Archive for June 11th, 2007

Sunday,2007-06-10: Why Are Cambodian Oil Concession Contracts the Most Unfavorable in the Region?

Posted on 11 June 2007. Filed under: *Editorial*, Week 511 |

The Mirror, Vol. 11, No. 511

On 17 February 2007, we mirrored the headlines of two articles in the same newspaper, one saying that “the stock market might move down” and the other speaking about a “good climate for investment in Cambodia.”

The two examples above are from astrologers. However, we can frequently find such contradictory statements originating from well reputed economists. This reflects a general difficulty in economics as a science: there is a vast range of data to be collected and evaluated before a somewhat solid prediction can be made – and such predictions are often combined with a series of “IF’s” – describing the conditions under which the prediction is made.

Last Friday, we mirrored the positive outlook the German ambassador has after three years in Cambodia: “German Ambassador Predicts Bright Future for Cambodian Economy” – however, his statement is made with an important condition: “…but He Warns of Corruption.”

Economics – the effort to analyze and describe economic activities through a set of rules, and to develop the rules into elaborate theories, delivers less predictable results than natural science. Even so, economics does show the way to confront statements or claims related to the economy: through rigorous verifying questions and collection and analysis of facts, similar to the ways in which claims about the laws underlying the dynamics in nature are tested.

There are now several threads of public discussion in Cambodia for which such rigorous checking and open exposure of facts and balancing of different elements would be useful.

High level leaders of the Cambodian government have repeatedly spoken about plans to create a stock market in Cambodia – in July 2005 Singaporean Stock Market experts came to provide their experience, and recently international broadcast media reported the Prime Minister’s announcement that in 2009 a stock market will be set up in Cambodia, in order to “mobilize Cambodian people’s savings and channel them into long-term investments in social, economic and infrastructure projects.” – But to entrust one’s savings to such a venture requires trust in, and transparency about, the financial performance of the institutions which could benefit from such investments. As long as many of the major economic actions of the government are kept secret from the public – as are the contracts between the Cambodian government and the companies engaged in oil exploration, for example – it is difficult to imagine how a stock market could find investors.

Article 90 of the Constitution stipulates: “The National Assembly shall approve the national budget, State planning, loans, financial contracts, and the creation, modification and annulment of tax.” Questions are raised by the sudden announcement, in international media on 9 June 2007, that the China National Offshore Oil Corporation, China’s dominant offshore oil and gas producer, has been awarded exclusive exploration and production rights to a 5,000 square kilometer section off Sihanoukville. Has the National Assembly already approved the related state plans and financial contracts, as required in the Constitution? If so, why was it not reported thoroughly in the Khmer language press? If not, when will the details of the contract be sent to the National Assembly for approval? These questions seem especially important because it is reported that the Director of Exploration of the Cambodian National Petroleum Authority has stated that some details of the revenue sharing agreement with Chevron, concluded in 2003, have been kept confidential between Chevron and the Authority. How can the National Assembly approve a financial contract, if its details are not known?

The discussion about the possible consequences of substantial income from oil and natural gas, which might become available in coming years, has become more and more complicated during the last couple of weeks. The Prime Minister has commented frequently that different agencies “are concerned about our income from oil which has not yet been received” – and that they should not worry, because the current Cambodian government knows how to use the oil revenue for the benefit of citizens and the country. But during this last week, he asked foreign governments to intervene and “help first to negotiate with the foreign companies, in order to encourage them to give big shares to Cambodia.” – “For instance, for Chevron of America, the US Embassy should speak with the company so that it gives big shares to Cambodia.”

Such a request cannot easily receive much positive response. First of all, the relevant agreements and contracts have already been concluded by the Cambodian National Petroleum Authority [CNPA] with several foreign companies. Mr. Men Den, the director of the CNPA’s petroleum exploration department, has recently been quoted in the Cambodia Daily to have stated, when refuting warnings contained in international studies, that the CNPA is fully equipped to handle contract negotiations. “I’ve known petroleum for 20 years. We can do it. I guarantee it.” Recently, the Prime Minister appealed to the World Bank and to the Asian Development Bank to employ national and not international experts.

We mirrored on 8 May 2007 the call by UNDP, that “Cambodia Has to Build Capacity to Benefit from Oil,” a reminder of the detailed critical questions raised in January 2006. Already more than one year ago, a UNDP funded study “Review of Development Prospects and Options for the Cambodian Oil and Gas Sector,” which had been developed in cooperation with the CNPA and Harvard University in the USA, had pointed out:

In general, the terms of the current Model Production Sharing Contracts [PSC] are generous in favor of the Contractor. The Contractor may receive up to 90% of the post royalty production in order to recover costs. The remaining 10% of production will be split between the Contractor and the CNPA on a sliding scale.

The marginal profit oil split in the Model PSC is the lowest of all profit oil splits when compared to terms of PSC’s from other countries in the region. Additionally, the Model PSC is the most generous in the region in allowing contractors to recover costs from oil revenue. The 90% allowance for cost recovery limits the amount of possible cash flow that will become available to Cambodia in the early stages of production.

The Model PSC is a product of the period when it was first developed… At the time, CNPA also had very little experience in negotiating revenue contracts. Given the shift in negotiating leverage, CNPA should regularly revisit its Model PSC and its approach to negotiating future PSC’s in order to maximize, to the greatest extant possible, revenue and benefit for the Cambodian economy. Even modest improvements in the Model PSC can result in large marginal gains for the Cambodian side given the length of the contracts and the amounts of revenue involved.

At this point, there does not seem to be much room for foreign government intervention into contracts which the Cambodian government has directly negotiated. The Cambodian National Petroleum Authority has no website of its own on the Internet, which makes it difficult for anyone to research what the current situation is, or what steps could be helpful. Some information about the Cambodian National Petroleum Authority can be collected from websites in Canada, Indonesia, Japan, Malaysia, Norway, and Thailand, and from the web sites of the Asian Development Bank. The most detailed information, however, is on a website of Concessions International, a private company advising a number of energy companies around the world and helping them to facilitate and structure business, prepare information, and assist in negotiations and documentations.

This organization posts, on their website, a collection of more than 40 laws, agreements, Royal resolutions, Krams, Krets, and Anukrets, relating to oil and related investments, taxation, and other aspects of concessions that the Cambodian government has given.

That documentation supports the observation in the UNDP study that apparently Cambodia has signed some contracts which are the most unfavorable – for the country and the citizens in whose interest the government is mandated to act – in the whole region of South-East Asia. Why did that happen? Who benefits?

To clarify this situation is not only of academic interest for the past – it is very important for the way in which the Cambodian National Petroleum Authority conducts its present and future business. Maybe some response to the request which the Prime Minister addressed to other countries – to help Cambodia get high income from oil – is already contained in the recent comments by the German ambassador: that there should be – according to the Cambodian Constitution – a real separation between the executive, the legislative, and the power of the courts, and that there should be no administrative interference into the free flow of information, especially when there are calls to clarify whether accusations about improper handling of concessions and their revenue are justified or not.

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