One Of Asia’s Most Exciting Offshore Prospects

Introduction

Vietnam is a fast-growing nation in Southeast Asia with rapidly growing energy demand. But it also has significant offshore gas resources. The government has a questionable human rights record, but has gone to great lengths to court international oil and gas investment.

Let's take a look at some of the opportunities there.

Malay Basin

PetroVietnam signed a memorandum of understanding with Murphy Oil (NYSE: MUR) on July 8, 2015, in order to cooperate on the development of oil and gas projects in Vietnam. Murphy is looking at Vietnam for its long-term potential. It has expressed specific interest in the Block B project, located in the Malay-Tho Chu Basin off Vietnam's southern coast (see map below).

Chevron (NYSE: CVX) found gas in Block B a decade ago. But PetroVietnam acquired control of Chevron's subsidiary in Vietnam in June. This gave PetroVietnam control of two offshore production sharing contracts (PSCs), Block B and Block 52. Chevron had discovered gas in these sections years ago, which are located in the Malay Basin. PetroVietnam also acquired Chevron Southwest Vietnam Pipeline Co. Ltd., giving it a 28.7 percent stake in the pipelines that will deliver the natural gas from the offshore projects to power plants onshore.

"The Block B gas project is PetroVietnam's main oil and gas project. The project is of major significance, contributing to ensuring the energy security of the country and promoting the socio-economic development of the region," PetroVietnam's Chairman, Nguyen Xuan Son, said in June.

It is this Block B that Murphy is interested in.

Figure 1 Source: Rigzone

The Malay Basin is expected to be the core of future gas production in Vietnam. By the 2020s, the Malay Basin is expected to see production soar, overtaking the Nam Con Son Basin (east of Malay) as the largest source of supply in Vietnam.

There is one small company operating in the Malay Basin, Mitra Energy (CVE: MTE), a Canadian company that has made some gas discoveries and successfully farmed out drilling operations to larger players, such as Talisman Energy (NYSE: TLM). Mitra has stakes in five PSCs - Block 51, 46/07, 45, 127, and MVHN/12KS. Over 11 trillion cubic feet of natural gas has been discovered in Block 51, 7.5 of which is in production. Mitra and its partners are spudding wells in the other blocks with plans to bring them online.

Figure 2 Source: Mitra Energy

Phu Kanh Basin

Further north is the Ca Voi Xanh (Blue Whale) project, located off the central coast of Vietnam in the Phu Khanh Basin. On his trip to the U.S. this month in which he signed the MOU with Murphy, PetroVietnam's Nguyen also met with officials from ExxonMobil (NYSE: XOM) to discuss their cooperation on Ca Voi Xanh. In 2013, PetroVietnam and ExxonMobil signed an agreement to develop the Ca Voi Xanh, an offshore gas project.

ExxonMobil drilled three wells in Ca Voi Xanh, two of which struck pools of natural gas. The company found gas at the 118-Ca Voi Xanh-2X well, drilled in 2011. The following year it found more gas at the 118-Ca Voi Xanh-3X. The first well failed to find anything of note. There is quite a bit of lead time for these projects however. ExxonMobil says it is putting together a drilling program, and expects gas to start flowing in 2021. Ca Voi Xanh is projected to be holding 3 to 10 tcf of natural gas.

Much of the gas produced from these projects will target domestic consumption. Vietnam is looking to build natural gas-fired power plants in central Vietnam that would burn the gas produced from the offshore fields. The government also wants to locate more industry there as well.

The Russian energy giant Gazprom (OTCMKTS: OGZPY) has also been active in Vietnam for quite some time. It signed a deal with Vietnam in 2000 to develop Block 112 in central Vietnam, and in 2007 it drilled its first exploratory well (in Bao Vang). It discovered gas at a second well (Bao Den) it drilled in 2009, with flows of 300,000 cubic meters per day. Gazprom also has the rights to Blocks 129, 130, 131, and 132, and conducted 2D seismic surveying.

Nam Con Son Basin

More intriguing was the agreement between PetroVietnam and Gazprom for Blocks 5.2 and 5.3, located in the Nam Con Son Basin off the southern coast, which were signed in 2012. These were previously abandoned by BP (NYSE: BP) in 2009 because they are located in disputed territory in the South China Sea. China's "9 Dashed Line" carves out extraordinary swathes of maritime territory, with China claiming control of territory deep within Vietnam's Exclusive Economic Zone (EEZ). Under international law, all signatories, including Vietnam, have control of 200 miles of territory from their shoreline. China ignores this with their 9 Dashed line claim.

Figure 3 Source: Gazprom

Still, Chinese pressure was enough to scare away BP. Gazprom seized upon the opportunity, and with heavy backing from the Russian state, Gazprom is much less susceptible to Chinese pressure. Gazprom started commercial production from two fields within these blocks in 2013. The fields hold 36 billion cubic meters of recoverable natural gas and 15 million tons of gas condensate. Gazprom has plans to drill 16 exploratory wells.

Outlook

Vietnam has a growing problem with gas shortages. It has a rapidly expanding economy, but will need more resources. Mitra Energy predicts that the shortage will hit 300 million cubic feet per day in 2015, ballooning to 1.5 Bcf/d in 2025. With Vietnam desperate for energy supplies, the government will likely maintain attractive terms and a stable investment climate in order to stimulate interest. It also means that Vietnam will expand LNG import facilities to meet the shortfall in gas supplies.

The hungry Vietnamese economy also means that producers will have no trouble finding a market for their gas. Large industrial centers and more power plants will willingly take offshore gas once production begins at more and more fields.

The one big red flag for Vietnam is bullying by China. China is pursuing an aggressive foreign policy to maintain control over the South China Sea and claims territory that the international community recognizes as Vietnam's. That conflict shows no signs of abating. This could scare away investment. But for companies that stick it out, they will probably be rewarded with impressive reservoirs of gas to tap.

Conclusion

While Vietnam is not as developed as its neighbor Malaysia, this offers exploration companies a larger upside. Geopolitics may interfere with some projects and hold back investment, but other companies are pushing ahead. With strong domestic demand, there should be no worries over market potential. The gas is in place and the government is eager to keep companies happy.

There are enough ingredients here to spell success in the years ahead.