The Kingdom’s maiden oil project has two roles to play - to save a bleeding firm and to grow an economy

The future of the Cambodian oil sector rests squarely on KrisEnergy Ltd’s shoulders, a promise it has had to make good since 2013.

Just under a decade last year with the first extraction three days shy of the December 31 deadline to produce or risk contract cancellation, it fulfilled the pledge after overcoming hurdles.

The hurdles consisted of regulatory and operational issues, as well as a protracted and steep oil price downturn since 2014 and the Covid-19 pandemic.

“It resulted in the adjustment [of our] initial development plan to a prototype phase to reduce costs … these factors extended the timeline of the project,” said a spokesperson of KrisEnergy, who chose to remain anonymous.

On the face of it, a drawn-out debate on the viability of Cambodia’s oil sector has eased – a small mercy for the upstream oil and gas player, and the government, having undergone years of widespread criticism.

Yet, the jury is out on its long-term sustainability as challenges including external headwinds and the absence of an onsite refinery continue to unfold in the background.

This leaves the debuting oil venture, which has been mired by countless delays and internal strife with the resignations of top directors, and tanking crude oil prices, with a greater plea to survive.

To be sure, KrisEnergy has produced 41,000 barrels of oil in the first 33 days of extraction of oil on Mini Phase 1A of the Apsara oil field on Block A, spanning 3,083 square kilometres over the Gulf of Thailand.

This was announced by a jubilant Prime Minister Hun Sen on February 1, calling it a blessing.

But there is some way to go for the loss-making Singapore Exchange (SGX)-listed entity before it can return to the black.

As it stands, KrisEnergy, which has working interests in 10 contract areas in Asia has been reporting losses since going public in 2013, with a $476.8 million debt-restructuring scheme underway.

According to its latest filing on the SGX, net loss expanded year-on-year to $201.1 million for the financial year ended December 31, 2020 (FY20) from $168.9 million net loss in FY19.

Revenue in FY20 contracted 64.1 per cent to $45.4 million from $126.5 million a year ago because of lower prices and sales volume.

Total debt stood at $578.8 million, pushing up its gearing to 248.7 per cent.

The debt includes the $87 million capital expenditure for Apsara that was loaned by Kepinvest Singapore Private Ltd, a wholly-owned subsidiary of KrisEnergy’s majority shareholder Keppel Corp Ltd.

“Miniscule but good start”

Understandably, the oil and gas sector is risk-prone due to production volatility and vulnerability to market forces, two main causes that influence global crude oil pricing.

Often, this results in industry players being highly geared to ensure continued operation and maintenance while cushioning demand and supply and pricing pressure.

Although, presently analysts expect the rally on oil pricing to extend on the back of rising demand.

At the time of writing, Brent futures gained 29.7 per cent at $67.09 per barrel in a year whereas light sweet crude West Texas Intermediate rose 34.3 per cent to $63.25 a barrel, a huge upswing from teetering levels last year.

If this trend continues, a bounty might be in the offing for KrisEnergy and the government.

In fact, the government has roughly calculated an annual revenue of $30 million if oil prices hover above $55 per barrel.

It could be more on the pretext that crude oil prices increase, a 2015 independent report by Canada-based Resources for Development Consulting on the prospects of oil revenue for Cambodia showed.

The report stated that if full development of the second phase takes off, total government revenue over the project’s lifespan could range between $630 million, at a barrel cost of $70, and $1 billion ($90 per barrel).

Early estimates shared by Minister of Mines and Energy Suy Sem over three weeks ago revealed that the mini phase might be able to guarantee a minimum output of between 7,000 and 7,500 barrels daily.

It is “miniscule”, he was quoted as saying, adding that it might not leave a profound impact but was nevertheless a “good start” for the industry in Cambodia.

After the crippling effect on the economy because of Covid-19, with the wind taken out of the tourism sector and garment, textile and footwear manufacturing sector, a diversification in the revenue stream is timely.

Even more so with the 20 per cent loss of the EU’s Everything but Arms tariff scheme, applied to some €1 billion worth of Cambodian exports as of August 12 last year.

Separately, Jason Yek, a senior Asia country risk analyst with Fitch Solutions Inc opined that the impact on exports and revenue due to the loss has not been that significant so far.

However, it influenced garment players to re-orient their supply chains away from the EU and towards the US while China ramped up investments into the non-garment manufacturing space in Cambodia.

“… probably to supply back to its own market,” he said, adding that this would support Cambodia’s exports in years to come. “The broader market outlook is also constructive with global growth and trade flows both anticipated to see recoveries in 2021.”

Absent refinery plant

Meanwhile, the absence of a refinery, which was to be built by Cambodian Petrochemical Co with Chinese interest at a cost of $2 billion on the Sihanoukville coast, could eat into the earnings of the state.

Co-refinery partner Sinomach China Perfect Machinery Industry Corp is said to have retreated from the project due to financial problems.

However, several Chinese parties are showing interest in building the refinery, which initially broke ground in May 2017, but there has been no update on new investors yet.

It was supposed to process between two and five million tonnes of oil per year.

“For over 10 years, the tentative project has been in doldrums due to an internal disagreement among partners,” said David Van, public-private partnership senior associate of investment firm Platform Impact Co Ltd.

He opined that Cambodia’s output of oil might not justify such heavy capital investment unless it has the ability to compete efficiently with neighbouring refinery facilities in Singapore, Thailand and Vietnam.

“Honestly, that is a long shot. Therefore, Cambodia would need to export its crude to those facilities and import back the refined oil,” Van said.

Another view is that the oil produced might not even prompt the need for a refinery as the production is small.

“I think the oilfield and importing refined products into the country are two different things,” said Refinitiv Oil Research (Asia) director Yaw Yan Chong.

“Even if there are plans for one [refinery], I doubt that crude output of 7,500 barrels per day would be sufficient to meet all of the country’s needs,” he told The Post via email. It could mean that oil imports will likely continue, albeit at a lower quantum.

A series of questions to Cheap Sour, director-general of the Ministry of Mines and Energy’s General Department of Petroleum, did not elicit much reply. However, Sour did confirm that there is no progress on the contruction of a refinery. “No activity at all,” he stressed.

According to Fitch Solutions senior oil and gas analyst Peter Lee, not having a refinery exposes Cambodia to effects of international price swings, and potential bottlenecks in logistics chains and deliveries.

It also risks placing national energy supply security in the hands of others, neither of which are ideal.

That being said, Chinese interest into the infrastructure space has been growing, and could “very well see progress” at the proposed, stalled refinery renewed, if not another new build, in the coming months, he told The Post via email.

In addition, the regional market for fuels is crowded, and is expected to become even more so in the next few years, as more markets add refining capacities of their own.

“This should keep prices relatively low, easing the import burden associated with direct fuel purchases for Cambodia if needed,” Lee said.

Going concern uncertainty

Circling back to KrisEnergy, there is more is at stake in staying afloat, particularly with some level of stress in its Thailand, Vietnam and Bangladesh operations.

The anxiety is obvious, as revealed in its annual report 2020 where it acknowledges being “over-geared” and “under-equitised” while undergoing a restructuring process.

It reiterated its auditors’ view that there is material uncertainty over the group’s ability to continue as a going concern.

All these have perhaps made the Cambodian project its single-most important task to sustain long-term.

According to the KrisEnergy spokesperson, the group considers Block A to be its “most important near-term development project” given the size of the concession, the 95 per cent working interest and operatorship.

It is coupled with KrisEnergy’s potential to multiply future assets, phases of development, as well as the ability to control the timing of future developments.

“Block A is anticipated to be the asset that will generate the most revenue after it is developed, primarily because the company’s other producing assets are mature [while] Block A’s growth potential is relatively higher,” the spokesperson said.

Presently, it is undertaking a re-organisation of its liabilities to ease the stress on its balance sheet.

“[Because] we believe that Block A will be a cornerstone asset, [we] decided to focus [our] energy and limited financial resources on progressing the development of the concession.

“The announced asset divestments or relinquishment in Indonesia, Vietnam and Bangladesh are for exploration assets which do not generate any revenue,” the spokesperson explained.

Initially possessing 25 per cent interest, it acquired operatorship of the Apsara oilfield block when it bought out Chevron Corp’s subsidiary Chevron Overseas Petroleum (Cambodia) Ltd’s 30 per cent interest at $65 million in October 2014.

Back in 2005, Chevron Cambodia discovered an oil reserve of 400 million barrels in the Cambodian waters off the disputed overlapping claims area (OCA) in the Gulf of Thailand.

Two years later, Japanese Mitsui Oil Exploration Co Ltd and South Korean GS Energy Corp, the original joint venture partners, transferred their shares of 28 per cent and 14.25 per cent, respectively, to KrisEnergy.

This pushed up the Singapore company’s stake in the production sharing agreement, which it signed in 2017, to 95 per cent, with the government holding the remaining five per cent.

No actual reason was ever proffered by Chevron Cambodia when it disposed of its stake, which it held for 10 years since 2004, and having supposedly spent about $160 million to assess the commercial viability of the block.

Then-Chevron Cambodia spokesman Alex Yelland did not respond to a request to be interviewed when asked.

The only indications can be gleaned from news articles that mentioned a break down in the deal with the government due to a lack of consensus over regulatory terms including an upward revision on taxes.

Interestingly, its exit coincided with oil prices coming off historic highs that extended from 2012.

While Chevron started off Cambodia in this sector, it should be noted that there are 19 blocks altogether on the Khmer Basin, seven of which are occupied, Fitch Solutions said last June.

There could be more. Talks about a joint oil exploration in the OCA between Cambodia and Thailand in the Gulf of Thailand, for which a memorandum of understanding was signed back in 2001, is expected to resume once the virus pandemic subsides. “The OCA is believed to contain about 400 to 500 million barrels of oil reserves in place,” it noted.

Fast forward to now, experts recently divulged that Block A’s 1p (proven) reserves of 4.18 million barrels of oil is expected to last for only 10 years.

According to KrisEnergy’s 2020 annual report, all five wells in Mini Phase 1A had been drilled but the initial production rates are less than the initial peak forecast rate of 7,500 barrels of production per day.

However, optimisation of production continues. It added that more pressure and production data are required for further assessment to determine reservoir characteristics before clarity on a sustainable production rate and achievable volumes can be made available.

KrisEnergy spokesperson said there is potential in six other areas in the Block A licence, which have yet to be explored and appraised.

“The assessment of reserves and resources is governed by a series of technical parameters at a specific time and at a given oil or gas price,” they added.

The production from the mini phase would be considered in the annual reserves and resource assessment for the fiscal year ending 2021.

“Give them credit”

Going forward, questions surround the viability of the project, given the setbacks that could drag both KrisEnergy and Cambodia down.

“At 7,500 barrels per day of output, it is modest to say the least,” Refinitiv’s Yaw said, particularly when compared to Saudi Arabia which has the capacity to produce 10 million barrels per day.

“So it’s safe to say that Cambodia isn’t going to become a major oil-producing nation any time soon.

“That said, from the perspective of the country and its government, the oil production will bring some revenue and help to diversify its incomes sources, which can only be a good thing,” Yaw said.

Still, there is the challenge emanating from the transition to electric vehicles with a first wave expected in 10 years, he cautioned, adding that crude demand would naturally decline.

“That Chevron and other major oil companies opted not to participate in the project, and that it was saddled with issues for years, would signal that Apsara isn’t exactly the most-sought after project,” he noted.

Similarly, Fitch Solutions viewed that Cambodia remains as one of the riskiest upstream oil and gas markets in the Asia-Pacific. It said in spite indications of hydrocarbons within its geology, noted by “favourable thermal conditions and successful discoveries” in nearby Thailand and Vietnam, foreign firms have largely steered clear of investing in Cambodia’s oil and gas.

Unlike its regional neighbours with established oil and gas industries, Cambodia is a frontier market, having only adopted its first Petroleum Law in July 2019, after more than two decades of delays.

“While the law is intended to govern all domestic oil and gas activities, lack of any precedent means it remains uncertain how individual provisions of the law will be implemented in practice.

“Cambodia held bidding rounds in 1991 and 1998, though subsequent contract negotiations were blemished by little transparency and allegations of corruption. There is little evidence that such issues have been eradicated since,” it wrote.

Conversely, KH Khmer C-Mall Co Ltd CEO Tommy Christensen advised that both KrisEnergy and the government should be given time.

For KrisEnergy, he said, it has to look out for many “moving parts” such as transport, logistics, spare parts and safety, and as a grass-root facility, meaning built from scratch, it faces pressure from all sides.

Additionally, there is no certainty on the quality of the crude oil, which makes it difficult to set the price and determine operating expenditure in future.

“[Nevertheless] it will [sustain] and they will get a footprint to continue. Brent crude price is on its way up these days. I guess it will end at $75 per barrel,” said Christensen, who has vast experience in the oil and gas sector.

Based on his calculations, the group’s revenue could amount to $418,000 a day if production from five wells comes up to 7,500 barrels a day and Brent crude prices stood around $55.80 per barrel.

In three to five years, revenue could hit $11.2 million a day, assuming Brent crude price stays in the $55 range, and an average of 201,600 barrels of oil a day is produced from seven platforms of 168 wells.

“So you see, revenue can grow from an estimated $400,000 to $11.2 million a day, but there are so many factors at play,” he said.

He added that by the end of 2021, KrisEnergy would be in position to predict its plans going forward as there will be results from the trial wells and how to scale up.

“Try not to attack [them] but give them credit for the hard work [as] there are many challenges [including] Covid-19 as there were many procedures to follow,” Christensen said.