CHEVRON VIETNAM EXECUTIVES DISCUSS ENERGY PROJECT

UNCLAS SECTION 01 OF 02 HANOI 001379 SIPDIS STATE FOR EAP/MLS AND EEB STATE PASS USTR FOR BISBEE SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EPET ECON ENRG TRGY EINV ETRD VM SUBJECT: CHEVRON VIETNAM EXECUTIVES DISCUSS ENERGY PROJECT HANOI 00001379 001.2 OF 002 (U) THIS CABLE IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET. ¶1. (SBU) Summary: Chevron Vietnam Ltd has been negotiating for several years with Vietnam's Ministry of Industry (MOI) and the state-owned energy firm, PetroVietnam, over the Malay-Tho Chu Basin Natural Gas Concession Project. Chevron seeks to extract and sell a portion of the gas into regional markets, which would allow the company to provide gas to the power generators in Vietnam at a competitively low price while earning a viable return on investment on the venture. While the production sharing agreement originally signed by Chevron and PetroVietnam gives Chevron the right to export 27 percent of the gas, MOI is now resisting this move. Chevron could ultimately terminate the project if MOI continues to deny the company the right to export a share of the gas. End summary. ¶2. (SBU) On July 25, Econoff met with three executives of Chevron Vietnam Ltd: Andrew Latham, President; David Bates, Senior Counsel; and Jim Ollen, Chief Representative, to learn about Chevron's work in Vietnam. Chevron has been negotiating with MOI and PetroVietnam for several years over the Malay-Tho Chu Basin Natural Gas Concession Project, and has signed a Letter of Intent with PetroVietnam. The Malay-Tho Chu Basin is located off the southwestern tip of Vietnam, in the eastern Gulf of Thailand. Geologists estimate the Chevron parcel contains approximately 3.6 trillion cubic feet of gas (TCFG). Chevron proposes to extract the gas and transport it to an onshore power plant in southern Kien Giang Province via a 400-kilometer pipeline that Chevron would build. ¶3. (SBU) The executives explained that while conventional reservoirs typically require anywhere from six to several dozen drilling rigs to extract the gas, the fractured nature of the Malay-Tho Chu Basin will require that Chevron construct and disassemble 400-500 drilling rigs to recover all of the gas. Consequently, the drilling and completion costs, including construction of the pipeline, will likely cost as much as USD 2 billion. Moreover, due to the rapid escalation in costs of materials and services in the construction sector over the last year - as negotiations with MOI and PetroVietnam have dragged on - Chevron needs to sell a portion of the gas into regional markets, primarily to Thailand. This will allow Chevron to provide gas to Electricity Vietnam (EVN) power generators at a competitively low price while earning a viable return on investment on the venture. ¶4. (SBU) Although the production sharing agreement (PSC) signed by Chevron and PetroVietnam gives Chevron the right to export 27 percent of the gas, MOI is now resisting this move. In a meeting with Chevron one year ago, MOI's Minister Hai confessed that political considerations were behind his refusal to allow Chevron to export a share of the gas. According to Hai, the Vietnamese people already view power and gasoline as prohibitively expensive, despite heavy subsidization by the GVN, and blame foreign energy companies for gouging the Vietnamese consumer. Allowing Chevron to export a share of the national wealth would merely exacerbate this perception, he said. ¶5. (SBU) Latham highlighted what he sees as a disconnect between the often lofty commitments made by GVN leaders, and the cautious, almost grudging actions of the GVN bureaucracy, by describing a scene he witnessed at a PetroVietnam anniversary celebration in February 2007. At the event, Vietnamese Prime Minister Nguyen Tan Dzung stood up and launched into a lengthy diatribe berating PetroVietnam's assembled staff for their poor performance. Latham said Dzung has sharply criticized PetroVietnam's failure to undertake or complete energy infrastructure projects during several on-camera interviews recently. ¶6. (SBU) The Chevron executives were inquisitive about the motives behind China's recent confrontation with the GVN over BP's work in parcels 53 and 54 near the Spratly Islands. Chevron would like to commence gas explorations in a parcel located approximately 500 miles north of the Islands, along the disputed line of demarcation, and the company is evidently concerned about China's potential reaction. ¶7. (SBU) To date, Chevron has invested approximately USD 100 million in the Malay-Tho Chu Project. Latham, who pointedly noted that Chevron abandoned its holdings in Sudan in 1984 after the company had invested over USD 1 billion, said Chevron could do the same in Vietnam if MOI continues to deny the company the right to export a share of the gas. ¶8. (SBU) If Chevron ultimately abandons the project, Latham said it is conceivable that a Russian, Chinese, Malaysian, or Venezuelan energy firm could step in to build the pipeline and agree to sell 100 percent of the gas to PetroVietnam. However, he said Chevron's expertise is particularly suited to the technical challenges of this HANOI 00001379 002.2 OF 002 project, and warned that the integrity of the enterprise could suffer if taken over, for example, by the Russian state-owned oil firm Zarubezhneft, or Venezuela's state-owned oil company, PDVSA. MARINE