Friday, October 27, 2006

Cambodia Braces for Oil Boom, China May Profit From It

by Sherry Su Dow Jones Newsires Friday, October 27, 2006

SINGAPORE, Oct 27, 2006 (Dow Jones Newswires) Sitting on billions of dollars worth of black gold, Cambodia is on the way to lifting itself from abject poverty, but getting the money into the bank seems fraught with difficulty.

The government anticipates oil will be being pumped out of rich offshore deposits from 2009 but just who will be doing it, how much will be produced then and in the years ahead and what will happen to the profits is still a matter of conjecture.

Two factors may have a decisive impact on this - ownership of some offshore areas are contested by Thailand, and China's very long game with the Cambodians puts it in a good position when political decisions on oil extraction and concessions are made.

A consortium led by US oil giant Chevron Corp. (CVX) announced significant offshore finds last year, and companies from China, Japan, South Korea, Thailand and France, among others, are already prospecting or vying for exploration rights.

Cambodia has seven designated offshore blocks in undisputed Cambodian waters in the Gulf of Thailand, covering about 37,000 square kilometers.

But the situation is very murky, as Cambodia and Thailand have unresolved overlapping claims in the Gulf of Thailand covering 27,000 square kilometers.

The dispute between the two countries over the maritime boundary has dragged on since the early 1970s.

In 2001, the two signed a Memorandum of Understanding on joint development of oil and gas in the disputed areas, but no significant moves have been made since then.

Asia is no stranger to this type of problem. Exploration in some waters claimed by both Malaysia and Brunei has been stymied, and in the case of the Spratly Islands in the South China Sea overlapping claims by five countries has prevented prospecting.

Just How Much Is There?

In Cambodia's undisputed waters, nine wells were drilled in the 1990s and oil traces were found in three.

But by the end of 1997, all holders of production-sharing contracts had relinquished their blocks, partly due to weak global oil prices. Things then stalled until 2002 when Cambodia awarded offshore Block A to Chevron.

"The government of Cambodia hopes to sign up PSCs as soon as possible with international companies to explore Cambodia's available acreage," Ho Vichit, vice chairman of the Cambodian National Petroleum Authority said recently.

The government has yet to release official data on its oil reserves. But according to a study by the United Nations Development Program and Harvard University, the recoverable reserves in Cambodian offshore blocks are estimated at a very substantial 2 billion barrels of oil and 10 trillion cubic feet of natural gas.

As far as is known, much of Cambodia's onshore oil and gas reserves are located in its Tonle Sap Basin, but to date no serious exploration has been done.

Japan National Oil Corp. conducted some airborne gravity and magnetic surveys in the areas in 1990s.

China May Get Lion's Share

Cambodia's rich hydrocarbon deposits have stoked strong interest from its oil-deficient Asian neighbors, as well as U.S. and European companies.

Singapore Petroleum Co. (S99.SG), Dallas-based X-Change Corp., South Korea's GS Caltex Oil Co., Japan's Mitsui Oil Exploration Co., and several other companies are exploring oil and gas in Cambodia.

However, among them, Chinese oil companies may well grab the biggest share, mainly because of the historically- close relationship between the two countries.

China has been supporting the Cambodian government since the establishment of diplomatic ties in 1958. It is also Cambodia's biggest aid donor, and a major trading partner.

In 2002, China agreed to exempt all of Cambodia's mature debts to it.

French oil giant Total SA (TOT) is competing with a Chinese oil company for exploration rights to offshore Block B, according to Cambodia Daily newspaper recently.

It didn't say which Chinese firm was involved but noted that officials from Chinese National Offshore Oil Co., or CNOOC, had met Cambodia's prime minister in July and expressed interest in the block.

"Chinese companies are in a more favorable position (compared with other countries)," said Sheng Lijun, senior fellow at the Institute of Southeast Asian Studies.

China, eager to secure more stable oil and gas supplies to meet its robust energy demand, has already demonstrated its interest in the Cambodian oil sector.

Currently, China National Petroleum Corp. (CNPC.YY), CNOOC, and Zhuhai Zhenrong Co. are all planning to, or already participating in oil and gas exploration.

China National Chemical Engineering Group Corp. will help build a 40,000-barrel-a-day oil refinery at the southern town of Sihanoukville, the country's largest port.

The refinery, with planned total investment of $420 million, is expected to come on line by 2009. Cambodia now needs to import all the oil products it uses.

Challenges Ahead

For the 13 million Cambodians, one third of whom live below the poverty line, oil revenues could be a bonanza.

But as the inhabitants of East Timor - another potentially wealthy, oil-and-gas-rich but socially and politically unstable country - know only too well, the wait can be long and hard.

Cambodia has fragile manufacturing sectors. Agriculture, tourism and textile contributing the most to gross domestic product and it is still heavily reliant on foreign aid.

Added to that, Cambodia struggles with stifling bureaucracy, widespread corruption and a lack of skilled workers, and its infrastructure is badly decayed after decades of war.

According to the Global Competitiveness Index 2006 compiled by the World Economic Forum, Cambodia ranked the 103rd among 125 countries, below Bangladesh.

Oil and gas revenues "could promote significant socioeconomic development (in Cambodia) if they are used prudently," the Asian Development Bank said recently.

But a sudden inflow of money, as happened in many poor countries where oil was found, has often led to high-level corruption and political battles for access to this wealth.

"In the absence of mechanism to improve their use and broaden their impact, oil receipts could lead to a further concentration of wealth and greater social tension. They may also lead donors to curtail their aid," the ADB's 2006 Asia Development Report said

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