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Market Versus Cost for Chevron in Cambodia

[Editor’s note: Eight years after Chevron found crude oil off Cambodia’s coast, the American company has yet to begin full production. In remarks in April, Prime Minister Hun Sen said he wants the oil giant to begin production by 2012 or risk losing its rights. Michael McWalter, an adviser to the National Petroleum Authority, has 30 years of experience in the oil industry, including with the World Bank and Asian Development Bank. In an interview with VOA Khmer in Phnom Penh, he says things are not so simple.]

What has caused Chevron to delay offshore oil production for so long?

The question of development is always linked around commerciality. You can’t forget the fundamentals of geology and economics when you are dealing with the oil business. In Cambodia, it has been marginal, not quite enough to make it commercial, not quite enough to make it development. Contrarily, in Ghana, they discovered oil more recently and already they have put it into development of production very quickly, but it is very large—some 1,000 million barrels.

But the resources that have been identified in the offshore areas of Cambodia are much smaller and cut up with small pockets, which makes it very difficult to develop. Remember that an oil company tends to pursue big oil. If they find a big oil field, they are often prepared to throw more money at it to start production. If things don’t look so attractive, then of course the company isn’t so inclined to make production. However, it is very important for Cambodia because the economy here requires more input for development.

What is Chevron doing right now, following the government’s warning to revoke their contract?

I understand that they are going to do some more drilling in three more wells at the end of this month, which brings together 18 wells that have been drilled by the company, to try and improve the volume of recovered oil. And they plan to get production as soon as possible on a small scale development; smaller than people might think, but still significant for Cambodia, because it will provide the initial core development, and that is a starting point. I think the expectation now may meet what the prime minister said in 2012. Or maybe at the end of 2011 it can be the time for considering production.​ But there is no evaluation yet, and I don’t want to raise expectations, because it depends on the final development plan.

When will Chevron release its evaluation results, and what is the company’s next step?

Hopefully, there could be a decision later on this year, maybe the third or fourth quarter of the year. It is a decision regarding development and that leads to detailed development planning and engineering. So I think things would start at the end of this year. If the contractor finds enough oil or gas to produce it, and make a commercial development, then the petroleum contractor can apply for a development permit, and that starts a new period of rights, to start production.

Then they can work on a scheme for development. You know if you have a very big oil field you can engineer it very nicely, since you know that you will work for a profit. But if it is small, like the situation in Cambodia, you have to be very careful that you don’t let the cost get out the proportion. If the cost gets out of proportion, you can rapidly turn the economic viability for development into a nightmare, and you will lose money.

So there will be a lot of work in planning, engineering and designing, and the design has to be optimized to make sure the cost cuts down, and you have to prepare the well for extraction of oil. And of course, when you are going into production, you have to work on your operating cost. Actually, they already have done some of the planning and sent it to the government.

The challenges so far are finding resources available for commerciality, and if the oil price were to plummet, then it is possible that the development could be stalled.

Last year we saw the oil price fall to $35 a barrel after the very high price rise before. Now it is back up and stable at about $70 a barrel. If the oil price maintains at this level, that will be good for the development of oil in Cambodia.

Where will the oil be sold? Will there be an oil refinery in Cambodia?

Crude oil can be sold on the world market. Normally, if you have ship of crude oil ready, you can look for the best market and whoever pays you the most, and sometimes you sell just to traders. Whether a refinery will be available in Cambodia will depend on the market and the investment, because a refinery is very expensive. Let’s suppose you want to have a 30,000-barrel-per-day refinery; you will have to spend at least $600 million. If you’ve just got a small market, it is quite risky, because a small refinery usually makes a very high operating cost.

What is the model for revenue sharing between Cambodia and Chevron?

The model contract that Cambodia has is 12.5 percent of royalties and 30 percent of petroleum tax. But during the first three or four years, you have to allow the company to make a recovery of costs. The company is allowed to take oil for the compensation of cost, and the oil left will be spread and shared 60 percent to 40 percent, or 40 percent to 60 percent, as product-sharing. When you add all these different things together, it starts to become quite hard for the company.

What are the other 10 companies doing right now?

I don’t think there is anything on the public record about what they are doing. The only company besides Chevron that is drilling is Thai’s PTT, which brings the number of drill wells to 29 across the country. But none of them have found any oil yet.