Cambodia moved a step closer to becoming an oil-producing nation yesterday after the government finalised its long-awaited production-sharing agreement with Singapore-listed KrisEnergy to develop the country’s first oil field.

KrisEnergy has been the operator of Cambodia’s offshore Block A in the Gulf of Thailand since purchasing the stake of departing US energy giant Chevron in 2014. The company has applied to develop the block’s Apsara oil field, where Chevron first struck oil more than a decade ago.

According to the fiscal and technical agreement, KrisEnergy has 60 days to declare a final investment decision that outlines the investment cost for Phase 1A of the Apsara Oil development project, and would start extracting crude sometime in 2019.

Under the revised terms of a petroleum agreement first inked with Chevron in 2002, the government retains a 5 percent interest in Block A.

However, yesterday’s agreement triggers a relinquishment phase by which 1,626 square kilometres, or about 25 percent of the concession, is returned to the government, leaving 3,083 square kilometres under the operatorship of KrisEnergy.

The revised agreement allows KrisEnergy to develop Phase 1A and 1B on 197.6 square kilometres of the Apsara oil field, with the firm having to pay an income tax rate of 25 percent for the first five years on taxable income, and 30 percent thereafter. Additionally, the government has imposed an excess income tax, which, if conditions are met, would apply a progressive tax rate between 10 to 30 percent on what are deemed “windfall profits”.

Royalty rates paid to the government remain unchanged at 12.5 percent of production, while the newly signed agreement adds an obligation for KrisEnergy to pay a 2 percent export tax on crude shipments.

Cambodia’s ambitions to become an oil-producing nation have been dogged by delays, including disputes over production sharing and the collapse of international oil prices in 2014.

KrisEnergy first farmed into Block A in 2010, and increased its participation in 2014 by buying out Chevron’s stake for $65 million. Chevron, which first entered the Cambodia oil market in 2002, left Block A after a decade of hurdles.

In November 2016, KrisEnergy took over the minority stakes of Japanese-backed MOECO Cambodia Co Ltd and South Korea’s GS Energy Corporation, which were seen as blocking any further progress in negotiations toward a revised production agreement.

With a production agreement now inked, development of Block A can proceed, although the commercial prospects of the oil project remain questionable given the conservative estimates of how much recoverable crude is held within the concession.

A February 2008 diplomatic cable from the US Embassy in Phnom Penh, released in 2011 by Wikileaks, claimed that the former Chevron general manager for exploration, Gerry Flaherty, had inflated Block A’s potential in a move to push Cambodia and Thailand to solve their long-running dispute over the Overlapping Claims Area and their maritime borders.

“The offshore block is believed to hold 700 million barrels of oil as well as 3 trillion to 5 trillion cubic feet of natural gas, with an estimated production capacity that could reach 10,000 barrels per day,” Flaherty announced at the time.

Finance Minister Aun Porn Moniroth claimed yesterday that Block A was believed to hold about 30 million barrels of oil, which would be extracted over the course of nine years. With the price of Brent crude currently hovering around $50 a barrel, the government expects to earn $500 million in total income from royalties and tax over the project’s lifespan.

The minister added that the delays in finalising an agreement were due to the government’s cautious approach to its natural resources, and its willingness to learn from the pitfalls of oil-rich nations.

“Cambodia has a clear direction for its future. It will not allow itself to become a heavily oil-dependent economy,” he said. “It will instead use oil revenue to fuel structural transformation to sustain economic growth in the medium and long terms.”

KrisEnergy’s own findings have debunked the potential of the fragmented Block A, with 13 of 27 exploration wells having hit crude oil at a depth between one and 42 metres, and with no commercially viable natural gas reserves identified.

Kelvin Tang, KrisEnergy’s chief operating officer and head of Cambodia operations, said yesterday that for Phase 1A, the company has defined a best estimate of 8.5 million barrels of oil that would be extracted from a single platform with 20 drill sites.

“We are trying to be careful in the numbers that are projected,” he said. “And the numbers that have been disclosed of 8.5 million barrels of oil for Phase 1A have been supported by a third-party analysis from Netherland, Sewell and Associates.”

He said the projected amount of 30 million barrels by the government for Block A was “not too unreasonable”.

“While those are government projections, we think as we add more platforms we could achieve more than 30 million barrels, but that is not our company’s official forecast,” he said.

KrisEnergy has struggled to get out of the red since 2014. The firm currently carries $383.7 million in debt as of June of this year.

While Tang declined to predict the investment cost for developing Block A, he said the company would consider divesting up to half of its ownership by finding partners to help shoulder financial operations.

“We will look for partners that see the importance of the longevity of the project,” he said. “But naturally, the real profits will come through the subsequent phases after we set up the infrastructure. So as we expand, we will be more productive and profitable.”

Adrian Pooh, an Asian upstream specialist at energy research company Wood Mackenzie, estimated Phase 1A would be “marginally profitable” at current crude prices, with the company needing to invest $145 million to $150 million to jumpstart operations.

“Like many projects in the Gulf of Thailand, the reservoirs of Block A are heavily faulted, which makes forecasting recoverable reserves highly uncertain,” he added. “The operator has indicated an additional 6 to 7 million barrels of oil reserves, above our base case of 8.5 million.”

He explained that if Phase 1A is successful, Phase 1B – set to be implemented in early 2021 – could recover 40 million barrels, according to their analysis.

Jean-Baptiste Berchoteau, another research analyst at Wood Mackenzie, said that with clear fiscal terms now in place, KrisEnergy should start to gather investor interest.

“In order to generate much-needed cash flow and reduce capital expenditure, [KrisEnergy] has announced its intention to farm-out up to half of its stake in the block,” he said. “With the fiscal terms for the block now clarified, we expect interest in the project from both local and international players.”

However, Han Phoumin, an energy economist for the Economic Research Institute for Asean and East Asia, said the government could secure the project’s success by lowering its 12.5 percent royalty scheme on resources that at current prices could be valued at $2 billion.

“The best way [is that] the government should establish lower royalty payments by creating them based on the actual production,” he said.

“Normally, the offshore operators may have lower royalty rates from the start, and progressive royalty rates could be applied afterwards,” he said, adding that this would help both the company and the government curb risk.