Identifier
Created
Classification
Origin
05HOCHIMINHCITY104
2005-01-27 03:18:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Ho Chi Minh City
Cable title:  

STATE TRADING IN VIETNAM - PETROVIETNAM A

Tags:  ENRG ETRD EPET ECON EINV PGOV VM SOE 
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270318Z Jan 05
UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000104 

SIPDIS

SENSITIVE

DEPARTMENT PLEASE PASS USTR, ELENA BRYAN
USDOC FOR 6500 AND 4431/MAC/AP/OPB/VLC/HPPHO

E.O. 12958: N/A
TAGS: ENRG ETRD EPET ECON EINV PGOV VM SOE
SUBJECT: STATE TRADING IN VIETNAM - PETROVIETNAM A
PROBLEM FOR U.S. OIL AND GAS


UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000104

SIPDIS

SENSITIVE

DEPARTMENT PLEASE PASS USTR, ELENA BRYAN
USDOC FOR 6500 AND 4431/MAC/AP/OPB/VLC/HPPHO

E.O. 12958: N/A
TAGS: ENRG ETRD EPET ECON EINV PGOV VM SOE
SUBJECT: STATE TRADING IN VIETNAM - PETROVIETNAM A
PROBLEM FOR U.S. OIL AND GAS



1. (U) This is the first in a series of cables on
industry perspectives in southern Vietnam on the role
of the state in the economy.

SUMMARY
--------------

2. (SBU): Vietnam's oil and gas industry is
completely controlled by the state-owned Vietnam Oil
and Gas Corporation, known as PetroVietnam. U.S.
companies in Ho Chi Minh City are critical of
the company that is simultaneously a partner, manager,
service provider and regulator. They are unanimous in
the view that PetroVietnam is poorly managed, lacks
transparency and often displays ignorance of basic
business principles. These weaknesses constrain U.S.
companies' ability to do business in the oil and
gas sector and hinder Vietnam's capacity to fully
exploit its oil and gas resources. END SUMMARY.

MANAGEMENT WITH SKEWED PRIORITIES
--------------

3. (SBU) In a series of meetings with senior U.S.
energy company leaders (protect,) Econoff heard that
that PetroVietnam officials are primarily concerned
with control and make poor management
decisions as a result. A case in point is the state-
owned enterprise's recent decision to reduce the oil
production of one venture. ConocoPhillips has a 25
percent stake in a consortium that is approved to
produce 65,000 barrels per day. However, the
field has developed better than expected, and the
consortium has been producing oil 88,000 bpd. In
December, Conoco received a written order from
PetroVietnam requiring that production be
immediately reduced from 88,000 to 65,000 bpd.
PetroVietnam's stated rationale was that Conoco was
removing resources too quickly and irresponsibly.
Conoco maintains it is producing in accordance with
international standards, and says that privately
PetroVietnam's technical employees are satisfied with
Conoco's methods and do not understand their
superiors' rationale.


4. (SBU) Conoco has already contracted for future
sales based on the 88,000 bpd rate. If production is

cut immediately, Conoco would pay hefty penalties.
After Conoco told PetroVietnam that the state company
would be responsible for these penalties,
PetroVietnam ordered Conoco to produce 88,000 bpd
until future sales commitments were fulfilled before
eventually dropping production to 65,000 bpd.


5. (SBU) Conoco speculates that PetroVietnam is
"saving" resources to prduce at100 percent ownership
in the future, when the foreign investor contracts
expire. Conoco has a 20-year operating license for
this block, so the loss of revenue if the production
cap is maintained will be considerable. PetroVietnam
has a 50 percent stake in the consortium and stands to
lose revenues by capping production. Further, the GVN
loses tax revenues. The tax rate for this field is
the highest of those in operation - at the height of
production, the GVN benefits from an 80 percent tax
rate.

LACK OF ECONOMIC SENSE AND PROFESSIONAL EXPERTISE
-------------- --------------

6. (SBU) U.S. companies cite numerous examples to
illustrate PetroVietnam's ignorance of international
standards and economics. Unocal reports that it has
been negotiating with PetroVietnam for more than two
years on a development agreement and expects to sign
a contract by the end of January. Ironically, the
final contract is virtually identical to the original
proposal. From Unocal's perspective, PetroVietnam was
incapable of evaluating its offers or of understanding
standard industry practices or terms in comparable
contracts.


7. (SBU) Unocal offered to model its development
contract on a similar agreement between British
Petroleum (BP) and PetroVietnam. (Note: BP's
negotiations took 10 years to finalize. End Note.)
Unocal's discovery was two large, but separate, gas
deposits within two exploration blocks and the company
proposed developing both deposits as a unified area to
lower capital costs and maximize efficiency.
PetroVietnam viewed this as a divergence from the
original contract and insisted on each deposit being
developed separately. Unocal attempted to explain
that PetroVietnam would lose millions following this
route. According to Unocal, one PetroVietnam engineer
said, "We don't care about economics! We want to put
the platform where there is the most gas." Unocal
eventually spent $30,000 to hire a third-party
industry consultant to explain gas development methods
and analyze Unocal's proposal for PetroVietnam.
Unocal reports PetroVietnam was receptive to the
consultant, but the company was frustrated
at having to educate PetroVietnam's employees about
both the science and economics of the industry.


8. (SBU) ConocoPhillips reports that it has also been
overruled on production decisions by PetroVietnam
without any technical or financial reasoning. For
example, to maintain well pressure in its field,
Conoco proposed injecting 20,000 barrels of water/day
into five wells at a cost of $75 million.
PetroVietnam forced Conoco to drill eight or nine
water injection wells at a cost of $200 million,
without any technical explanation.

SUBSIDIARIES HELP PETROVIETNAM RETAIN CONTROL
--------------

9. (SBU) U.S. companies report that PetroVietnam uses
an interlocking network of subsidiaries to maintain
its complete control of the oil and gas sector. In
the past, PetroVietnam has created subsidiary
companies to compete with Halliburton, which
provides services to the industry. PetroVietnam has
announced plans to divest three subsidiaries by the
end of 2005: the Petroleum Technical Services
Company, the Drilling and Well Services Company, and
the Drilling Mud Company. However, the state will
retain a more than 50 percent stake in the companies,
limiting foreign ownership to 30 percent.
ConocoPhillips and Unocal both report that
PetroVietnam frequently prohibits foreign
companies from bidding on projects that are then
awarded to subsidiaries and frequently requires
foreign companies to use PetroVietnam subsidiaries as
suppliers. According to Halliburton, these
subsidiaries are often poorly organized and managed,
and their employees lack the appropriate skills and
knowledge. All the companies agreed PetroVietnam is
run like an opaque government ministry rather than a
business enterprise.

COMMENT
--------------

10. (SBU) As U.S. companies point out, PetroVietnam is
in an enviable position. It is able to capture rents
and revenues at every step in the process - royalties,
taxes, service fees, etc. And as oil and gas are
Vietnam's top exports, bringing in $5.6 billion in
2004, PetroVietnam is the GVN's largest revenue
generator. However, lack of industry experience,
professional expertise, and business understanding by
PetroVietnam is preventing both U.S. investors and the
GVN from reaping maximum benefits. If PetroVietnam
continues to forego profit and experience in the
interest of complete industry control, foreign
participation in the oil and gas sector will become
even more difficult.

WINNICK