incorporate a price adjustment formula (as suggested above) so that Vietnam can avoid its current problems with contracts having a cost oil limit below 70 percent. 3.31 Profit oil definition. The concept of determining profit oil as total oil less royalties and cost oil is in accordance with international practices. 3.32 Profit oil sharing. On the sharing of profit oil, however, smaller fields should be made much more attractive. This can be done by including a much lower profit oil share for Petrovietnam for small fields. To illustrate, consider the scale shown in table 3.3: Table 3.3 Profit Oil Sharing Production level Petrovietnam Contractor 0-5,000 barrels of oil per day 10 percent 90 percent 5,001-10,000 barrels of oil per day 20 percent 80 percent 10,001-15,000 barrels of oil per day 30 percent 70 percent 15,001-20,000 barrels of oil per day 40 percent 60 percent 20,001-25,000 barrels of oil per day 50 percent 50 percent 25,001-50,000 barrels of oil per day 60 percent 40 percent 50,001-75,000 barrels of oil per day 62.5 percent 37.5 percent More than 75,000 barrels of oil per day 65 percent 35 percent 3.33 This scale is, of course, subject to negotiation and will vary by contract area. But the general principle of starting the scale at a low level for Petrovietnam for the first small increment of production is important. It strongly helps make marginal fields economic. 3.34 Profits tax (or corporate income tax). Several changes are recommended for the profits tax and its calculation: * The profits tax concept. The current concept of calculating the profits tax on the same basis as cost recovery levels should be abandoned. Instead, Options for Adjusting Fiscal Terms 33 the profits tax should be used as the main instrument for making contracts flexible in terms of low well productivity, deep wells, and high facility costs. Ring-fencing of the tax. The implementing decree stipulates that the contractor should be the taxpayer. This setup implies ring-fencing of the profits tax on a contract-by-contract basis. With a view toward stimulating easy administration and certainty of tax collection, it is acceptable to ring- fence contract areas for income tax purposes. (This is also still the practice in Malaysia and Indonesia.) In the future, however, Vietnam may want to review this matter (see below) when Vietnam considers amending the Petroleum Law. * Taxable income definition. Provided that our interpretation is correct, the definition of taxable income suggested in article 52 of the decree implementing the Petroleum Law seems acceptable. The total revenue, however, should be the revenue of the contractor (as per article 50)- meaning that contractors should not include in their total revenue the profit oil share paid to Petrovietnam. Thus the total revenue of the contractor should be the total revenue earned from the contract area less the profit oil share paid to Petrovietnam. -- Tax rate. Article 33 of the Petroleum Law permits the profits tax to be reduced under certain circumstances. Low oil prices are a reasonable justification for providing profits tax relief. Thus it is suggested that the profits tax rate of 50 percent be divided into two components: the base tax rate of 32 percent and a surtax rate of 18 percent. Moreover, based on article 33 of the Petroleum Law it is recommended that the government allow the surtax rate to be adjusted in accordance with oil prices based on the following formula: Surtax rate= 18 percent * AF AF = (Market Price - Min Price)/(Min Price) In this formula AF, Market Price, and Min Price would have the same meaning as in the previous formula. This means that when the price of oil is $10 a barrel, the tax rate would be 32 percent. When the price of oil is $20 or above a barrel, the tax rate would be 50 percent. In between, the tax rate would move gradually and linearly from 32 percent to 50 percent. * Deduction of costs. All costs incurred by contractors should be deducted as incurred. Vietnam could choose between two alternatives in this respect. It could follow the traditional method of dividing all costs into operating costs and capital costs and depreciating for capital cost items. In this case the depreciation for exploration costs (including exploration wells) could be 100 percent. The depreciation for oil and gas facilities and platforms could be 25 percent. The depreciation for other assets could be in accordance with the income tax law. Such levels of depreciation would 34 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam be internationally competitive and would stimulate reinvestment in the same contract area. Alternatively, Vietnam could adopt the free depreciation method. This method was introduced in the Netherlands to stimulate the development of marginal gas fields and optimize tax credit issues. Under this method there is no need to divide costs between operating costs and capital costs- meaning that all capital costs would essentially be expensed. But contractors would have the right to voluntarily depreciate at a rate lower than 100 percent. In Vietnam the procedure can be further simplified by stipulating that the costs that would be deductible for tax purposes would be the same as those allowable for cost recovery. Thus this method would be easy to administer. All costs approved for cost recovery by Petrovietnam could be deducted unless the tax authorities do not agree with the assessment by Petrovietnam and the contractor of recoverable costs. This deduction of costs is liberal relative to almost all other tax laws. But the great advantage of this procedure is that it is a simple way to encourage deep drilling, production of low-productivity wells, and development of difficult fields with high facility costs. Because all costs can be immediately deducted for corporate income tax purposes, no tax would be payable until the contractor has achieved payout. This beneficial arrangement will strongly encourage the development of a wider range of petroleum resources as well as reinvestment in the same contract area for the development of smaller fields. The profits tax procedure would replace more complex measures to encourage petroleum developments such as Thailand's Special Remuneratory Benefit, China's deemed interest, or Indonesia's uplifts. That contracts are ring-fenced for tax purposes would mean that contractors would start paying the profits tax four to five years after achieving payout, consistent with international practices. Depreciation rates of 20-25 percent in other countries are also based on the notion that it usually takes four to five years (from the start of production) to achieve payout. Another advantage of the free depreciation method is that companies can depreciate at a rate that is optimal relative to taxation in their home countries-providing an incentive for investing in Vietnam. 3.35 Export tax. The measure introduced (in the prime minister's decree of 7 November 1998) for the export tax in difficult areas should be extended to easy areas (that is, areas that are nonmarginal and easily explored in terms of water depth, field size, and productivity). It is not reasonable to ask companies to pay an export tax on a royalty that has already been paid to the government. Otherwise, the export tax would simply be payable as required. Options for Adjusting Fiscal Terns 35 3.36 Value-added tax. Vietnam's value-added tax provisions are unattractive to investors in the petroleum industry. Thus it is recommended that Petrovietnam pay these taxes (from its share of profits) on behalf of the contractor. 3.37 Fifteen percent Petrovietnam participation on a carried basis. The 15 percent participation rate set by Petrovietnam on a carried basis could be maintained. As discussed in chapter 5, joint ventures are not recommended at this time. But the notion of modest participation-such as that included in current contracts to help transfer know- how and technology to Petrovietnam-is worthwhile. 3.38 Economic results. The economic results of the suggested contract terms are shown in tables 3.1 and 3.2 (under "suggestion for new contracts"). At $20 a barrel the spread on the rate of return between the 50 million and 300 million barrel field ranges from 16.2 percent to 18.8 percent, instead of from 14.4 percent to 23.2 percent. Moreover, the government take from small fields increases from 71.4 percent to 73.7 percent-and the take from large fields goes from 71.3 percent to 81.7 percent. This structure prevents windfall profits while stimulating the development of small fields. Despite the much higher government take, the risk-adjusted rate of return is almost the same: 13.4 percent. This is because of the more favorable proposed tax system, which would allow investors to achieve payout before paying tax. 3.39 At lower prices the system responds in much the same as the Thai system. Vietnam remains strongly competitive with Thailand at low prices. What Thailand achieves with its Special Remuneratory Benefit, Vietnam would achieve with the price adjustment of the surtax rate and the cost recovery limit and the free depreciation concept for taxation. In this way Vietnam could achieve the same results as Thailand-with a contract that is easier to administer. 3.40 Although the revised contract terms are proposed to address problems related to low oil prices, the "new contract" is evaluated against high oil prices in annex 1. The table shows that for the three field sizes the rate of return to investors ranges from 21.9% to 23.5% at $25 a barrel and from 26.6% to 27.7% at $ 30 a barrel. The government take is around 80% for the larger fields. For the smallest field, however, it declines to around 71 % at higher oil prices due to lower profit oil split for small fields. Changes that would require amending the decree 3.41 The fiscal system could be changed in many other ways, but such changes would involve amending the decree implementing the Petroleum Law. 3.42 Deduction of bonuses. Production sharing contracts in Asia usually do not allow bonuses to be cost recoverable for production sharing purposes. But permit bonuses are usually allowed to be deducted for corporate income tax purposes. It would be preferable to avoid concerns about tax credits in investors' home countries. There is concern about the tax creditability of a corporate income tax that does not permit bonuses as a deduction for the determination of taxable income. 36 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam 3.43 In terms of the government take, the deduction of bonuses is rather irrelevant. The loss in government take is minimal and can easily be adjusted through a slightly higher profit oil share for Petrovietnam. Thus it is recommended that the decree be changed to allow the deduction of bonuses for profit tax purposes. Doing so would eliminate an important possible irritant for companies whose home countries (Australia, Canada, the United Kingdom, the United States) use the worldwide system of taxation. 3.44 Deduction of interest on loans. Again, it is common not to allow interest on loans as a cost-recoverable expense for production sharing purposes. But nearly all countries-except some Islamic ones-permit the deduction of interest for profits tax purposes. To be deductible, the interest has to be at market rates and the amount of the loans has to reflect sound commercial conditions. 3.45 Not deducting interest for tax purposes also raises tax credit issues. Vietnam puts itself at a competitive disadvantage by not allowing the deduction of interest for profits tax purposes. The inability to deduct interest from the profits tax makes it unattractive for companies to finance developments in Vietnam. This removes flexibility and so is a significant disincentive for investing in Vietnam. Therefore a fiscal system whereby the corporate income tax is calculated on the basis of the general corporate income tax rules is advantageous from the point of view of promoting investment. Under such a system interest would be a deductible expense. 3.46 Ring-fencing. The English translation of the Petroleum Law does not seem to require ring-fencing of each contract for profits tax purposes. The law distinguishes between an "organization or individual" and a "Contractor." The profits tax is payable by the "organization or individual." The word "Contractor" is not used in article 33 of the law. The concept that the tax is payable by the "Contractor" was introduced in the decree. 3.47 Ring-fencing limits companies' ability to make economic, incremental investments in unexplored parts of petroleum basins or in less attractive fields in the same contract area. Most countries stimulate the regional and full development of their resource potential through a 100 percent deduction (for profits tax purposes) of exploration costs. This means that exploration costs anywhere in the country can be entirely deducted from nationwide taxable income-providing a strong stimulus for exploration, because the deduction lowers the net after-tax costs of a dry hole with the tax rate. For example, if a dry hole costs $10 million and the tax rate is 35 percent, the incremental net after-tax costs for a company that is in a taxable position is just $6.5 million. This significant reduction in net after-tax exploration costs could provide a strong stimulus for new exploration. 3.48 Vietnam may determine that the level of exploration is not satisfactory. In that case the most important measure that can be recommended would be to abolish ring- fencing. To stimulate exploration in riskier parts of its basins, Vietnam could develop a policy in phases, as explained below: * Exploration blocks consisting of various parcels. Vietnam could fully retain the concept of ring-fencing but follow a policy whereby some Options for Adjusting Fiscal Terrm 37 parcels covering higher-risk parts of petroleum basins are included in the same contract area. This means that a single contract area would consist of several noncontiguous parcels; the parcels would include some highly attractive acreage and some less attractive acreage. This approach would allow the contractor to make incremental investments in the less attractive acreage once a commercial field has been discovered in the good acreage. A dry hole in the less attractive parcel would be recoverable for cost oil purposes against the commercial discovery because the parcel is part of the same contract area. This method would stimulate exploration in such areas. Cross-recovery of exploration expenditures. In the Philippines exploration expenditures made by the same contractor in a contract area not yet in production can be included in the cost oil of a contract area already in production. This approach can encourage exploration by the same contractor in higher-risk contract areas once the contractor has made a discovery. The main shortcoming of this method is that the ownership of different contract areas could interfere with this concept. For instance, it would be difficult to recover a dry hole from a contract area that is owned 50 percent by one contractor and 50 percent by another contractor from another contract area that is 100 percent owned by one of the contractors. -- Full removal of ring-fencing. The simplest, most practical way to remove ring-fencing is to adjust the decree and stipulate that the taxpayer is the "organization" or "individual" rather than the "Contractor," and that for every organization and individual, taxes will be based on the income and costs in Vietnam's upstream petroleum industry. This is how profits taxes are calculated in most countries. Moreover, this is the best method if the Government of Vietnam believes that exploration is too low. If the government decides to remove the ring-fence, and at the same time adopts the suggestion for the base tax rate and surtax rate indicated above, the consolidation would apply to all contract areas for the base tax rate and would apply only to the surtax for areas where the surtax was applicable. It should be noted that abolishing ring-fencing on a block-by-block basis does not necessarily imply the removal of ring-fencing for the upstream petroleum industry as a whole. The foreign investment law requires the corporate income tax to be calculated on a license-by-license basis. Therefore, ring-fencing could be maintained for the upstream petroleum industry as a whole depending on the level of consolidation permitted under investment licenses. Potential Enhancements to Make Oil and Gas Contracts Even More Flexible 3.49 The recommendations for existing and new contracts offered in this report would likely stabilize Vietnam's petroleum industry and increase interest in exploration. Still, it is useful to consider other ideas that could enhance the flexibility of contracts and discuss their possible use in Vietnam. 38 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam 3.50 None of the following ideas is being recommended because changes to the government take should not be too large or too sudden. All the ideas below would lower the government take. Any lowering of the government take should be done carefully 3.51 Of greater importance is first seeing how the petroleum industry responds to the recommendations offered above. There is no need to be more generous than is strictly necessary. Only when low activity by investors indicates that a further stimulus is necessary should the following list of ideas be considered. Uplifts 3.52 Indonesia's system of uplifts offers a useful model for stimulating the development of marginal oil and gas fields-provided the uplifts do not create a marginal incremental tax rate that is too high. An uplift of 20 percent of the capital costs related to developing an oil or gas field seems appropriate. This means that contractors would be allowed to claim 120 percent of these costs as cost recovery oil or gas instead of the normal 100 percent. This extra deduction has a strong effect on cash flow under high-cost conditions, and provides support for all conditions where development costs are high. 3.53 The system is easy to administer because it requires only a simple multiplication of all facility and development costs. This means that one would have to separate costs into capital costs and operating costs-not a difficult task. R-factors and rate of return sliding scales for profit oil 3.54 Some countries determine profit oil and profit gas based on R-factors or rate of return (ROR) sliding scales. This system attempts to correct some of the problems with the systems described above. Other fiscal systems are based on an anticipated relationship between proxies for profitability and actual profitability and use proxies instead of measured profitability. The advantages of a rate of return system are that it relates directly to the profitability of the project and automatically adjusts to changes in production, oil prices, costs, timing of cash flows, and capital costs. 3.55 The main problem with such scales is that they often inspire "gold- plating"-meaning that they induce the petroleum industry to become less interested in cost-effective operations. Companies can reduce the payments to be made to government by simply spending more. 3.56 In principle, the data required to administer contracts based on R-factors and rates of return are the same required for income tax purposes and for profit sharing. Under production sharing contracts, however, it is often claimed that contracts based on rates of return are difficult to administer because it is hard to control costs. To do so, the government must determine the level of profitability and costs. If an error is made in verifying costs, the loss in government revenues is considerable because it affects the level of approved costs as well as the corresponding reduction in approved profits. This "double effect" creates conditions of possibly severe reductions in government revenues. Options for Adjusting Fiscal Terms 39 3.57 Interestingly, Thailand's Thai Special Remuneratory Benefit is an exception. The benefit's special profit share is based on an R-factor. The R-factor is the ratio between the annual revenues from the project and the cumulative number of meters drilled (plus a constant). Thus, when higher revenues are obtained per well, the Special Remuneratory Benefit is higher. 3.58 The R-factor is based on revenues and meters drilled, so there is no double-counting effect. It is, however, a proxy for profitability. Allowances 3.59 Instead of uplifts, simple allowances could be provided for specific difficult conditions. For example, cost oil or cost gas could include certain extra deductions for marginal operations-say, a $0.10 per MMBtu allowance in the cost oil for gas produced from reservoirs deeper than 2,500 meters. Or the allowance could be based on a sliding scale. Allowances are even easier to administer than uplifts and do not increase an error if costs that are being approved are too high. One drawback, however, is that allowances are less flexible than uplifts. Profit oil or gas based on cumulative production 3.60 Instead of determining the sliding scale on daily production, the scale can be determined on cumulative production. This is the option used in Angola and Pakistan. The cumulative scale offers projects the advantage of being "back-end loaded," allowing investors to first recover their investment before making large payments to the government. This makes projects more profitable. Deemed interest 3.61 China's deemed interest feature provides automatic 9 percent interest on 100 percent of the development expenditures for cost oil or cost gas. This mechanism has an impact similar to that of sliding scales based on rates of return. But it is difficult to administer and increases the likelihood of errors in cost control, so it is not recommended for consideration in Vietnam. 4 Gas Terms Alternative Strategies for Gas Prices and Fiscal Systems 4.1 Unlike the fiscal systems used for oil, fiscal systems for gas are often considered in conjunction with the price of gas. This is particularly the case where both are being negotiated at the same time or as part of the same sequence of events. In this respect, three options are explored: * Packages. It is possible to negotiate a specific package of gas prices, pipeline tariffs, and fiscal terms for a gas field or fields that would result in a reasonable sharing of benefits between Vietnam's government and private investors. * Government price fixing. Another strategy would be for the government to simply fix gas prices at the "city gate." For example, prices could be fixed at 75 percent of the energy equivalent of the crude oil price. Subsequently, the government could negotiate the fiscal terms for various gas field developments. * A flexible fiscal formula. The government could allow producers to freely negotiate gas prices. Packages 4.2 In many cases governments start off gas market developments by negotiating a package of fiscal terms, prices, transport tariffs, and the like. This is the process being followed in Vietnam with respect to the Lan Tay/Lan Do situation. 4.3 Vietnam could follow the same process with the next project or the following projects. Eventually, however-once it becomes necessary to add gas production projects on a regular basis-this setup could lead to an unstructured and chaotic situation. One field might have a gas price of $2.25 with a profit gas split of 51/49. The next field might have a price of $3.25 with a profit gas split of 80/20. 4.4 The government's interests in each field would be reasonably protected if Vietnam were able to negotiate an optimal package for each case. But overall gas development could be hampered by the need for long negotiations every time a new field 41 42 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam goes onstream. It might be preferable to sharpen the policies guiding the development of Vietnam's gas reserves. Doing so would send a clearer message to investors. Government price fixing 4.5 Another strategy would be to adopt a system where the government simply fixes the gas price-as is being done in the Arab Republic of Egypt and Pakistan. In this case the best procedure would be to fix the price relative to the price of crude oil or fuel oil. 4.6 One possibility would be to fix the gas price onshore for large users and at the city gate at 75 percent of the value of possible imported crude oil. (Crude oil is not actually being imported; thus this would be a hypothetical calculation.) For instance, if the import price of crude oil were $18 a barrel, the price of gas would be $2.25 per MMBtu. 4.7 This price would be competitive with other possible energy sources, leading to rapid expansion in the use of gas in the Vietnamese economy. Rapidly developing the domestic use of gas would benefit Vietnam. The price could then be combined with a simple fiscal package. 4.8 The main advantage of a relatively low fixed gas price is that it could stimulate the use of gas in the economy. In addition, the setting of a specific gas price would make the negotiations for developing gas fields much easier. It would create a clear framework in which investors can decide whether to appraise and continue to explore further gas fields. 4.9 The main disadvantage of a fixed gas price is that it makes the government or Petrovietnam responsible for paying producers and marketing the gas. Petrovietnam may not have the experience and ability to market the required gas volume as it comes onstream, or it may not be able to finance gas distribution infrastructure. In addition, prices may be set at a level that is inconsistent with the market situation. The level may be set too high if large new low-cost gas reserves are discovered that could be introduced in the market at much lower prices, stimulating gas development. Similarly, the price level could be set too low if it turns out that further gas reserves are relatively costly and can only be developed for high-price markets. 4.10 The problem with fixing a price is that it eliminates the flexibility offered by gas markets with freely negotiated prices. Such markets can develop more sophisticated price-volume relationships, provide interruptible and noninterruptible gas deliveries, and apply other variations of gas contracts that a fixed-price regime does not provide. Fixing the price of gas is always somewhat risky and may unduly limit the flexibility that may be required to introduce gas into the market. 4.11 A flexible fiscal formula allowing producers to freely negotiate gas prices with buyers could create a gas industry that is competitive in the long term. The fiscal system would be based on a formula, however, to provide for a reasonable government Gas Terms 43 take under a wide range of price scenarios. This more flexible fiscal system would encompass a wider range of economic cost and development scenarios. This is essentially the same recommendation as has already been made for oil. This option is discussed in much greater detail below. New Terms for Gas The international situation 4.12 Because gas is costly to transport, the world's gas markets are largely regional or continental. Each market has its own pricing system. In general, the world can be divided in two types of areas: * Areas with a low ratio of reserves to production (8 to 20 years of production). Examples include North America and Western Europe * Areas with a high ratio of reserves to production (50 to 300 years of production). Examples include Indonesia, Russia, and the Middle East. 4.13 In areas with a low ratio of reserves to production, the fiscal terms for oil and gas are. usually the same. For instance, royalties are the same for oil and for gas. If the royalties include a sliding scale based on volume, the sliding scale for gas is typically based on the energy equivalent of gas for oil. 4.14 In areas with a high ratio of reserves to production, the fiscal terms for gas are often based on a lower government take than for oil. The government take differential is often directly proportional to the difficulties of marketing gas. Differences in the government take between oil and gas are considerable-ranging from 0 percentage points in North America and Western Europe, to 15 percentage points in Australia and Trinidad and Tobago, to 30 percentage points in Indonesia, to 45 percentage points in Qatar. 4,15 This means that in North America the government take is the same for oil and for gas. In Australia the government take for gas is 15 percentage points less than it is for oil. In Indonesia the differential is typically 30 percentage points, although for the high-cost Natuna gas field development the differential is closer to 40 percent. In Indonesia the differential for the upstream terms is further complemented by the fact that the government provides support for the construction of plants producing liquefied natural gas. What is clear is that many governments in countries with high reserves- production ratios take strong steps to make their gas economic relative to oil, taking into account the more difficult marketing situation. 4.16 Vietnam has a high ratio of reserves to production. Thus it should follow the overall international approach of supporting gas development through a fiscal system that is more attractive to investors-one with a smaller government take. Methods to introduce more affractive fiscal terms for gas 4.17 Countries use many different methods to make fiscal terms for gas more attractive than for oil. What follows is a brief review of the main methods being used. 44 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam 4.18 Separate royalty rates. Many countries stimulate gas development by charging lower royalties for gas. Vietnam follows this strategy as well, in the decree implementing the Petroleum Law. Thus the concept of stimulating gas development with more attractive fiscal terms is already part of Vietnam's policy. 4.19 Not applying certain taxes to gas. Australia, Malaysia, and Trinidad and Tobago simply do not apply certain taxes to gas. In Australia the excise tax does not apply to gas. Malaysia does not apply the export tax to gas. In Trinidad and Tobago the Special Petroleum Tax and petroleum levy do not apply to gas. 4.20 Lower profit gas share. Indonesia and several other countries using production sharing contracts apply lower profit gas shares to government than profit oil shares. In Indonesia the difference is quite significant. 4.21 Higher cost gas limit. Malaysia's government applies a higher cost gas limit than oil (see above). 4.22 Lower additional profits tax. Papua New Guinea's government applies a lower additional profits tax to gas than to oil. 4.23 Special conversion factors. Based on energy content, about 6,000 cubic feet of gas is equal to one barrel of oil. But to support gas development, some nations use a higher conversion factor-such as 7,000 cubic feet in Colombia and 10,000 cubic feet in Pakistan-to apply sliding scales or make certain allowances. 4.24 R-factors and rate of return systems. Some nations-Colombia, Peru, Russia, Thailand-base sliding scales on R-factors or rate of return indicators. Such systems automatically apply a more attractive scale for gas than for oil because R-factors and rate of return indicators are typically lower for gas projects than for oil projects. With Thailand's Special Remuneratory Benefit, gas prices on an energy equivalent basis are typically lower than oil prices, resulting in a lower benefit (assuming similar wells and well productivity). 4.25 High depreciation rates for pipelines. Another way to stimulate gas development is to make gas transport tariffs as low as possible, though they should still cover costs. This can be done with attractive depreciation rates for pipelines in the corporate income tax calculation. Bolivia has followed this approach. Suggested terms for gas in Vietnam for easy areas 4.26 Description of terms. The following describes possible new terms for gas in Vietnam for easy areas: * Signature bonuses. Signature bonuses are paid before it is known whether there is a discovery. Thus there are no special considerations for gas. For oil, it is strongly suggested that signature bonuses be limited to (at most) $3 million. Gas Terms 45 * Production bonuses. Current production bonuses are consistent with practices in other part of Asia. No change is required in this fiscal component. * Royalties. The royalties provided for in chapter V of the decree regulating the Petroleum Law are adequate, and no change is recommended. The royalty scale included in the decree is consistent with international royalty levels. The sliding scale, in fact, results in royalties that are somewhat lower than the international average of 10-12.5 percent for small fields. * Production sharing. The concept of a production sharing contract should be maintained. Joint ventures should not be pursued at this time. * Cost gas. The general concept of a cost gas limit is economically acceptable and can be maintained. But it is strongly recommended that the cost gas limit be made higher than for oil. The reason is that costs as a percentage of revenues in the first phase of a field's development are usually higher for gas than they are for oil. This is because the gas price is lower on an energy-equivalent basis and the amount of gas produced as a percentage of reserves in the first five years of production is usually less than it is for oil. Thus, cost gas limits should aim at 70 percent rather than 35-70 percent. The concept of recovering cost gas on the basis of costs as expensed is also acceptable for gas. Future contracts should incorporate a price adjustment formula (as suggested above for oil) to raise the cost gas limit when gas prices are low. The same formula can be applied as the one used for oil: ACGL = CCGL + (70 percent - CCGL) * AF AF = (Max Gas Price - Market Gas Price)/(Min Gas Price) Here ACGL means the adjusted cost gas limit, CCGL means the cost gas limit in the contract not exceeding 70 percent, AF means the adjustment factor (which cannot be less than 0 or more than 1), Max Gas Price means the gas price at the measurement point in the contract area of $2 Mcf adjusted for inflation, Market Gas Price means the average gas price at the measurement point in the contract area, and Min Gas Price means the gas price at the measurement point in the contract area of $1 per metric ton adjusted for inflation. The price levels of $2 and $1 Mcf are merely examples and would require further analysis before definitive levels can be suggested. * Profit gas definition. The concept of determining profit gas as total gas less royalties less cost gas is consistent with international practices. * Profit gas sharing. On the sharing of profit gas, gas should be made more attractive than oil relative to the profit oil sharing proposed earlier. For instance, the scale shown in table 4.1 could be used as an example: 46 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam Table 4.1 Profit Gas Sharing Production level Petrovietnam Contractor 0-100 MMcft per day 10 percent 90 percent 10 1-150 MMcft per day 20 percent 80 percent 151-200 MMcft per day 30 percent 70 percent 201-250 MMcft per day 40 percent 60 percent 251-300 MMcft per day 50 percent 50 percent 301-400 MMcft per day 55 percent 45 percent More than 400 MMcft per day 60 percent 40 percent Again, this scale is subject to negotiation and will differ by contract area. But the general principles of starting the scale at a low level for Petrovietnam for the first small increment of production and making it lower for gas than for oil are important. These concepts will help make marginal gas fields more economic and introduce gas in the market at lower prices. * Profits tax. The same concepts apply to oil and gas for the profits tax concept, ring-fencing of the tax, taxable income definition, and deduction of costs. D Tax rate. As it is with oil, article 33 of the Petroleum Law should be applied to permit a reduction of the gas tax under special circumstances. Among other circumstances, low gas prices are a reasonable circumstance for providing profit tax relief. Thus it is suggested that the surtax concept also be applied to gas, as follows: Surtax rate = 18 percent * AF AF = (Market Gas Price - Min Gas Price)/(Min Gas Price) Here AF, Market Gas Price, and Min Gas Price have the same meaning as in the previous formula. This means that for a gas price of $1 Mcf the tax rate would be 32 percent. For a price of $2 Mcf the tax rate would be 50 percent. In between, the tax rate would move gradually and linearly from 32 percent to 50 percent. In case the surtax rate applies to oil, the oil surtax and gas surtax would be calculated on the proportional share of the taxable income based on the ratio of gross revenues for gas and for oil. * Export tax. No export tax applies to gas exports. This situation should be maintained, with a stipulation in contracts that if an export tax for gas were applied, Petrovietnam would be responsible for discharging such a tax on behalf of the contractor. * Value added tax. Petrovietnam should pay the value added tax on behalf of the contractor from its profit share. The uncertainty about the exemption of export gas and export crude oil is a major issue in contract economics and is discussed in more detail in chapter 5. Gas Terms 47 Fifteen percent Petrovietnam participation on a carried basis. To make exploration for gas more attractive, the policy established with the Lan Tay/Lan Do negotiations should be maintained. Carried interest should not be applied to gas or gas-condense projects. 4.27 Economic results. Again, the economic results of these terms can be seen in tables 3.1 and 3.2 ("comparison for gas"). In general, under the current system the government take would go down with higher gas prices. Small gas fields (0.5 Tcf) would result in a high government take, making such fields unattractive to investors. The proposed system results in a higher government take with higher prices. It also results in a higher government take on larger gas fields. This system would make small gas fields relatively economic. 4.28 The risk-adjusted rate of return on the basis of the $1.60 per Mcf gas price is much higher under the proposed system. This creates the "space" to negotiate lower prices at the platform while maintaining acceptable project economics. Possible future modifications 4.29 The same possible future modifications that were discussed for oil also apply to gas. The interest deduction for tax purposes is extremely important for gas because gas projects are usually financed by more debt than are oil projects. Thus, not permitting an interest deduction for tax purposes is a strong disincentive for gas development relative to oil development. In addition, the complete removal of ring- fencing would enhance gas exploration and development. 5 Other Issues Joint Venture Contracts and Production Sharing Contracts 5.1 The Chinese petroleum fiscal system, which includes a carried interest of 51 percent, was illustrated in chapter 3 (tables 3.1 and 3.2). China has emphasized the participation component in the contract and de-emphasized the production-sharing component. Some countries follow petroleum arrangements that do not include production sharing and include only participation. 5.2 Tables 3.1 and 3.2 also show how the Chinese model is rather attractive to investors. The combination of relatively low royalties, a low tax rate, and low profit oil shares with a high (51 percent) carried interest creates an attractive economic situation for investors. In fact, the government "buys" its own take. Without the 51 percent carried interest, the government take would be relatively low in China. For the $20 a barrel example, the government take without the participation would be just 43 percent for a 50 million barrel field and 49 percent for a 300 million barrel field. The low government take prior to any participation creates attractive economics for investors. 5.3 China followed the policy of a low government take prior to participation because it has always been concerned about being self-sufficient in oil. Thus China is willing to reduce the government take prior to participation in order to enhance economics to private investors. 5.4 China's policy cannot be recommended for Vietnam. The Vietnamese government urgently needs the revenues that can be derived from oil and gas production. Thus Vietnam is not in a position to "give away" the government take prior to participation. Moreover, Vietnam is not in a sufficiently strong financial position to contribute through Petrovietnam the 51 percent share of the development expenditures of oil fields, either as share capital in a joint stock company or directly in a joint operating agreement. 5.5 Vietnam should focus on attracting foreign investment to the maximum number of sectors in the economy where foreign investment can play an effective role. The oil and gas industry is one such sector. Thus, limiting foreign investment by reducing the role of foreign investors in oil and gas is counterproductive in a broader strategy. 49 50 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam 5.6 Rather than investing 51 percent in oil and gas field development, Vietnam should attract foreign investment to these sectors and use its financial resources for investments in other sectors where foreign investment cannot be effective or is not desirable. Such a policy maximizes Vietnam's overall growth potential. Thus, it is more effective to take a variety of other measures, as indicated in this report, to increase profitability to foreign investors while continuing to require them to contribute 85 percent of the development costs. Value Added Tax General structure of the Value Added Tax Law 5.7 The general structure of the Value Added Tax Law and its regulations is very much in line with international practices. The law and the regulations are clearly drafted. The law and regulations as promulgated constitute a fair and important tax that will make a sizable contribution to the revenue requirements of the Vietnamese government. Impact on exploration and development 5.8 The Value Added Tax Law includes a significant refund mechanism that applies to the exploration phase. Any excess of input value added tax over output value added tax is being refunded (on a quarterly basis) pursuant to article 16 of the law. This important principle is consistent with international practices. 5.9 The setup avoids having companies that are in the exploration phase of oil and gas, without any revenues, being burdened by a value added tax that would be unrecoverable if the exploration is unsuccessful. (This problem occurs with the value added tax in several developing countries that do not have a refund mechanism and instead use an indefinite carry-forward system of value added tax credits). 5.10 In the case of development of oil and gas fields, prior to the period of any revenues being earned, the same principles apply to development as they do to exploration. Thus, again, there does not seem to be any concern about this aspect of oil and gas development. 5.11 The only lingering concern-for both exploration and development-is that the Vietnamese government may be slow in refunding the amounts due. The regulations are not very specific about when the refunds are due. Impact on production 5.12 Article 4, subsection 25 of the Value Added Tax Law includes an unusual clause indicating that the export of certain natural resources (as stipulated by the government) may be exempted from the value added tax. It is not possible to claim input value added tax refunds or deductions against the sale of an exempted product. Such exemptions are unusual because normally all exports of goods and services are zero rated. Other Issues 51 5.13 The regulations state that crude oil is one of the exempted products. Yet natural gas is zero rated. This setup implies that the input value added tax of a company exporting crude oil cannot be refunded or deducted. Yet a company exporting gas can deduct its input value added tax and/or receive a refund. 5.14 A company partially exporting crude oil and partially selling crude oil in the domestic market will have to apportion its input value added tax. Only the percentage of the input tax that corresponds with the percentage of the domestic sales would be deductible. The same applies to partial exports of crude oil and natural gas. 5.15 This provision has a sizable impact on companies that export crude oil production. It means that the input value added tax on operating costs as well as further incremental exploration and development cannot be recovered. This essentially increases costs by 10 percent for cost components that are subject to a value added tax rate of 10 percent. On average, the cost increase will be less than 10 percent, depending on the amount of imported equipment that cannot be produced in Vietnam, which is not subject to the value added tax. 5.16 Contractors that have production sharing agreements with Petrovietnam that call for Petrovietnam to pay all taxes not specifically mentioned in the agreement will now ask Petrovietnam to pay this value added tax on their behalf. In future contracts, Petrovietnam may not have any choice but to continue to offer to pay the value added tax on the contractor's behalf. Such a clause would be especially necessary because of the financial risk associated with the fact that the government may also decree that gas exports are exempted, creating the same problem for gas production. 5.17 Thus, the end result of the crude oil exemption is that Petrovietnam will have to pay the government more from its revenues. It is beyond the scope of this report to judge whether such an additional burden on Petrovietnam is desirable or undesirable. 5.18 However, concern should be expressed with respect to article 4 of the law and the regulations. The creation of uncertainty with respect to the value added tax related to oil and gas exports adds to the concern about fiscal stability and the concern about the ability of Petrovietnam to discharge its obligations to government. Impact on own use of oil and gas 5.19 Specific rules relate to the application of the value added tax to the use of oil and gas in production in Vietnam. This item seems to contradict the law. 5.20 Any use of oil or gas in the operations of a contractor for energy purposes or otherwise is simply part of the production process and so is not subject to the value added tax because no purchase or sale is taking place. Nor can it reasonably be deemed that a transaction took place that otherwise would have been a purchase or sale or is an exchange. The use of raw natural gas in petroleum production operations is a normal part of petroleum production. It is no different from the own use of refinery gas by a refinery or the own use of coal by a coal producer. Thus the own use of petroleum in petroleum 52 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam operations should not be exempted or subject to the value added tax. It simply does not enter into the value added tax calculation because it does not relate to an activity that is a purchase or sale or can be deemed to be a purchase or sale. 5.21 In the unusual event that one contractor would sell gas to another contractor for energy use or for reinjection, such a transaction should be considered a sale and should be subject to the value added tax. Impact on refining 5.22 Gasoline is subject to consumption taxes. Products that are subject to consumption taxes are exempt from the value added tax. Thus there are two impacts on refining: * Petrovietnam would have a stronger incentive to build a refinery and use its Vietnamese crude in the refinery because this would be the best way to reduce unrecoverable input value added tax. * Because gasoline is exempt, the refinery will be unable to recover part of its input value added tax. 5.23 Some concern should be expressed about the fact that the value added tax considerably distorts the economics of the refining operation. The refinery may simply be economic for the sole purpose of recovering otherwise unrecoverable input value added tax. 5.24 The tax would also considerably distort the crude selection. Petrovietnam would have an overwhelming incentive to use Vietnamese crudes in the refinery even if using foreign crudes would otherwise be more profitable. None of these factors is helpful in creating a transparent and competitive downstream sector. Unitization 5.25 Unitization is a separate issue that also requires consideration. Unitization is sometimes required when the same oil field covers two or more contract areas with different operators or fiscal terms. It is only necessary when: * The unified development of the oil or gas field results in better management of the reservoirs, resulting in a higher recovery factor. * The unified development of the oil or gas field results in lower costs. 5.26 In North America oil or gas fields often cover different lease areas, and the authorities often do not require unitization. Unitization is not required when the overall recovery of oil or gas from the reservoirs is not affected by whether the field is developed separately or unified. 5.27 For example, in certain oil reservoirs with low-productivity wells, the production of any wells in a certain lease may not affect the production of other wells in a Other Issues 53 neighboring lease. This is the case if the "drawing radius" of the well is relatively small-say, 100 meters. This means that the production from the well only results in a recovery of oil from a 100 meter radius. In such a case unitization is not necessary. The wells can be produced and the leases can be produced as individual units without affecting the overall recovery, so long as both producers comply with the conservation rules applicable in the jurisdiction. 5.28 Another example could be a dry gas field. The production of a gas well in one lease may affect the gas reservoir in a neighboring lease. But the production of gas from the well may not lower the overall recovery factor. This means that both leases can produce gas at the rates stipulated by the conservation authorities without affecting the overall recovery factor from the reservoir. Again, unitization is not necessary. 5.29 If one of the leaseholders does not drill a gas well or gas wells, the gas will be drawn from his lease by the neighboring leaseholders. No compensation is necessary for the extra gas production that the neighbors produce. Thus a leaseholder who does not drill the respective wells may lose all or part of his gas reserve without being able to get compensation for this loss. 5.30 In offshore areas unitization is often desirable regardless of whether it is necessary for maximum recovery purposes. The main reason is that unified development typically reduces operating and capital investment costs, because one might be able to produce the field with fewer platforms and facilities. For this reason, governments often require unitization. In addition, companies sometimes engage in voluntary unitization. 5.31 The unitization process usually involves the following steps: - Operator A may initiate the unitization procedure by making a proposal to operator B to start unitization discussions. * Operators A and B may decide to unitize voluntarily. * Once the negotiations have been concluded and an agreement has been reached, the agreement is presented to the govenmment for approval. 5.32 Government approval is particularly necessary if fiscal terms differ between contract areas. Because many production sharing contracts are based on sliding scales, the level of profit oil in each contract area is affected by the production in each area. Companies could reduce the profit oil or gas to government by agreeing to allocate more of the production to the contract area with the most beneficial sliding scale. The government should verify that this has not happened. Moreover, the government must verify that the agreement maximizes the economic recovery of the reservoirs. 5.33 If the two operators fail to agree on a unitization agreement, or if one of the operators is unwilling to negotiate, the government may require unitization and order the operators to start the process. If the operators cannot agree, the government may impose an agreement on the two parties. 54 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam 5.34 A unitization agreement usually takes a year or two to negotiate. This delay in development is costly for the operators and for Vietnam. Thus unitization should only be ordered or imposed when the government is convinced that it is necessary. 5.35 A special case is unitization across an offshore boundary. In this case, the unitization process should be in accordance with the international agreement concluded between the respective country and Vietnam. Annex 1: Overview of Competitive Situation for Oil in Vietnam-Oil Prices at $12-30 a Barrel Rate of return based on constant 1998 U.S. dollars Price (S per barrel) 30 30 30 30 25 25 25 25 20 20 20 20 12 12 12 /2 Field size 50MM 150MM 300 MM EMV 50MM 150MM 300MM EMV 50MM 150 MM 300 MM EMV 50MM 150 MM 300 MM EMV No government 54.5% 63.0% 65 1% 51.2% 46.8% 553% 57.7% 452% 37.7% 463% 49.2% 380% 184% 277% 31 5% 227% Vietnam-tax included 246% 31.7% 33.0% 21 5% 20.0% 26.9% 284% 18.0% 14.4% 21.4% 23.2% 13.9% NEG 8.6% 12.1% 4.0% Vietnam-no signbonus 285% 34.4% 34.8% 27.1% 23.2% 29.1% 298% 22.8% 169% 23.% 243% 178% NEG 9.4% 12.7% 6.2% Vietnam-tax separate 175% 23.7% 25 1% 166% 133% 194% 21.0% 132% 8.2% 145% 163% 94% NEG 2.7% 67% NEG Thailand-Gulf 227% 23.0% 23.3% 18.8% 198% 203% 20.6% 164% 16.2% 17.3% 175% 13.7% 73% 106% 11.2% 74% China-offshore 36.0% 430% 44.2% 32 1% 30.5% 373% 38.7% 27.8% 24.% 30.8% 32.5% 228% 10.0% 17.3% 197% 12.2% Indonesia-incentive temis 190% 25.6% 28.3% 197% 15.3% 21.6% 243% 16.5% 11 3% 17.2% 19.9% 12 8% 3 6% 8 6% 11.2% 5.6% UK -offshore 442% 523% 547% 422% 376% 45.6% 48 2% 36.9% 29.9% 378% 40.7% 3077% 13.5% 219% 25.5% 175% Norway 212% 27.8% 30.0% 22.0% 175% 238% 26.1% 18.7% 13.2% 19.3% 21.5% 14.9% 47% 103% 126% 7.1% U S.-GulfofMexico <400m 34.7% 42 5% 454% 305% 29.2% 36.8% 398% 26.3% 22.7% 30.1% 33 3% 21 4% 8 3% 16.1% 19.7% 10.5% Suggestionsfor adjustment to current contracts Vietnam-tax inc-WTI adj 254% 324% 335% 21.8% 208% 27.7% 291% 18.4% 144% 21.4% 232% 139% 47% 116% 138% 61% Vietnam-tax sep-WTI adj 18-% 245% 257% 170% 142% 203% 21 7% 13.8% 82% 145% 16.3% 94% 00% 61% 83% 22% Ul LJI Vietnam-tax adj-WTI adj 254% 32.4% 33.5% 21 8% 208% 277% 29.1% 184% 162% 189% 188% 13.4% 63% 11 0% 11.9% 67% Undiscounted government take in constant 1998 U.S. dollars Price (S per barrel) 30 30 30 30 25 25 25 25 20 20 20 20 12 12 12 12 Field size 50MM /50 MM 300 MM EMV 50MM 150 MM 300 MM EMV 50MM 150 MM 300 MM EMV 50MM 150fMM 300MM EMV No government 0 0% 0.0% 0 0% 0 0% 0 0% 0.0 0.0% 0.0% 00% 0.0% 00% 0.0% 00% 00% 0.0% 0.0% Vsetnan-tax included 686% 684% 70.6% 71 2% 69.5% 68.8% 709% 72.1% 71.4% 69.5% 713% 73.6% 108.1% 7777% 74.0%!. 86.5% Vietnam-no sign bonus 67.7% 68.2% 705% 69.9% 683% 685% 70.7% 705% 69.8% 690% 71.1% 71.5% 103 7% 767% 736% 81 7% Vietnam-tax separate 82.8% 81.6% 825% 83.6% 84 1% 82 3% 830% 84.6% 86.8% 83 5% 83.8% 86.5% 135.9% 942% 880°/ 101 4% Thailand-Gulf 752% 826% 84.7% 83.0% 73 5% 81 4% 83.9% 82 2% 71.4% 797% 82 8% 811% 707% 759% 800% 80 1% China-offshore 71.6% 728% 747% 73.9% 71.9% 729% 748% 74.2% 72.3% 732% 75.0% 74.6% 75.6% 743% 75 8% 76.9% Indonesia-incentive temis 80.1% 802% 80.2% 81 1% 80.5% 80.3% 80.3% 81 5% 81.0% 806% 804% 82 1% 85 1% 81 9% 81 0% 85 3% UK-offshore 319% 314% 313% 31 8% 32.2% 316% 314% 32.0% 327% 318% 31.6% 32.4% 35.8% 328% 322% 343% Norway 851% 846% 846% 85.2% 85.3% 84.7% 84.6% 85.4% 85 7% 847% 846% 85.7% 879% 84.9% 847% 872% U S.-GulfofMexico <400m 460% 472% 47.4% 48.4% 471% 47.9% 47.9%/ 49.5% 49.1% 49.0%/i 48.7% 51.2% 615% 543% 524% 597% Suggestionsfor adjustment to current contracts Vietnam-tax inc-WTI adj 68.5% 684% 706% 71.2% 69.2% 688% 709% 72.0% 71.4% 69.5% 71 3% 736% 799% 72.3% 731% 80.2% Vietnam-tax sep-WTI adj 826% 81.6% 825% 83.5% 83 8% 82.2% 829% 84.5% 84.1% 79.7% 80.2% 82.9% 999% 88.3% 87.1% 945% Suggestion for new contracts Vietnam-tax adj-WTI adj 685% 68.4% 706% 71.2% 69.2% 688% 70.9% 72.0% 73.7% 78.1% 81 7% 81 0% 75.4% 75 1% 789% 81.2% Annex 2: Petroleum Law and Implementing Decree PETROLEUM LAW* In order to effectively conserve, exploit and utilize Petroleum resources for the development of the national economy and the promotion of cooperation with foreign countries; Pursuant to Articles 17, 29 and 84 of the 1992 Constitution of the Socialist Republic of Vietnam: This Law govems Petroleum exploration and production activities carried out within the territory, the exclusive economic zone and the continental shelf of the Socialist Republic of Vietnam. Chapter I GENERAL PROVISIONS Article 1 All the Petroleum existing in the subsoil of the land, islands, internal waters, territorial sea, exclusive economic zone and continental shelf of the Socialist Republic of Vietnam is the property of the Vietnamese people under the sole space management of the State of Vietnam. Article 2 The State of Vietnam encourages Vietnamese and foreign organizations and individuals to invest capital and technology to conduct Petroleum Operations on the basis of respect for the independence, sovereignty, territorial integrity and national security of Vietnam and in compliance with Vietnamese law. The State of Vietnam protects ownership rights with respect to the capital investments, assets and other lawful rights of Vietnamese and foreign organizations and individuals conducting Petroleum Operations in Vietnam. Article 3 As used in this Law, the following terms shall have the following meanings: "Petroleum" means crude oil, natural gas, and hydrocarbons whether in natural liquid, gaseous, solid or semi-solid state, including sulphur and other similar substances associated with hydrocarbons except coal, shale, bitumen or other minerals from which oil can be extracted. "Crude Oil" means hydrocarbon in natural liquid state, asphal, ozokerite and liquid hydrocarbons obtained by distillation or extraction of Natural Gas. "Natural Gas" means hydrocarbons in gaseous state produced from wells, including wet gas, dry gas, wellhead gas and residue gas after the extraction of liquid hydrocarbons from wet gas. "Petroleum Operations" mean activities in exploration, field development, and production of Petroleum, including services directly related to or supporting such activities. "Petroleum Contract" means a written agreement entered into by and between the Vietnam Oil and Gas Corporation and any organization or individual to carry out Petroleum Operations. This English translation of the Petroleum Law is an unofficial translation provided for informational purposes only. All questions of interpretation must be resolved by reference to the official Vietnamese text. 57 58 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam "Petroleum Services" mean activities conducted by Sub-Contractors related to exploration, field development and production of Petroleum. "Block" means an area delimited by geographical coordinates, designated for the exploration and production of Petroleum. "Contractor" means any Vietnamese or foreign organization or individual who is permitted to conduct Petroleum Operations under a Petroleum Contract. "Sub-Contractor" means any Vietnamese or foreign organization or individual who enters into a Contract with a Contractor or Petroleum Joint Venture Enterprise to render Petroleum Services. "Petroleum Joint Venture Enterprise" means a joint venture enterprise established under a Petroleum Contract or Treaty entered into by and between the Government of Vietnam and a foreign government. Chapter II PETROLEUM OPERATIONS Article 4 An organization or individual conducting Petroleum Operations shall utilize advanced technology and comply with Vietnamese law regarding the protection of natural resources and the environment, and the safety of person and property. Article 5 An organization or individual conducting Petroleum Operations shall have a plan for environmental protection, take all measures to prevent pollution, promptly eliminate sources of pollution, and be responsible for remedying all consequences of pollution. Article 6 An organization or individual conducting Petroleum Operations shall establish a safety zone around an installation servicing Petroleum Operations in compliance with regulations of the Government of Vietnam. Article 7 An organization or individual conducting Petroleum Operations shall obtain and maintain insurance for facilities and installations servicing Petroleum Operations, environmental insurance and other forms of insurance in compliance with Vietnamese law and in accordance with international practices of the petroleum industry. Article 8 The exploration acreage covered by a Petroleum Contract shall be determined based upon the blocks delimited by the Government of Vietnam. Article 9 Petroleum Operations shall not be conducted in any areas declared by the State of Vietnam to be off-limits or provisionally off-limits for reasons of national defense, national security or public interest. In the event any Petroleum Operations that have been permitted are prohibited or temporarily prohibited, the Govemment of Vietnam shall make appropriate settlement for the damages to organizations or individuals resulting from such prohibition or temporary prohibition. Article 10 The Government of Vietnam pernits an organization or individual to conduct scientific research, exploration for and production of minerals and natural resources other than Petroleum in the area covered by a Petroleum Contract in compliance with Vietnamese law. These operations shall not hinder or be detrimental to Petroleum Operations. Article 11 All the samples, cores, data and information acquired during the conduct of Petroleum Operations are the property of the State of Vietnam. The handling and utilization of such samples, cores, data and information shall comply with Vietnamese law. Annex 2: Petroleum Law and Implementing Decree 59 Article 12 An organization or individual conducting Petroleum Operations is permitted to install and operate and maintain fixed installations and equipment servicing Petroleum Operations; to construct and use transport routes, pipelines, and warehouses for the purpose of transporting and storing Petroleum in compliance with Vietnamese law. The ownership of the above installations and equipment shall belong to the State of Vietnam from the date agreed upon by the parties to a Petroleum Contract. Article 13 Upon the termination of Petroleum Operations, the organization or individual shall clear the used acreage and remove fixed installations and equipment at the request of State management authorities having jurisdiction. Article 14 The Vietnam Oil and Gas Corporation (known in its intemational dealings as "PETROVIETNAM") is a State-owned business enterprise founded by the Government of Vietnam to conduct Petroleum Operations and enter into Petroleum Contracts with organizations and individuals for the conduct of Petroleum Operations in accordance with this Law. Chapter III PETROLEUM CONTRACT Article 15 A Petroleum Contract may be entered into in the form of a production sharing contract, joint venture agreement or other forms of contract. A petroleum Contract shall conform to the Model Contract issued by the Government of Vietnam, and shall contain the following essential provisions: 1. Legal identity of an organization or individual who shall enter into the contract; 2. Objects of the contract; 3. Acreage delimitation and schedule for the relinquishment of the contract area; 4. Duration of the contract; 5. Conditions for early termination or any extension of the contract; 6. Commitments on work program and financial investment; 7. Rights and obligations of each party to the contract; 8. Recovery of capital investment, determination and sharing of profit; rights of the host country to fixed assets after the recovery of capital investment and termination of the contract; 9. Conditions for assignments of interest and obligation of the parties to the contract; right of the Vietnam Oil and Gas Corporation to participate in the capital investment; 10. Commitments on training and preferential employment of Vietnamese personnel and use of Vietnamese services; 11. Obligations to protect the environment, and to secure safety in the course of the conduct of Petroleum Operations; 12. Procedures for the settlement of disputes that may arise from the contract. In addition to the provisions of the Model Contract, the parties to the contract may agree upon other provisions that are not inconsistent with the provisions of this Law and Vietnamese law. Article 16 Any organization or individual wishing to enter into a Petroleum Contract shall be subject to the bidding or other procedures stipulated by the Government of Vietnam. Such organization or individual shall explicitly present its financial resources, technical competence and professional expertise in the conduct of Petroleum Operations. 60 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam Article 17 The duration of a Petroleum Contract shall not exceed twenty five (25) years during which the exploration period shall not exceed five (5) years. The duration of a Petroleum Contract with regard to deep-water or remote offshore areas, and the contractual duration of exploration for and production of Natural Gas shall not exceed thirty (30) years during which the exploration period shall not exceed seven (7) years. At the request of the Contractor and subject to the decision of the Government of Vietnam, the duration of a Petroleum Contract may be extended, provided that the extended term does not exceed five (5) years; and the exploration period may be extended, provided that the extended period does not exceed one (1) year. A Petroleum Contract may terminate prior to its stated term, provided that the commitments and obligations of the Contractor have been fulfilled and that such early termination has been agreed upon by the parties to the contract. Article 18 An exploration acreage under a Petroleum Contract shall not cover more than two (2) blocks. In special cases, the Government of Vietnam may award all exploration acreage of more than two (2) blocks but not exceeding four (4) blocks for a Petroleum Contract. Article 19 The Contractor shall relinquish the exploration acreage as stipulated by the Government of Vietnam. Article 20 The Contractor and the Vietnam Oil and Gas Corporation shall agree in a Petroleum Contract upon work program and minimum commitments on financial investment during the exploration period. Article 21 Upon discovering Petroleum, the Contractor and the Vietnam Oil and Gas Corporation shall submit a report and provide all the required information about such discovery to State management authorities having jurisdiction. In case a commercial discovery is made, the Contractor shall proceed immediately with an appraisal program, prepare a reserves evaluation report, and a field development and production scheme to submit to State management authorities having jurisdiction for approval. Article 22 The language of the Petroleum Contract signed with foreign organizations, individuals and the documents attached thereto shall be the Vietnamese language and a commonly used foreign language as may be agreed upon by the Vietnam Oil and Gas Corporation and such organizations and/or individuals. Both the Vietnamese version and the foreign language version are equally authentic. Article 23 A Petroleum Contract shall take effect upon the approval of the Govemment of Vietnam. Article 24 Any total or partial assignment of a Petroleum Contract by the parties to the Contract shall only be effective after it is approved by the Government of Vietnam. The Vietnam Oil and Gas Corporation shall have the preemptive right to acquire the Petroleum Contract or portion thereof subject to assignment of interest. Annex 2: Petroleum Law and Implementing Decree 61 Article 25 The Vietnam Oil and Gas Corporation shall have the right to participate in capital investment under a Petroleum Contract. Its share of capital investment, terms of participation, reimbursement of expenses incurred by Contractor, and operating agreement shall be provided in the Petroleum Contract in accordance with international practices of the Petroleum industry. Article 26 A Contractor is entitled to enter into Petroleum Service contracts with preference given to a Vietnamese organization or individual. Vietnam will undertake flight service or enter into a joint venture contract with a foreign company providing flight service in support of Petroleum Operations. Article 27 Any disputes arising from a Petroleum Contract shall first and foremost be settled through negotiation and reconciliation. In case no reconciliation can be made, if the disputing parties are Vietnamese organizations and/or individuals, the dispute will be resolved in accordance with Vietnamese law; if a disputing party is a foreign organization or individual, the dispute will be resolved in compliance with the provisions of the Law on Foreign Investment of Vietnam. Chapter IV RIGHTS AND OBLIGATIONS OF CONTRACTORS Article 28 Contractors shall have the following rights: 1. To enjoy privileges and guarantees as stipulated by Vietnamese law; 2. To use samples, cores, data and information that have been acquired for the conduct of Petroleum Operations; 3. To recruit personnel for the performance of the work under the Petroleum Contract on the basis of preferential employment of Vietnamese personnel; 4. To hire Sub-Contractors in accordance with the provisions of this Law and international practices of the Petroleum industry; 5. To be exempt from import tax with regard to equipment and materials required for Petroleum Operations and from re-export tax with regard to such equipment that are not permanently installed, or unused materials, in accordance with Vietnamese law; 6. To be entitled to the ownership of their share of Petroleum after fulfillment of their financial obligations to the State of Vietnam; 7. To export their share of Petroleum as provided in the Petroleum Contract; 8. To recover their capital investment under the terms of the Petroleum Contract; 9. Foreign organizations and individuals shall have the right to transfer abroad their recovered capital investment and profit obtained during Petroleum Operations in accordance with the provisions of the Law on Foreign Investment of Vietnam. Article 29 Sub-Contractors shall have the rights stipulated at Items 1, 3 and 5 of Article 28 of this Law. A Sub-Contractor that is a foreign organization or individual shall also have the rights provided in Item 9 of Article 28 of this Law. Article 30 Contractors shall have the following obligations: 1. To comply with Vietnamese law; 2. To fulfill their commitments as stipulated in the Petroleum Contract; 62 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam 3. To pay royalty, taxes, and fees as stipulated by Vietnamese law; 4. To transfer technology, train and employ Vietnamese staff and workers and to respect their interests; 5. To take environmental protection measures; 6. To submit their Petroleum Operations reports to State management authorities having jurisdiction and to the Vietnam Oil and Gas Corporation; 7. To provide documents as may be requested by an inspection team; 8. To remove installations, equipment, and facilities upon the termination of Petroleum Operations at the request of State management authorities having jurisdiction; 9. To sell in the Vietnamese market a portion of their share of Petroleum when requested by the Government of Vietnam. Article 31 Sub-Contractors shall have the obligations stipulated in Items 1, 2, 3, 4, 5 and 7 of Article 30 of this Law. Chapter V ROYALTY, TAXES AND FEES Article 32 An organization or individual producing Petroleum shall pay a royalty. The royalty shall be calculated on the actual production rate during the relevant taxable period for each Petroleum Contract. The rate of royalty shall range from six percent (6%) to twenty five percent (25%) for Crude Oil and can be higher in special cases. The rate of royalty shall range from zero percent (0%) to ten percent (10%) for Natural Gas. Specific rates of royalty will be established by the Government of Vietnam within the aforesaid rate framework depending on geographical, economic and technical field conditions and the level of production of Crude Oil or Natural Gas. Article 33 An organization or individual conducting Petroleum exploration and production shall pay profit tax at a rate of 50% of taxable profit during the relevant taxable period. In special cases, an organization or individual conducting Petroleum exploration and production may be granted an exemption from profit tax or a reduction in profit tax rate. Such exemption or reduction will be granted by the Government of Vietnam. Article 34 A Sub-Contractor that is a Vietnamese organization or individual conducting operations in Vietnam shall pay profit tax in accordance with the Profit Tax Law. A Sub-Contractor that is a foreign organization or individual registered to operate in Vietnam shall pay profit tax in accordance with the Law on Foreign Investment of Vietnam. A Sub-Contractor that is a foreign organization or individual not registered to operate in Vietnam shall pay taxes in accordance with Vietnamese law. Article 35 An organization or individual conducting Petroleum Operations shall pay export and import taxes, rental for use of land or real estate tax, other taxes and fees as stipulated by Vietnamese law. Annex 2: Petroleum Law and Implementing Decree 63 A foreign organization or individual conducting Petroleum Operations shall pay a profit transfer tax in accordance with the Law on Foreign Investment of Vietnam. Article 36 Employees of Vietnamese and foreign nationality working for Contractors, Petroleum Joint Venture Enterprises and Sub-Contractors shall pay personal income tax as stipulated by Vietnamese law. Article 37 As may be agreed in a Petroleum Contract, royalty and all other taxes payable by a Contractor or Petroleum Joint Venture Enterprise may be included in the share of production of the Vietnam Oil and Gas Corporation, provided that the Vietnam Oil and Gas Corporation undertakes to pay such royalty and taxes on behalf of the Contractor or Petroleum Joint Venture Enterprise. Chapter VI STATE MANAGEMENT OF PETROLEUM OPERATIONS Article 38 The State management of Petroleum Operations shall include: 1. Making decisions on strategies, plans and policies for the development of the Petroleum industry; 2. Issuing regulations with respect to the management of Petroleum Operations; 3. Monitoring, inspecting and supervising Petroleum Operations; 4. Designating and delimiting blocks or acreage for Petroleum exploration and production; 5. Making decisions on policies and forms of cooperation with foreign entities; 6. Approving Petroleum Contracts; 7. Establishing policies to promote or to restrict Petroleum exports to protect the interest of the State while taking into account Contractors' interest; 8. Monitoring, giving instructions and guidance to relevant authorities and localities in carrying out activities related to Petroleum Operations; 9. Resolving issues related to the right to conduct Petroleum Operations, and adjudicating any violations of this Law. Article 39 The Government of Vietnam shall solely exercise the State management of Petroleum Operations. The State Petroleum management authority shall be established in accordance with the law on the Organization of the Government to assume the State management of Petroleum Operations. Ministries and other State authorities shall carry out the State management of Petroleum Operations in accordance with their respective functions, powers and responsibilities. Chapter VII INSPECTION OF PETROLEUM OPERATIONS Article 40 Inspection of Petroleum Operations forms a specialized inspection in the Petroleum Industry with a view to ensuring compliance with the provisions of this Law and regulations, technical procedures, specifications and rules; to conserving Petroleum resources, protecting the environment, enforcing safety rules, and fulfilling obligations to the State of Vietnam by organizations and individuals conducting Petroleum Operations. 64 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam Article 41 The State Petroleum Management Authority shall establish and organize the implementation of the inspection function regarding Petroleum Operations. In conducting the inspection of Petroleum Operations, the inspection team shall have the right: 1. To request relevant organizations and individuals to provide documents and clarify issues relevant to the inspection; 2. To take measures for on-site technical verification; 3. To suspend or make recommendations to State authorities having jurisdiction to suspend Petroleum Operations that may cause accidents or serious damage to life and/or property, petroleum resources and pollution; 4. To adjudicate any violations of this Law within its jurisdiction or make recomnmendations regarding the adjudication of violations to State authorities having junisdiction. Article 42 An organization or individual conducting Petroleum Operations shall facilitate the inspection team in carrying out its duties, and shall strictly observe all decisions made by the inspection team. Any organization or individual shall have the right to appeal decisions of the inspection team as stipulated by Vietnamese law. Chapter VIII ADJJUDICATION OF VIOLATIONS Article 43 Any organization or individual violating any provision of this Law shall be subject to warning and/or fine and/or confiscation of their facilities or other administrative sanctions depending on the severity of its violations. Any individual whose violation also constitutes a crime shall be prosecuted in accordance with Vietnamese law. Article 44 Any organization or individual conducting Petroleum Operations that cause damage to Petroleum resources, other natural resources and the environment or property of State, such organization or individual shall be liable for compensation for such damage in accordance with Vietnamese law. Article 45 Any organization or individual who illegally obstructs Petroleum Operations shall be prosecuted for its violations in accordance with Vietnamese law. Article 46 Organizations and individuals shall have the right to appeal any decisions made on adjudication of violations as stipulated by Vietnamese law. Annex 2: Petroleum Law and Implementing Decree 65 Chapter IX IMPLEMENTATION PROVISIONS Article 47 This Law and other provisions of Vietnamese law shall also apply to: 1. All installations, structures, facilities and equipment used for the purpose of Petroleum Operations in the exclusive economic zone and/or on the continental shelf of the Socialist Republic of Vietnam. 2. Installation, structures, facilities and equipment owned by Vietnamese organizations and/or individuals for the purpose of Petroleum Operations on the basis of cooperation with foreign entities in areas not under the jurisdiction of the Socialist Republic of Vietnam. Article 48 The Govemment of Vietnam shall protect the economic interest of the parties to Treaties and Petroleum Contracts approved by the Government of Vietnam prior to the effective date of this Law. Article 49 Based upon the provisions of this Law, the Government of Vietnam enters into with foreign government (s) treaties of cooperation to conduct Petroleum Operations in Vietnam. Article 50 All prior regulations that are inconsistent with this Law are hereby abrogated. The Government of Vietnam shall provide Regulations for the implementation of this Law. Article 51 This Law shall take effect on the first of September, 1993. This Law was passed by the Ninth National Assembly of the Socialist Republic of Vietnam at its third Session on the eh of July, 1993. 66 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam NONG DUC MANH DECREE OF THE GOVERNMENT REGULATING DETAILS OF THE IMPLEMENTATION OF THE PETROLEUM LAW THE GOVERNMENT OF VIETNAM Pursuant to the law on the Organization of the Government on the 30'h of September 1992; Pursuant to the Petroleum Law on the 6'h of July 1993 DECREES: Chapter I GENERAL PROVISIONS Article 1 This Decree regulates details of the implementation of the Petroleum Law ratified by the Ninth National Assembly of the Socialist Republic of Vietnam on the 6th of July 1993. Article 2 This Decree applies to activities regarding Petroleum exploration, Field Development, Petroleum production, including treatment, collection, storage and transportation of Petroleum within and from the area of production to the Point of Delivery and Disposal of Petroleum. Article 3 Organizations and individuals encouraged by the State of Vietnam to conduct Petroleum Operations include: 1. State-owned business enterprises. 2. Business enterprises established under the Company Law. 3. Private business enterprises established under the Pnvate Business Enterprise Law. 4. Co-operatives. 5. Foreign organizations and individuals who invest directly in Vietnam. 6. Foreign invested enterprises. Article 4 Terms already defined in Article 3 of the Petroleum Law definition apply in this Decree. Additionally, in this Decree the following terms shall have the following meanings: 1. "Fixed Installation" means any fixed facilities constructed, installed and used for Petroleum Operations. 2. "Contract Area" means the area determined on the basis of the exploration Blocks as agreed upon in a Petroleum Contract or any area remaining after relinquishment of acreage. 3. "Point of Delivery" means the point accepted by the Vietnam Oil and Gas Corporation where Crude Oil or Natural Gas is transferred from an oil tanker or other storage facilities to a receiving tanker, other oil receiving facilities, or the outlet of a Petroleum pipeline. Annex 2: Petroleum Law and Implementing Decree 67 4. "Disposal of Petroleum" means the transfer of Petroleum ownership, including any sale and/or exchange of Petroleum. 5. "Arm's Length Sales Contract" means a transaction contract in an ordinary market relationship between buyer and seller, excluding sale contracts or any exchange, transaction between affiliates of a company, between governments, between government agencies affected by abnormal commercial motives. 6. "Associated Gas" means Natural Gas extracted in the course of Crude Oil production and treatment. 7. "Contract Year" means the 12-calendar-month period following the effective date of a Petroleum Contract or any anniversary date thereof. 8. "Field Development" is a process of preparation and investment to construct facilities, drill wells, install equipment in order to put a field on production of Petroleum, counting from the date of announcement of commercial discovery. 9. "Net Petroleum Production" means the amount of Petroleum produced and saved from a Contract Area, as measured at the Point of Delivery. Chapter II PETROLEUM OPERATIONS Article 5 Prior to conducting exploration operations, a Contractor shall prepare and submit to the Vietnam Oil and Gas Corporation for review and approval the conceptual and detailed plans and annual work programs pertaining to each relevant phase corresponding to the provisions regarding the term, work and financial commitments agreed upon in the Petroleum Contract. In the event that amendments have to be made in the approved plans or programs, such amendments shall be subject to the concurrence of the Vietnam Oil and Gas Corporation. The period for review and approval shall not exceed 90 days with respect to the conceptual plan and 30 days with respect to the detailed plan and the annual work programs, counting from the date of receipt of such documentation. Article 6 In the event the Vietnam Oil and Gas Corporation conducts Petroleum exploration, Field Development and Petroleum production by itself, it shall submit its plans and work programs to State management authorities having jurisdiction for approval. Article 7 In the conduct of Petroleum Operations, an organization or individual shall apply the Vietnam standards on safety, the environment, relevant techniques and technology. In case of the unavailability of such Vietnam standards, an organization or individual conducting Petroleum Operations may apply standards provided in those international treaties to which Vietnam is a signatory. The application of other standards shall be subject to approval by the Ministry of Science, Technology and Environment. Article 8 Prior to the conduct of Petroleum Operations, an organization or individual shall prepare and submit the following documents to the authority having jurisdiction: * Environmental impact assessment; 68 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam * Program for safety management and risk evaluation accompanied by measures to minimize risks; * Emergency response plan including technical measures and the utilization of facilities, equipment, and tools to cope with incidents. Article 9 In the conduct of Petroleum Operations, an organization or individual shall undertake the following tasks related to environment and safety: 1. Establish safety zones for Petroleum Installations, facilities and equipment in accordance with Article 12 of this Decree; 2. Carry out safety measures in accordance with the approved safety management program; 3. Carry out monitoring programs on environmental changes, implement environmental protection plans and take measures to prevent pollution and to remedy consequences brought about by environmental pollution in accordance with the Law on Environmental Protection; 4. Minimize adverse effects or negative consequences on the environment such as land, water, forest, air pollution which may be detrimental to flora and fauna, disturb the ecological equilibrium or adversely affect the human environment; 5. Update data and complete risk evaluation, and report the implementation of an emergency response plan; 6. Record all the occurrences of incidents and/or accidents; 7. Urgently report and immediately take remedial measures in case of accidents or incidents; 8. Take measures to ensure safety of labor, working conditions and environment for the labor force. Article 10 An organization or individual conducting Petroleum Operations shall be held legally liable for damage to life, property and the environment, including the cleaning up and restoration of the environment to its normal status which has been directly or indirectly caused by Petroleum Operations such as oil spill, improper discharge of industrial wastes and/or garbage. Article 11 An organization or individual conducting Petroleum Operations shall conserve natural resources and Petroleum resources, and maximize the recovery of Petroleum in accordance with international practices of the Petroleum industry. Article 12 Depending on the geographic and social conditions of the locality of Petroleum Operations, the State Petroleum management authority will specify the scope of the safety zones surrounding the facilities for onshore Petroleum exploration and production. The limit of the safety zone surrounding offshore installations is 500 meters from the outside perimeter of these installations or from the anchor point(s) for floating facilities, with the exception of special cases as may be defined by the State Petroleum management authority. Vessels shall not be anchored within two (2) nautical miles from the outside perimeter of any offshore installations and/or facilities. Except for special cases as may be determined by the State Petroleum management authority, unauthorized persons are prohibited from intruding into and/or operating within the safety zones on Petroleum installations. Annex 2: Petroleum Law and Implementing Decree 69 Article 13 While drilling, an organization or individual shall comply with the following provisions: 1. Drilling shall be in accordance with the approved well design or approved amended design. 2. There shall be no drilling outside the Contract Area. 3. All documents and samples acquired as a result of drilling activities shall be retained and submitted to the Vietnam Oil and Gas Corporation. 4. All other natural resources discovered in the course of drilling shall be reported to the Vietnam Oil and Gas Corporation in a timely manner. An organization or individual conducting drilling activities shall also comply with all provisions of other Regulations then in force. Article 14 An organization or individual producing Petroleum shall comply with the provisions of all Regulations on production then in force, properly implement the contents of the approved conceptual plan and Field Development plan, apply advanced technology and equipment in order to maximize the recovery of Petroleum without causing adverse effects on the subsoil, eco-environment and safety of the field. Measuring instruments shall be ensured to comply with legal requirements and the stipulations of the State management authority on measurement. An organization or individual producing Petroleum shall have a program for well study, collection of samples for analysis on properties, components of oil, gas, water separately on a fixed periodical basis, and report analyses of Petroleum production of each well, each reservoir and the entire field and other analyses on a monthly, quarterly and annual basis to the Vietnam Oil and Gas Corporation. Article 15 The Govemment of Vietnam shall have the right to utilize equipment, facilities for Petroleum Operations including pipelines, storage facilities that are under the management and in use by organizations, individuals conducting Petroleum Operations provided that such utilization does not hinder Petroleum Operations. Article 16 A Contractor shall prepare programs, plans for removing Fixed Installations and submit them to the Vietnam Oil and Gas Corporation for approval. Costs and expenses of such removal shall be paid by the Contractor and included in cost recovery. In case the Vietnam Oil and Gas Corporation carries out Petroleum Operations by itself, it shall prepare programs, plans for removing Fixed Installations and submit them to management authorities having jurisdiction for approval.. State management authorities having jurisdiction may request an organization or individual to remove the whole or a portion of Fixed Installations. An organization or individual conducting Petroleum Operations shall acquire Insurance in compliance with the provisions of Vietnamese law and in accordance with international practices of the Petroleum industry, particularly insurance on installations for Petroleum Operations, environmental pollution insurance, life insurance, property insurance and third-party liability insurance. 70 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam Insurance may be preferentially acquired from Vietnam insurance companies or may be bought from other insurance companies. Article 18 The Vietnam Oil and Gas Corporation shall submit the following essential reports to the State Petroleum management authority: 1. Report on the long-term and annual plans for Petroleum Operations. 2. Integrated report regarding the conduct of Petroleum Operations and the results thereof on an annual and quarterly basis. 3. Detailed report on economic and technical plans to carry out Petroleum Operations. 4. Report on major incidents and/or accidents related to Petroleum Operations which have been resolved or must be urgently resolved. 5. Other reports at the request of the State Petroleum management authority. The deadline for submitting each kind of report and contents thereof shall be stipulated by the State Petroleum management authority. Article 19 Contractor shall provide sufficient information, data and reports on its Petroleum Operations to the Vietnam Oil and Gas Corporation. In case of necessity, authorities having jurisdiction may request a Contractor to provide information, data or reports in accordance with their function of State management. Article 20 All reports and information shall be kept confidential in accordance with law. An organization or individual conducting Petroleum Operations shall archive in Vietnam original data, samples and reports; and shall have the right to export and re-import the same in accordance with the regulations of the State Petroleum management authority and the Vietnam Oil and Gas Corporation. Chapter III PETROLEUM CONTRACT Article 21 The model Petroleum Contract stipulated in Article 15 of the Petroleum Law only includes basic provision. Depending on the form of the Petroleum Contract and other conditions, the contractual parties shall specify in detail the terms regarding the rights and obligations of the participating parties as well as the responsibilities of each party to the State of Vietnam in accordance with the provisions of Vietnamese law. Article 22 The Vietnam Oil and Gas Corporation and its partners shall select a contract form in compliance with Article 15 of the Petroleum Law, including geophysical survey contracts or other forms. In the event the Petroleum Contract takes the form of a joint venture contract, the joint venture is entitled to the same rights and obligations as a Contractor. The subject of a Petroleum contract may include all of the Petroleum exploration, Field Development and Petroleum production activities or any part thereof Article 23 The Vietnam Oil and Gas Corporation shall organize bidding in accordance with the bidding procedures provided in Article 16 of the Petroleum Law. Annex 2: Petroleum Law and Implementing Decree 71 With the permission of the Vietnamese Government, the Vietnam Oil and Gas Corporation may enter into Petroleum Contracts on a selective or bilateral negotiation basis. Article 24 In its bid invitation, the Vietnam Oil and Gas Corporation is responsible for providing the following information: 1. Bidding contents. 2. Bidding conditions. 3. Participation fees. 4. Other details relating to the bidding procedures. Article 25 An organization or individual wishing to participate in bidding shall submit a file consisting of an application for participation, a certificate of legal status, justification of financial and technical capabilities, and bidding commitments. In the event an organization is a consortium or a joint venture, details relating to the relations, responsibilities, equity ratio or share of each member shall be provided. Article 26 An organization or individual winning the bidding or selected as a partner shall have the right to enter into a Petroleum Contract with the Vietnam Oil and Gas Corporation. The Vietnam Oil and Gas Corporation is responsible for notifying the organizations, individuals winning the bidding or selected as partners of the time and place for signing Petroleum Contracts. If an organization or individual is not present on the notified date to sign Petroleum Contracts, the Decision to award the contract or the Decision to select it as a partner may be nullified. Article 27 The exploration period prescribed in Article 17 of the Petroleum Law may be divided into phases. The duration of each phase shall be agreed upon by the parties to the Petroleum Contract. Article 28 A Contractor shall relinquish its exploration acreage as follows: 1. Not less than 20% of the initial Contract Area at the end of each phase. 2. The entire Contract Area remaining at the end of the exploration period, except areas for Field Development, Petroleum production, and areas under appraisal. A Contractor may voluntarily relinquish the Contract Area at any time during the exploration period. Areas which have been voluntarily relinquished are deducted from areas required to be relinquished. However, the voluntary relinquishment of an area shall not diminish the obligations undertaken in the Petroleum Contract. Each relinquished area shall have a simple geometric shape. All Fixed Installations must be removed from the relinquished area in accordance with Article 16 of this Decree. Article 29 A Contractor and the Vietnam Oil and Gas Corporation shall agree on a work program for the exploration period with minimum commitments regarding the quantity of geophysical survey, number of wells, other integrated studies, training, recruitment, and transfer of technology. 72 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam Estimated costs and expenses for the above mentioned minimum commitments shall be deemed the minimum financial commitments. A Contractor shall be deemed to have fulfilled its minimum financial commitments when the minimum work commitments have been completed. In the event a Contractor applies for the termination of the Contract without fulfilling its minimum commitments, it shall pay the Vietnam Oil and Gas Corporation a sum of money in proportion to the work commitments which have not been completed. Article 30 During the exploration period, should a Contractor have a plan for Field Development and production of Petroleum it shall submit such plan to the State Petroleum management authority for approval in accordance with the provisions of the Petroleum Law and this Decree. Article 31 After a discovery of Petroleum has been made, the Contractor shall promptly notify and report the results obtained from studies, evaluations and relevant data to State management authorities having jurisdiction and the Vietnam Oil and Gas Corporation. The Contractor shall prepare a program for field appraisal and submit it to the Vietnam Oil and Gas Corporation for approval. The Contractor shall notify the Vietnam Oil and Gas Corporation of the results of such appraisal program. If such results show the field to have commercial value, the Contractor shall announce such commercial discovery. The Contractor shall submit to State management authorities having jurisdiction and the Vietnam Oil and Gas Corporation a report on the field reserves, conceptual plan, and Field Development plan. In the Petroleum Contract, the Vietnam Oil and Gas Corporation and the Contractor shall agree upon provisions on the basis for determining a conimercial field, the period for submitting the program for field appraisal, conceptual plan and Field Development plan. The project for Field Development and exploitation can only be implemented after it has been approved by State management authorities having jurisdiction. If, after receiving approval from the State management authorities having jurisdiction, the Contractor does not carry out the Field Development and Petroleum production within the period provided in the decision of approval, such State management authorities shall have the right to take back the field. Article 32 During the Petroleum production period, a Contractor may use the Petroleum produced from the Contract Area for other production operations in accordance with the technical consumption norms accepted by the Ministry of Science, Technology and Environment and in accordance with international practices of the Petroleum industry. Article 33 In the course of producing Petroleum, Contractors shall submit reports on the production rate, composition, and gravity of the Petroleum extracted from each field and each producing reservoir. The above reports shall include information on the amount of Petroleum used for Petroleum production and the amount of Petroleum lost or flared. Annex 2: Petroleum Law and Implementing Decree 73 Article 34 Associated Gas extracted from the Contract Area may be used by the Contractor as fuel for Petroleum Operations at the field or may be returned to the field. The Government of Vietnam has the right to use free of charge such Associated Gas which the Contractor plans to flare, if such use does not hinder the operations of the Contractor. In such a case, the Contractor shall facilitate such usage. Associated Gas may only be flared with the permission of the State Petroleum management authority. Article 35 In the event a Petroleum field extends beyond the Contract Area, the Vietnam Oil and Gas Corporation and the Contractor shall establish a plan to jointly exploit the entire field and shall submit the same to the Govemment of Vietnam for review and approval. Article 36 In the event a Petroleum field of a Contract Area extends into the area of other Petroleum Contracts, the related Contractors and/or the joint venture parties shall agree on a joint exploitation. All the agreements among such Contractors and/or the joint venture parties relating to a joint Field Development and exploitation shall be submitted to the Government of Vietnam for review and approval. Article 37 The Vietnam Oil and Gas Corporation shall exercise the inspection and supervision of the Petroleum Operations by a Contractor in accordance with the provisions specified in the Petroleum Contract. State management authorities of Vietnam, with their functions of State management, shall exercise the right to inspect and supervise the activities of the Vietnam Oil and Gas Corporation and Contractors. Chapter IV RIGHTS AND OBLIGATIONS OF ORGANIZATIONS, INDIVIDUALS CONDUCTING PETROLEUM OPERATIONS An organization or individual conducting Petroleum Operations has the right to enter into Contracts to purchase materials and equipment or into service contracts with Sub-Contractors. Sub-Contractors have the right to enter into contracts for the supply of materials, equipment and services with other organizations and individuals. Based on the capacity of the Sub-Contractors and the specific provisions of the contracts signed by the contractor and Sub-Contractors, the Vietnam Oil and Gas Corporation shall have the right to accept or reject the aforementioned contracts. The Contractor and Sub-Contractor shall preferentially purchase equipment and/or materials made and supplied by Vietnam; and shall preferentially enter into service contracts, including geological survey, drilling, diving, shipping and vessels chartering, onshore supply bases contracts with corresponding enterprises within the Vietnamese territory on the principle of ensuring competitiveness in terms of price and quality. Article 39 A Contractor shall have labor regulations, payroll, bonus, allowance and other regimes for Vietnamese and foreign employees in accordance with Vietnamese law, taking into 74 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam account international practices of the Petroleum industry; and shall have annual staffing, recruitment and training plans. The above documents shall be reviewed by the Vietnam Oil and Gas Corporation before Contractors' registration in accordance with the Labor Code. Article 40 A foreign organization or individual conducting Petroleum Operations shall maximize the employment of Vietnamese, and only employ foreign personnel in positions that Vietnamese are not yet able to undertake, provided that a budget and training programs are made available for Vietnamese to soon replace such foreign personnel. The recruitment of Vietnamese personnel shall be carried out through employment service organizations in accordance with Article 18 and Article 132 of the Labor Code. The recruitment of foreign personnel can only be carried out with the permission of the Ministry of Labor, War Invalids and Social Affairs in accordance with Item 1 of Article 132 of the Labor Code. A foreign organization or individual conducting Petroleum Operations is allowed to recruit directly and enter into labor contracts with personnel having work permits. The recruitment of technical and management employees must be channeled through the Vietnam Oil and Gas Corporation. The Vietnam Oil and Gas Corporation has the responsibility to act as the focal point for the management of the Vietnamese personnel working for foreign organizations and individuals in supervising the implementation of signed labor contracts. Article 41 An organization or individual conducting Petroleum Operations shall be exempt from import tax, taxes on temporary imports for re-export regarding equipment, and materials required for Petroleum Operations. If such equipment and materials are transferred or consumed in Vietnam for purposes other than servicing Petroleum Operations, there must be permission from the Ministry of Trade and import tax and other taxes must be paid in accordance with Vietnamese law. If such equipment and materials are transferred for the service of Petroleum Operations, they are exempt from import tax but shall be subject to other taxes in accordance with Vietnamese law. If such equipment and materials are transferred to the Vietnam Oil and Gas Corporation in compliance with the Petroleum Contract, the Contractor is exempt from import tax and other taxes. The Vietnam Oil and Gas Corporation shall report the receipt of this transfer to the Ministry of Finance in order to clear formalities for supplementary capital receipt and the payment of taxes related to the transfer of property ownership. The Ministry of Trade, the Ministry of Finance, the General Department of Customs, and the Vietnam Oil and Gas Corporation shall coordinate with each other to determine the list of equipment and materials exempt from import tax and taxes on temporary imports for re-export. Article 42 A foreign organization or individual entering into a service contract with a Contractor and/or Sub-Contractors is permnitted to establish offices or operating headquarters in a place where Petroleum services are carried out on the principle of complying with the regulations of Vietnam regarding the application to register activities, residence, recruitment of personnel and Annex 2: Petroleum Law and Implementing Decree 75 leasing of premises for office use, and fulfilling all the obligations in accordance with Vietnamese law. Chapter V ROYALTY Article 43 An organization or individual conducting production of Crude Oil shall pay a royalty. The royalty on Crude Oil is calculated on the incremental basis of the actual net aggregate production of Crude Oil during a taxable period based upon the daily average production of Crude Oil from the entire Contract Area at the following rates: Onshore & Under Over 200m water depth Production 200m water depth Below 50,000 barrels/day 8% 6% 50,001 - 75,000 barrels/day 10% 8% 75,001 - 100,000 barrels/day 15% 10% 100,001 - 150,000 barrels/day 20% 15% Over 150,000 barrels/day 25% 20% In special cases, depending upon specific geographic, economic and technical conditions of a particular field, the royalty rate for Crude Oil may be higher or may be a fixed rate set by the Government of Vietnam. Article 44 An organization or individual conducting production of Natural Gas shall pay a royalty. The royalty on Natural Gas is calculated on the incremental basis of the actual net aggregate production of Natural Gas during a taxable period based upon the daily average production of Natural Gas from the entire Contract Area at the following rates: Production Onshore & Under Over 200m 200m water depth water depth Below 5 million m3 /day 0% 0% 5 - 10 million m3/day 5% 3% Over 10 million m3/day 10% 6% In special cases, depending on the specific geographic, economic and technical conditions of a particular field, the royalty rate for Natural Gas can be a fixed rate set by the Govemment of Vietnam. Article 45 In the event the Vietnam Oil and Gas Corporation conducts Petroleum production, the Vietnam Oil and Gas Corporation shall be the taxpayer. In the event the Contractor conducts Petroleum production, the Contractor shall be the taxpayer. Article 46 The royalty is collectable in the form of Petroleum, cash, or partly in cash and partly Petroleum at the option of the tax agency. 76 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam The tax agency shall notify an organization or individual conducting Petroleum production six (6) months in advance as to whether the royalty is to be paid in cash or in Petroleum. If the royalty is paid in cash, such currency shall be U.S. dollars or other freely convertible currencies accepted by the Ministry of Finance. In the event that Petroleum is sold in Vietnamese Dong, the royalty shall be paid in Vietnamese Dong. Article 47 The price of Crude Oil for the purposes of calculating the royalty is the FOB price at the Point of Delivery as announced by the agency empowered by the Govemment of Vietnam based on consultation of intemational prices. In the event no such price has been announced, the Crude Oil price used shall be the average FOB price of Crude Oil at which sellers have sold Crude Oil at the Point of Delivery under Arm's Length Sales Contracts during the taxable period. In the event the FOB price under Arm's Length Sales Contracts is not available, the Crude Oil price used to calculate the royalty shall be calculated based on FOB price under Arm's Length Sales Contracts in intemational markets of such Crude Oil type in the taxable period, taking into account the sales price of a suitable combination of 3 types of similar Crude Oil from other South East Asian countries, after making appropriate adjustments based on quality, location and other related factors. The price for calculating the royalty on Natural Gas is the price at the Point of Delivery announced by the agency empowered by the Govemment of Vietnam based on consultation on intemational prices. Article 48 The royalty shall be provisionally paid every month based on the preceding month's production of Petroleum, and shall be reconciled every quarter. Article 49 If the royalty is paid in Petroleum, the point of tax payment is the Point of Delivery of Petroleum. In the event that the tax agency requests payment of the royalty at a different location, the freight and other direct expenses arising from such change of the location of tax payment shall be deducted from the royalty payable by the taxpayer. Chapter VI PROFIT TAX AND OTHER TAXES AND FEES An organization or individual conducting Petroleum exploration and production activities shall pay profit tax in accordance with the Petroleum Law and this Decree. In the event the Vietnam Oil and Gas Corporation conducts Petroleum production by itself, it shall be the taxpayer. In the event a Contractor conducts Petroleum production, it shall be the taxpayer. Article 51 The reduction in or exemption from profit tax provided in Article 33 of the Petroleum Law shall be granted to taxpayers conducting Petroleum exploration and production under difficult geographic, economic and technical conditions. Annex 2: Petroleum Law and Implementing Decree 77 Article 52 The basis for calculating profit tax is the total amount of taxable profit for the taxable period at the tax rate prescribed in Article 33 of the Petroleum Law. The total taxable profit consists of the total revenue less the value of Petroleum royalty paid, the amount of money paid for other taxes and fees other than the profit tax, and other lawful expenses recoverable during the taxable period. Article 53 The total revenue used to calculate total taxable profit is the sum of aggregate value of the sold and/or disposed Petroleum together with all other revenue related to the Petroleum Operations. The value of the sold Petroleum is the value of Petroleum sold in accordance with Arm's Length Sales Contracts using the FOB Point-of-Delivery price. In the case of Petroleum which is not sold under Arm's Length Sales Contracts, or in the case of all the Petroleum which is shared between the parties in kind, then the value of the sold Petroleum, the value of the paid Petroleum royalty, the value of the costs recovery Petroleum, the value of the profit Petroleum used to compute the profit repatriation tax shall be calculated by taking the corresponding amount of Petroleum and multiplying it by the price of one unit of production as stipulated in Article 47 of this Decree. Article 54 Costs and expenses which cannot be included in recoverable costs consist of: 1. Costs and expenses incurred prior to the effectiveness of the Petroleum Contract, except for special cases as agreed upon in the Petroleum Contract or approved by the State Petroleum management authority. 2. Petroleum bonuses of various types and other nonrecoverable undertakings agreed upon in the Petroleum Contract. 3. Interest on the amounts invested in Petroleum exploration and production. 4. Fines and penalties, amounts paid as compensatory damages and other damages resulting from the fault of the organization or the individual. 5. Money paid for profit taxes in Vietnam and abroad. 6. Losses that have been compensated by insurance. 7. Charitable and social contributions, and expenditures of a gift-giving character. 8. Unjustifiable and/or unreasonable expenses discovered by the Vietnam Oil and Gas Corporation or other Vietnamese organizations having jurisdiction during audit, final tax settlement and inspection. Article 55 The profit tax is payable in cash, either in U.S. dollars or other freely convertible currencies accepted by the Ministry of Finance. In the event Petroleum is sold in Vietnamese Dong, the profit tax shall be paid in Vietnamese Dong. The profit tax shall be provisionally paid every quarter, and finally reconciled every year. Article 56 A foreign organization or individual conducting Petroleum Operations shall pay taxes, fees and duties in accordance with Vietnamese law, except as otherwise provided in the Petroleum Law. 78 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam Chapter VII STATE MANAGEMENT OF PETROLEUM OPERATIONS Article 57 The Government of Vietnam uniformly manages Petroleum Operations. The State Petroleum management authority carries out the functions of State management oil Petroleum Operations. Based upon the policy to develop the Petroleum industry, the State Petroleum management authority shall submit for the determination of the Govemment areas for national reserves, areas for the Vietnam Oil and Gas Corporation to conduct exploration and production activities by itself, areas for cooperation with Contractors, and areas where investment needs to be encouraged with preferential conditions. The State Petroleum management authority submits to the Govemment of Vietnam plans for international cooperation in Petroleum exploration and production. Article 58 The State Petroleum management authority makes decisions on the delineation and readjustment of boundaries of Petroleum exploration Blocks. The Govemment of Vietnam makes decisions on issues regarding cooperation for conducting Petroleum Operations in areas overlapping with other countries. Article 59 The State Petroleum management authority reviews and submits to the Government of Vietnam for approval Petroleum contracts, and the assignments of interest and obligations under Petroleum Contracts signed by and between the Vietnam Oil and Gas Corporation and Contractors. With respect to Petroleum contracts signed by and between the Vietnam Oil and Gas Corporation and foreign Contractors, the Government of Vietnam assigns to the Ministry of Planning and Investment the issuance of investment licenses in accordance with the Law on Foreign Investment of Vietnam. Article 60 The State Petroleum management authority shall, within its jurisdiction, promulgate guidelines, procedures, standards, rules, technical regulations on Petroleum exploration and production. Article 61 The State Petroleum management authority shall decide on the following matters: 1. Monitoring and inspection of Petroleum Operations. 2. Submittal to the Govemment of Vietnam of issues regarding encouragement or restrictions on the export of Petroleum. 3. Requesting Contractors to sell a portion of their Petroleum to Vietnam for use. 4. Other important matters related to Petroleum Operations. Article 62 The State Petroleum management authority coordinates, guides and supervises various branches and local authorities with regard to issues related to Petroleum Operations. Article 63 To ensure the conduct of Petroleum Operations, the Ministries, relevant branches and the People's Committees of provinces and cities under the Central authority are held responsible for closely coordinating with each other in the granting of the right to land use, the reasonable use of waters, particularly in areas where national security must be ensured, and in areas where aquaculture, resort and tourism must be protected. Annex 2: Petroleum Law and Implementing Decree 79 Chapter V'III INSPECTION OF PETROLEUM OPERATIONS Article 64 Inspection of Petroleum Operations forms a specialized inspection aimed at ensuring the implementation of the Petroleum Law and other legal documents related to Petroleum Operations. The State Petroleum management authority organizes the implementation of the specialized functions of Petroleum inspection, and issues decisions to inspect Petroleum Operations. An inspection decision shall include the following essential contents: I . Composition of the inspection team. 2. Object under inspection. 3. Content of the inspection. 4. Location subject to inspection. 5. Inspection period. 6. Requests addressed to the organization or individual under inspection. Article 65 In order to fulfill its task, the inspection team shall have the following rights: 1. To be facilitated to conduct the inspection. 2. To bring along technical instruments necessary for the performance of inspection activities. 3. To request the party under inspection to provide necessary documentation within a definite time frame. If the deadline passes and the party under inspection has not complied with the request of the inspection team, the inspection team shall decide on the application of other necessary measures to collect the documentation in accordance with Vietnamese law. 4. To issue a decision to temporarily suspend Petroleum Operations which may cause accidents, or serious damage to life and property, and the environment. The period of temporary suspension shall not exceed 15 days. Within 24 hours counting from the time the decision is issued, the inspection team shall inform the State management authority having jurisdiction concerning such a decision and recommend adjudicative measures. Within 15 days, such State authority shall issue an adjudicative decision. 5. To coordinate with the Ministry of Planning and Investment to monitor foreign invested enterprises engaged in Petroleum Operations. 6. To recommend to State management authorities having jurisdiction adjudication of violations of Petroleum related law. Article 66 The party under inspection shall be notified of the inspection team's decision, which shall specify the conclusions and recommendations of the inspection team. In case the party under inspection does not agree with the decision of the inspection team, it will have the right to appeal to the State management authority having jurisdiction within 15 days. Within 30 days of receipt of the appeal, the State management authority having jurisdiction shall respond to such appeal in terms of its resolution. 80 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam Pending the results of the appeal, the party under inspection shall implement the decisions taken by the inspection team. Article 67 In case the inspection team's decision is not voluntarily implemented by the party under inspection, compulsory administrative measures shall be applied in accordance with the law on administrative sanctions. Article 68 In the course of conducting an inspection. the inspection team shall comply with the provisions of laws and shall be legally liable for its decisions. Chapter IX ADJUDICATION OF VIOLATIONS Article 69 The fines for violations referred to in Article 43 of the Petroleum Law are specified in detail as follows: 1. Conducting illegal Petroleum Operations shall be subject to a fine of up to U.S. $100,000 or an equivalent amount. 2. Failure to comply with the Regulations stipulated in Article 60 of this Decree. resulting in loss or damage to Petroleum resources or the environment or property of the State and/or individuals shall be subject to a fine of up to U.S. $100,000 or an equivalent amount in addition to compensation of damage. 3. Undertaking Petroleum exploration and production activities beyond the Contract Area without the approval of the State management authority having jurisdiction shall be subject to a fine of up to U.S. $ 50,000. 4. Fraudulent statements and/or evasion of royalty, profit tax and other taxes shall be fined for such fraudulent statements and/or tax evasion in accordance with the provisions of Vietnamese law in addition to the payment of the unpaid tax. 5. Failure to report to the State Petroleum management authority and the Vietnam Oil and Gas Corporation the discovery of mineral resources other than Petroleum, or failure to report valuable antique objects and/or property within the Contract Area shall be subject to a fine of up to U.S. $10,000 or an equivalent amount, and such antique objects and/or property shall be confiscated. 6. Obstructing inspection activities shall be subject to a fine of up to U.S. $10,000 or an equivalent amount. Apart from the above-mentioned fines, organizations and individuals who have committed other administrative breaches shall be adjudicated in accordance with the Ordinance on Administrative Sanctions. Article 70 The State Petroleum management authority shall issue decisions regarding the adjudication of violations and the extent of pecuniary fines provided in Article 69 of this Decree. Article 71 The jurisdiction to adjudicate the above violations shall be specified as follows: I. The State Petroleum management authority shall adjudicate violations and set the pecuniary fines provided in Items 1, 2, 3, 4, 5 of Article 69 of this Decree. 2. The Chief Inspector shall adjudicate breaches of and set the pecuniary fines provided in Item 6 of Article 69 of this Decree. Annex 2: Petroleum Law and Implementing Decree 81 Chapter X IMPLEMENTATION PROVISIONS Article 72 The treaty establishing the Vietnamese-Soviet Joint Venture (Vietsovpetro) and Petroleum Contracts entered into prior to the enactment of the Petroleum Law and/or this Decree shall continue to be implemented with respect to economic benefits relating to tax rates, tax payment regime, profit Petroleum sharing ratio, ratio of cost recovery, Petroleum committed in the treaty or such Petroleum Contracts. Article 73 State management authorities, within their jurisdiction and powers, are held responsible for guiding the implementation of this Decree. Article 74 This Decree takes effect from the date of signing. All prior regulations related to Petroleum Operations that are inconsistent with this Decree are hereby abrogated. Article 75 The Minister-Chairman of the Government Bureau, the Ministers, Chief of Ministerial Authorities and other agencies of the Government, Chairmen of the People's Committees of provinces and cities under the Central authority, the Vietnam Oil and Gas Corporation and the organizations and individuals conducting Petroleum Operations are held responsible for implementing this Decree. For the Government of Vietnam Prime Minister Signed VO VAN KIET Annex 3: Prime Minister's Decision of 7 November 1998 Government No. 216/1998/QD-TTg Hanoi, November 7, 1998 PRIME MINISTER'S DECISION ON INVESTMENT INCENTIVES FOR PETROLEUM ACTIVITIES IN DEEP WATER, FAR- OFFSHORE AREAS AND AREAS OF SPECIALLY DIFFICULT GEOGRAPHY, ECONOMY AND TECHNOLOGY PRIME MINISTER Based on the Law on Government Organization dated September 30, 1992; Based on the Petroleum Law dated July 6, 1993; Based on the Law on Foreign Investment in Vietnam dated November 12, 1996; In order to encourage investment in petroleum activities in deep water, far-offshore areas and areas of specially difficult geography, economy and technology; Upon the request of Minister of Finance (Official Letter No. 3398 TC/TCDN dated September 5. 1998), DECIDES: Article 1 Organizations, individuals conducting petroleum activities enjoy favorable incentive policies if having one of the following three conditions: 1. Petroleum activity in a area of water depth of over 200 meters. 2. Petroleum activity in a far-offshore area. 3. Petroleum activity in an area of especially difficult geography, economy and technology. Based on the decision of the authorized state management agency, Petrovietnam will announce the deep water, far-offshore areas and areas of especially difficult geography, economy and technology when issuing bidding documents of petroleum fields for exploration. Article 2 Organizations and individuals conducting petroleum activities in article 1 specified areas of this decision will enjoy the favorable taxes as follows: 1. Reduction of the corporate income tax rate from 50% down to 32%. 2. Favorable tax rate of 5% for overseas profit transmittal as stipulated in the law on Foreign Investment in Vietnam. 3. Exemption of export tax for the portion of petroleum under State natural resource tax. Article 3 Depending on each specific project, contract parties can come to arrangement in the petroleum contract on fee exemption of commission for signatures and reference document. 83 84 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices in Vietnam Article 4 Contract parties can come to an agreement in the petroleum contract on the terms and mode of interruption of the implementation of their contract rights, and obligations in case of arisen problems that cannot be foreseen and overcome. The duration of interruption will not be included in the duration of the contract. In case of the discovery of a gas field of commercial value with unavailability of gas consumers, Contractor is allowed to get hold of the field area for the period approved by the Govemment. Contract parties can come to an agreement in the contract on the conditions relating to the above interruption and hold of contract field area. Article 5 Upon the request of Petrovietnam, the authorized state management agency can adjust the area for exploration as stipulated in item 4 Article 38 of the Petroleum Law, to be large enough, meeting the requirement for an area of a petroleum contract. Article 6 Level of cost recovery for petroleum activities in the areas specified in Article 1 of this decision is 70% of the total actual exploitation output from the contract field. Article 7 After meeting the full domestic gas requirement, or upon the consideration that the domestic market is not well conditioned for gas consumption, Government will permit gas exploitation organizations and individuals to export gas. Article 8 State Bank of Vietnam ensures the gas exploitation organizations and individuals to exchange Vietnamese currency collected from their sale of gas in domestic market into foreign currencies. Article 9 In case of serious breakdowns, organizations and individuals conducting petroleum activities enjoy exemption from normal customs clearances for personnel and equipment and materials for the purpose of emergency assistance. Article 10 This decision comes into effect 15 days from the date of signing. Ministers, Heads of Ministerial agencies, Heads of Government bodies, Chairmen of Provincial and City People's Committees under the Central Government, Chairman of Management Board and General Directors of Petrovietnam are responsible for the implementation of this decision. Prime Minister Phan Van Khai (Signed and Stamped) Joint UNDP/World Bank ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP) LIST OF REPORTS ON COMPLETED ACTIVITIES Region/Country Activity/Report Title Date Number SUB-SAHARAN AFRICA (AFR) Africa Regional Anglophone Africa Household Energy Workshop (English) 07/88 085/88 Regional Power Seminar on Reducing Electric Power System Losses in Africa (English) 08/88 087/88 Institutional Evaluation of EGL (English) 02/89 098/89 Biomass Mapping Regional Workshops (English) 05/89 -- Francophone Household Energy Workshop (French) 08/89 -- Interafrican Electrical Engineering College: Proposals for Short- and Long-Term Development (English) 03/90 112/90 Biomass Assessment and Mapping (English) 03/90 -- Symposium on Power Sector Reform and Efficiency Improvement in Sub-Saharan Africa (English) 06/96 182/96 Commercialization of Marginal Gas Fields (English) 12/97 201/97 Commercilizing Natural Gas: Lessons from the Seminar in Nairobi for Sub-Saharan Africa and Beyond 01/00 225/00 Angola Energy Assessment (English and Portuguese) 05/89 4708-ANG Power Rehabilitation and Technical Assistance (English) 10/91 142/91 Benin Energy Assessment (English and French) 06/85 5222-BEN Botswana Energy Assessment (English) 09/84 4998-BT Pump Electrification Prefeasibility Study (English) 01/86 047/86 Review of Electricity Service Connection Policy (English) 07/87 071/87 Tuli Block Farms Electrification Study (English) 07/87 072/87 Household Energy Issues Study (English) 02/88 -- Urban Household Energy Strategy Study (English) 05/91 132/91 Burkina Faso Energy Assessment (English and French) 01/86 5730-BUR Technical Assistance Program (English) 03/86 052/86 Urban Household Energy Strategy Study (English and French) 06/91 134/91 Burundi Energy Assessment (English) 06/82 3778-BU Petroleum Supply Management (English) 01/84 012/84 Status Report (English and French) 02/84 011/84 Presentation of Energy Projects for the Fourth Five-Year Plan (1983-1987) (English and French) 05/85 036/85 Improved Charcoal Cookstove Strategy (English and French) 09/85 042/85 Peat Utilization Project (English) 11/85 046/85 Energy Assessment (English and French) 01/92 9215-BU Cape Verde Energy Assessment (English and Portuguese) 08/84 5073-CV Household Energy Strategy Study (English) 02/90 110/90 Central African Republic Energy Assessement (French) 08/92 9898-CAR Chad Elements of Strategy for Urban Household Energy The Case of N'djamena (French) 12/93 160/94 Comoros Energy Assessment (English and French) 01/88 7104-COM In Search of Better Ways to Develop Solar Markets: The Case of Comoros 05/00 230/00 Congo Energy Assessment (English) 01/88 6420-COB Power Development Plan (English and French) 03/90 106/90 C6te d'Ivoire Energy Assessment (English and French) 04/85 5250-IVC Improved Biomass Utilization (English and French) 04/87 069/87 Region/Country Activity/Report Title Date Number C6te d'Ivoire Power System Efficiency Study (English) 12/87 -- Power Sector Efficiency Study (French) 02/92 140/91 Project of Energy Efficiency in Buildings (English) 09/95 175/95 Ethiopia Energy Assessment (English) 07/84 4741-ET Power System Efficiency Study (English) 10/85 045/85 Agricultural Residue Briquetting Pilot Project (English) 12/86 062/86 Bagasse Study (English) 12/86 063/86 Cooking Efficiency Project (English) 12/87 -- Energy Assessment (English) 02/96 179/96 Gabon Energy Assessment (English) 07/88 6915-GA The Gambia Energy Assessment (English) 11/83 4743-GM Solar Water Heating Retrofit Project (English) 02/85 030/85 Solar Photovoltaic Applications (English) 03/85 032/85 Petroleum Supply Management Assistance (English) 04/85 035/85 Ghana Energy Assessment (English) 11/86 6234-GH Energy Rationalization in the Industrial Sector (English) 06/88 084/88 Sawmill Residues Utilization Study (English) 11/88 074/87 Industrial Energy Efficiency (English) 11/92 148/92 Guinea Energy Assessment (English) 11/86 6137-GUI Household Energy Strategy (English and French) 01/94 163/94 Guinea-Bissau Energy Assessment (English and Portuguese) 08/84 5083-GUB Recommended Technical Assistance Projects (English & Portuguese) 04/85 033/85 Management Options for the Electric Power and Water Supply Subsectors (English) 02/90 100/90 Power and Water Institutional Restructuring (French) 04/91 118/91 Kenya Energy Assessment (English) 05/82 3800-KE Power System Efficiency Study (English) 03/84 014/84 Status Report (English) 05/84 016/84 Coal Conversion Action Plan (English) 02/87 -- Solar Water Heating Study (English) 02/87 066/87 Peri-Urban Woodfuel Development (English) 10/87 076/87 Power Master Plan (English) 11/87 -- Power Loss Reduction Study (English) 09/96 186/96 Implementation Manual: Financing Mechanisms for Solar Electric Equipment 07/00 231/00 Lesotho Energy Assessment (English) 01/84 4676-LSO Liberia Energy Assessment (English) 12/84 5279-LBR Recommended Technical Assistance Projects (English) 06/85 038/85 Power System Efficiency Study (English) 12/87 081/87 Madagascar Energy Assessment (English) 01/87 5700-MAG Power System Efficiency Study (English and French) 12/87 075/87 Environmental Impact of Woodfuels (French) 10/95 176/95 Malawi Energy Assessment (English) 08/82 3903-MAL Technical Assistance to Improve the Efficiency of Fuelwood Use in the Tobacco Industry (English) 11/83 009/83 Status Report (English) 01/84 013/84 Mali Energy Assessment (English and French) 11/91 8423-MLI Household Energy Strategy (English and French) 03/92 147/92 Islamic Republic of Mauritania Energy Assessment (English and French) 04/85 5224-MAU Household Energy Strategy Study (English and French) 07/90 123/90 - 3 - Region/Country Activity/Report Title Date Number Mauritius Energy Assessment (English) 12/81 3510-MAS Status Report (English) 10/83 008/83 Power System Efficiency Audit (English) 05/87 070/87 Bagasse Power Potential (English) 10/87 077/87 Energy Sector Review (English) 12/94 3643-MAS Mozambique Energy Assessment (English) 01/87 6128-MOZ Household Electricity Utilization Study (English) 03/90 113/90 Electricity Tariffs Study (English) 06/96 181/96 Sample Survey of Low Voltage Electricity Customers 06/97 195/97 Namibia Energy Assessment (English) 03/93 11320-NAM Niger Energy Assessment (French) 05/84 4642-NIR Status Report (English and French) 02/86 051/86 Improved Stoves Project (English and French) 12/87 080/87 Household Energy Conservation and Substitution (English and French) 01/88 082/88 Nigeria Energy Assessment (English) 08/83 4440-UNI Energy Assessment (English) 07/93 11672-UJNI Rwanda Energy Assessment (English) 06/82 3779-RW Status Report (English and French) 05/84 017/84 Improved Charcoal Cookstove Strategy (English and French) 08/86 059/86 Improved Charcoal Production Techniques (English and French) 02/87 065/87 Energy Assessment (English and French) 07/91 8017-RW Commercialization of Imnproved Charcoal Stoves and Carbonization Techniques Mid-Term Progress Report (English and French) 12/91 141/91 SADC SADC Regional Power Interconnection Study, Vols. I-IV (English) 12/93 -- SADCC SADCC Regional Sector: Regional Capacity-Building Program for Energy Surveys and Policy Analysis (English) 11/91 -- Sao Tome and Principe Energy Assessment (English) 10/85 5803-STP Senegal Energy Assessment (English) 07/83 4182-SE Status Report (English and French) 10/84 025/84 Industrial Energy Conservation Study (English) 05/85 037/85 Preparatory Assistance for Donor Meeting (English and French) 04/86 056/86 Urban Household Energy Strategy (English) 02/89 096/89 Industrial Energy Conservation Program (English) 05/94 165/94 Seychelles Energy Assessment (English) 01/84 4693-SEY Electric Power System Efficiency Study (English) 08/84 021/84 Sierra Leone Energy Assessment (English) 10/87 6597-SL Somalia Energy Assessment (English) 12/85 5796-SO South Africa Options for the Structure and Regulation of Natural Republic of Gas Industry (English) 05/95 172/95 Sudan Management Assistance to the Ministry of Energy and Mining 05/83 003/83 Energy Assessment (English) 07/83 4511-SU Power System Efficiency Study (English) 06/84 018/84 Status Report (English) 11/84 026/84 Wood Energy/Forestry Feasibility (English) 07/87 073/87 Swaziland Energy Assessment (English) 02/87 6262-SW Household Energy Strategy Study 10/97 198/97 Tanzania Energy Assessment (English) 11/84 4969-TA Peri-Urban Woodfuels Feasibility Study (English) 08/88 086/88 Tobacco Curing Efficiency Study (English) 05/89 102/89 Remote Sensing and Mapping of Woodlands (English) 06/90 -- - 4 - Region/Country Activity/Report Title Date Number Tanzania Industrial Energy Efficiency Technical Assistance (English) 08/90 122/90 Power Loss Reduction Volume 1: Transmission and Distribution SystemTechnical Loss Reduction and Network Development (English) 06/98 204A/98 Power Loss Reduction Volume 2: Reduction of Non-Technical Losses (English) 06/98 204B/98 Togo Energy Assessment (English) 06/85 5221-TO Wood Recovery in the Nangbeto Lake (English and French) 04/86 055/86 Power Efficiency Improvement (English and French) 12/87 078/87 Uganda Energy Assessment (English) 07/83 4453-UG Status Report (English) 08/84 020/84 Institutional Review of the Energy Sector (English) 01/85 029/85 Energy Efficiency in Tobacco Curing Industry (English) 02/86 049/86 Fuelwood/Forestry Feasibility Study (English) 03/86 053/86 Power System Efficiency Study (English) 12/88 092/88 Energy Efficiency Improvement in the Brick and Tile Industry (English) 02/89 097/89 Tobacco Curing Pilot Project (English) 03/89 UNDP Temninal Report Energy Assessment (English) 12/96 193/96 Rural Electrification Strategy Study 09/99 221/99 Zaire Energy Assessment (English) 05/86 5837-ZR Zambia Energy Assessment (English) 01/83 4110-ZA Status Report (English) 08/85 039/85 Energy Sector Institutional Review (English) 11/86 060/86 Power Subsector Efficiency Study (English) 02/89 093/88 Energy Strategy Study (English) 02/89 094/88 Urban Household Energy Strategy Study (English) 08/90 121/90 Zimbabwe Energy Assessment (English) 06/82 3765-ZIM Power System Efficiency Study (English) 06/83 005/83 Status Report (English) 08/84 019/84 Power Sector Management Assistance Project (English) 04/85 034/85 Power Sector Management Institution Building (English) 09/89 -- Petroleum Management Assistance (English) 12/89 109/89 Charcoal Utilization Prefeasibility Study (English) 06/90 119/90 Integrated Energy Strategy Evaluation (English) 01/92 8768-ZIM Energy Efficiency Technical Assistance Project: Strategic Framework for a National Energy Efficiency Improvement Program (English) 04/94 -- Capacity Building for the National Energy Efficiency Improvement Programme (NEEIP) (English) 12/94 -- Rural Electrification Study 03/00 228/00 EAST ASIA AND PACIFIC (EAP) Asia Regional Pacific Household and Rural Energy Seminar (English) 11/90 -- China County-Level Rural Energy Assessments (English) 05/89 101/89 Fuelwood Forestry Preinvestment Study (English) 12/89 105/89 Strategic Options for Power Sector Reform in China (English) 07/93 156/93 Energy Efficiency and Pollution Control in Township and Village Enterprises (TVE) Industry (English) 11/94 168/94 Region/Country Activity/Report Title Date Number China Energy for Rural Development in China: An Assessment Based on a Joint Chinese/ESMAP Study in Six Counties (English) 06/96 183/96 Improving the Technical Efficiency of Decentralized Power Companies 09/99 222/999 Fiji Energy Assessment (English) 06/83 4462-FIJ Indonesia Energy Assessment (English) 11/81 3543-IND Status Report (English) 09/84 022/84 Power Generation Efficiency Study (English) 02/86 050/86 Energy Efficiency in the Brick, Tile and Lime Industries (English) 04/87 067/87 Diesel Generating Plant Efficiency Study (English) 12/88 095/88 Urban Household Energy Strategy Study (English) 02/90 107/90 Biomass Gasifier Preinvestment Study Vols. I & II (English) 12/90 124/90 Prospects for Biomass Power Generation with Emphasis on Palm Oil, Sugar, Rubberwood and Plywood Residues (English) 11/94 167/94 Lao PDR Urban Electricity Demand Assessment Study (English) 03/93 154/93 Institutional Development for Off-Grid Electrification 06/99 215/99 Malaysia Sabah Power System Efficiency Study (English) 03/87 068/87 Gas Utilization Study (English) 09/91 9645-MA Myanmar Energy Assessment (English) 06/85 5416-BA Papua New Guinea Energy Assessment (English) 06/82 3882-PNG Status Report (English) 07/83 006/83 Energy Strategy Paper (English) Institutional Review in the Energy Sector (English) 10/84 023/84 Power Tariff Study (English) 10/84 024/84 Philippines Commercial Potential for Power Production from Agricultural Residues (English) 12/93 157/93 Energy Conservation Study (English) 08/94 -- Solomon Islands Energy Assessment (English) 06/83 4404-SOL Energy Assessment (English) 01/92 979-SOL South Pacific Petroleum Transport in the South Pacific (English) 05/86 -- Thailand Energy Assessment (English) 09/85 5793-TH Rural Energy Issues and Options (English) 09/85 044/85 Accelerated Dissemination of Improved Stoves and Charcoal Kilns (English) 09/87 079/87 Northeast Region Village Forestry and Woodfuels Preinvestment Study (English) 02/88 083/88 Impact of Lower Oil Prices (English) 08/88 -- Coal Development and Utilization Study (English) 10/89 -- Tonga Energy Assessment (English) 06/85 5498-TON Vanuatu Energy Assessment (English) 06/85 5577-VA Vietnam Rural and Household Energy-Issues and Options (English) 01/94 161/94 Power Sector Reform and Restructuring in Vietnam: Final Report to the Steering Committee (English and Vietnamese) 09/95 174/95 Household Energy Technical Assistance: Improved Coal Briquetting and Commercialized Dissemination of Higher Efficiency Biomass and Coal Stoves (English) 01/96 178/96 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices In Vietnam 02/01 236/01 Western Samoa Energy Assessment (English) 06/85 5497-WSO - 6 - Region/Country Activity/Report Title Date Number SOUTH ASIA (SAS) Bangladesh Energy Assessment (English) 10/82 3873-BD Priority Investment Program (English) 05/83 002/83 Status Report (English) 04/84 015/84 Power System Efficiency Study (English) 02/85 031/85 Small Scale Uses of Gas Prefeasibility Study (English) 12/88 -- India Opportunities for Commercialization of Nonconventional Energy Systems (English) 11/88 091/88 Maharashtra Bagasse Energy Efficiency Project (English) 07/90 120/90 Mini-Hydro Development on Irrigation Dams and Canal Drops Vols. I, II and III (English) 07/91 139/91 WindFarm Pre-Investment Study (English) 12/92 150/92 Power Sector Reform Seminar (English) 04/94 166/94 Environmental Issues in the Power Sector (English) 06/98 205/98 Environmental Issues in the Power Sector: Manual for Environmental Decision Making (English) 06/99 213/99 Household Energy Strategies for Urban India: The Case of Hyderabad 06/99 214/99 Nepal Energy Assessment (English) 08/83 4474-NEP Status Report (English) 01/85 028/84 Energy Efficiency & Fuel Substitution in Industries (English) 06/93 158/93 Pakistan Household Energy Assessment (English) 05/88 -- Assessment of Photovoltaic Programs, Applications, and Markets (English) 10/89 103/89 National Household Energy Survey and Strategy Formulation Study: Project Terminal Report (English) 03/94 -- Managing the Energy Transition (English) 10/94 Lighting Efficiency Improvement Program Phase 1: Commercial Buildings Five Year Plan (English) 10/94 Sri Lanka Energy Assessment (English) 05/82 3792-CE Power System Loss Reduction Study (English) 07/83 007/83 Status Report (English) 01/84 010/84 Industrial Energy Conservation Study (English) 03/86 054/86 EUROPE AND CENTRAL ASIA (ECA) Bulgaria Natural Gas Policies and Issues (English) 10/96 188/96 Central and Eastem Europe Power Sector Reform in Selected Countries 07/97 196/97 Increasing the Efficiency of Heating Systems in Central and Eastern Europe and the Former Soviet Union 08/00 234/00 Eastern Europe The Future of Natural Gas in Eastem Europe (English) 08/92 149/92 Kazakhstan Natural Gas Investment Study, Volumes 1, 2 & 3 12/97 199/97 Kazakhstan & Kyrgyzstan Opportunities for Renewable Energy Development 11/97 16855-KAZ Poland Energy Sector Restructuring Program Vols. I-V (English) 01/93 153/93 Natural Gas Upstream Policy (English and Polish) 08/98 206/98 Energy Sector Restructuring Program: Establishing the Energy Regulation Authority 10/98 208/98 Portugal Energy Assessment (English) 04/84 4824-PO - 7 - Region/Country Activity/Report Title Date Number Romania Natural Gas Development Strategy (English) 12/96 192/96 Slovenia Workshop on Private Participation in the Power Sector (English) 02/99 211/99 Turkey Energy Assessment (English) 03/83 3877-TU Energy and the Environment: Issues and Options Paper 04/00 229/00 MIDDLE EAST AND NORTH AFRICA (MNA) Arab Republic of Egypt Energy Assessment (English) 10/96 189/96 Energy Assessment (English and French) 03/84 4157-MOR Status Report (English and French) 01/86 048/86 Morocco Energy Sector Institutional Development Study (English and French) 07/95 173/95 Natural Gas Pricing Study (French) 10/98 209/98 Gas Development Plan Phase II (French) 02/99 210/99 Syria Energy Assessment (English) 05/86 5822-SYR Electric Power Efficiency Study (English) 09/88 089/88 Energy Efficiency Improvement in the Cement Sector (English) 04/89 099/89 Energy Efficiency Improvement in the Fertilizer Sector (English) 06/90 115/90 Tunisia Fuel Substitution (English and French) 03/90 -- Power Efficiency Study (English and French) 02/92 136/91 Energy Management Strategy in the Residential and Tertiary Sectors (English) 04/92 146/92 Renewable Energy Strategy Study, Volume I (French) 11/96 190A/96 Renewable Energy Strategy Study, Volume II (French) 11/96 190B/96 Yemen Energy Assessment (English) 12/84 4892-YAR Energy Investment Priorities (English) 02/87 6376-YAR Household Energy Strategy Study Phase I (English) 03/91 126/91 LATIN AMERICA AND THE CARIBBEAN (LAC) LAC Regional Regional Seminar on Electric Power System Loss Reduction in the Caribbean (English) 07/89 -- Elimination of Lead in Gasoline in Latin America and the Caribbean (English and Spanish) 04/97 194/97 Elimination of Lead in Gasoline in Latin America and the Caribbean - Status Report (English and Spanish) 12/97 200/97 Harmonization of Fuels Specifications in Latin America and the Caribbean (English and Spanish) 06/98 203/98 Bolivia Energy Assessment (English) 04/83 4213-BO National Energy Plan (English) 12/87 -- La Paz Private Power Technical Assistance (English) 11/90 111/90 Prefeasibility Evaluation Rural Electrification and Demand Assessment (English and Spanish) 04/91 129/91 National Energy Plan (Spanish) 08/91 131/91 Private Power Generation and Transmission (English) 01/92 137/91 Natural Gas Distribution: Economics and Regulation (English) 03/92 125/92 Natural Gas Sector Policies and Issues (English and Spanish) 12/93 164/93 Household Rural Energy Strategy (English and Spanish) 01/94 162/94 Preparation of Capitalization of the Hydrocarbon Sector 12/96 191/96 - 8 - Region/Country Activity/Report Title Date Number Bolivia Introducing Competition into the Electricity Supply Industry in Developing Countries: Lessons from Bolivia 08/00 233/00 Final Report on Operational Activities Rural Energy and Energy Efficiency 08/00 235/00 Brazil Energy Efficiency & Conservation: Strategic Partnership for Energy Efficiency in Brazil (English) 01/95 170/95 Hydro and Thermal Power Sector Study 09/97 197/97 Rural Electrification with Renewable Energy Systems in the Northeast: A Preinvestment Study 07/00 232/00 Chile Energy Sector Review (English) 08/88 7129-CH Colombia Energy Strategy Paper (English) 12/86 -- Power Sector Restructuring (English) 11/94 169/94 Energy Efficiency Report for the Commercial and Public Sector (English) 06/96 184/96 Costa Rica Energy Assessment (English and Spanish) 01/84 4655-CR Recommended Technical Assistance Projects (English) 11/84 027/84 Forest Residues Utilization Study (English and Spanish) 02/90 108/90 Domninican Republic Energy Assessment (English) 05/91 8234-DO Ecuador Energy Assessment (Spanish) 12/85 5865-EC Energy Strategy Phase I (Spanish) 07/88 -- Energy Strategy (English) 04/91 -- Private Minihydropower Development Study (English) 11/92 -- Energy Pricing Subsidies and Interfuel Substitution (English) 08/94 11798-EC Energy Pricing, Poverty and Social Mitigation (English) 08/94 12831-EC Guatemala Issues and Options in the Energy Sector (English) 09/93 12160-GU Haiti Energy Assessment (English and French) 06/82 3672-HA Status Report (English and French) 08/85 041/85 Household Energy Strategy (English and French) 12/91 143/91 Honduras Energy Assessment (English) 08/87 6476-HO Petroleum Supply Management (English) 03/91 128/91 Jamaica Energy Assessment (English) 04/85 5466-JM Petroleum Procurement, Refining, and Distribution Study (English) 11/86 061/86 Energy Efficiency Building Code Phase I (English) 03/88 -- Energy Efficiency Standards and Labels Phase I (English) 03/88 -- Management Information System Phase I (English) 03/88 -- Charcoal Production Project (English) 09/88 090/88 FIDCO Sawmill Residues Utilization Study (English) 09/88 088/88 Energy Sector Strategy and Investment Planning Study (English) 07/92 135/92 Mexico Improved Charcoal Production Within Forest Management for the State of Veracruz (English and Spanish) 08/91 138/91 Energy Efficiency Management Technical Assistance to the Comision Nacional para el Ahorro de Energia (CONAE) (English) 04/96 180/96 Panama Power System Efficiency Study (English) 06/83 004/83 Paraguay Energy Assessment (English) 10/84 5145-PA Recommended Technical Assistance Projects (English) 09/85 -- Status Report (English and Spanish) 09/85 043/85 Peru Energy Assessment (English) 01/84 4677-PE Status Report (English) 08/85 040/85 Proposal for a Stove Dissemination Program in the Sierra (English and Spanish) 02/87 064/87 - 9 - Region/Country Activity/Report Title Date Number Peru Energy Strategy (English and Spanish) 12/90 -- Study of Energy Taxation and Liberalization of the Hydrocarbons Sector (English and Spanish) 120/93 159/93 Reform and Privatization in the Hydrocarbon Sector (English and Spanish) 07/99 216/99 Saint Lucia Energy Assessment (English) 09/84 5111-SLU St. Vincent and the Grenadines Energy Assessment (English) 09/84 5103-STV Sub Andean Environmental and Social Regulation of Oil and Gas Operations in Sensitive Areas of the Sub-Andean Basin (English and Spanish) 07/99 217/99 Trinidad and Tobago Energy Assessment (English) 12/85 5930-TR GLOBAL Energy End Use Efficiency: Research and Strategy (English) 11/89 Women and Energy--A Resource Guide The International Network: Policies and Experience (English) 04/90 -- Guidelines for Utility Customer Management and Metering (English and Spanish) 07/91 -- Assessment of Personal Computer Models for Energy Planning in Developing Countries (English) 10/91 -- Long-Term Gas Contracts Principles and Applications (English) 02/93 152/93 Comparative Behavior of Firms Under Public and Private Ownership (English) 05/93 155/93 Development of Regional Electric Power Networks (English) 10/94 -- Roundtable on Energy Efficiency (English) 02/95 171/95 Assessing Pollution Abatement Policies with a Case Study of Ankara (English) 11/95 177/95 A Synopsis of the Third Annual Roundtable on Independent Power Projects: Rhetoric and Reality (English) 08/96 187/96 Rural Energy and Development Roundtable (English) 05/98 202/98 A Synopsis of the Second Roundtable on Energy Efficiency: Institutional and Financial Delivery Mechanisms (English) 09/98 207/98 The Effect of a Shadow Price on Carbon Emission in the Energy Portfolio of the World Bank: A Carbon Backcasting Exercise (English) 02/99 212/99 Increasing the Efficiency of Gas Distribution Phase 1: Case Studies and Thematic Data Sheets 07/99 218/99 Global Energy Sector Reform in Developing Countries: A Scorecard 07/99 219/99 Global Lighting Services for the Poor Phase II: Text Marketing of Small "Solar" Batteries for Rural Electrification Purposes 08/99 220/99 A Review of the Renewable Energy Activities of the UNDP/ World Bank Energy Sector Management Assistance Programnme 1993 to 1998 11/99 223/99 Energy, Transportation and Environment: Policy Options for Environmental Improvement 12/99 224/99 - 10- Region/Country Activity/Report Title Date Number Global Privatization, Competition and Regulation in the British Electricity Industry, With Implications for Developing Countries 02/00 226/00 Reducing the Cost of Grid Extension for Rural Electrification 02/00 227/00 2/8/01 The World Bank 1818 H Street, NW Washington, DC 20433 USA Tel.: 1.202.458.2321 Fax.: 1.202.522.3018 Internet: www.esmap.org Email: esmap@worldbank.org A joint UNDP/Wortd Bank Programme