Southeast Asia Energy Advisory

This week our advisory for investors focus on India and Indonesia, where new oil and gas blocks are up for offer, and Pakistan, where the government is banking on a massive privatization plan that includes the state oil company and refinery-big profit makers.

INDIA

Last weekend, the government of India announced it was putting 46 new oil and gas blocks up for auction, but bidding rules have not yet been defined so investors remain wary. Here are the details for potential investors:

•    The new blocks include 14 deep-water, 15 shallow-water and 17 onshore, covering a total of 94 364 km2  of deep water, 47 745 km2 of shallow water , and 23,944 km2 on land
•    We don't yet have the details, but the government is expected to release the auction policies within the next few weeks
•    We do know that this will be the first time independent companies will be allowed to acquire a single license for exploration and development

This has not been a terribly attractive venue in the past due to heavy regulations, and there is still much uncertainty about this upcoming auction, but we will be monitoring the progress closely. Previous auctions required bidders to enter production-sharing agreements with the government. The Ministry has been pushing for revenue-sharing agreements instead. If this is pursued, it would have to be approved by a government committee, which would delay the process by several months at least. The Oil Ministry has proposed a revenue-sharing model with a 10-year tax break for ultra-deep-water exploration for the next auction (India's 10th) but a government committee is pushing to maintain the current system in which companies are allowed to recover their costs before sharing revenue with the state. What the Oil Ministry is hoping to do, essentially, is to replace the current system with a simplified model in order to avoid disputes with explorers over the costs of inflation or allegations of gas hoarding, for instance. Under the revenue sharing model, bidders will quote the amount of oil or gas output they are willing to offer to the government from the first day of production. The bidder offering the highest share of oil or gas will win the block. This is contrary to the current system under which operators could first recover profits, but this, according to some government figures, has allowed operators to inflate costs. The time-line for the auction will also be of paramount importance because the government will face a new election soon. While some officials are saying the auction will be held in February, we are doubtful that there will be a policy agreement in time for this.

INDONESIA

•    We have learned that Indonesia is in talks with Iran about reviving Indonesia's over 1,000 dead oil wells.
•    Affecting foreign mining companies, Indonesia has instituted a law banning the export of raw mineral ore as the government attempts to move from exporting raw commodities to manufacturing higher-value products. The move could lead to mass layoffs and may have a negative impact on the trade deficit, at least in the short term. At the 11th hour, copper, iron ore, lead and zinc were exempted from the export ban.
•    Indonesia will offer up 27 oil and gas blocks this year in regular tenders and direct offers. This will include 20 conventional blocks, 6 shale gas blocks, and 1 coal bed methane block. Direct offer tenders follow a joint study by the offering company and the government to develop seismic data for a block. The company then gains the right to match bids when the blocks are offered up in the tender process.  

PAKISTAN

•    Iran has announced that it is withdrawing from its pledge to finance part of the construction of an Iran-Pakistan gas pipeline on the Pakistani side. It will be very difficult for Pakistan to finance its part of the pipeline and we are still unclear as to the reasons for Iran's sudden withdrawal from this commitment, though in part we suspect continued delays to the project from the Pakistani side. Pakistani officials have suggested that Iran has withdrawn because it cannot handle the obligations while sanctions are still in place. Iran has already invested some $2 billion in the project on its side of the border. Under the terms of the contract, Pakistan will have to pay Iran $1 million per day if the pipeline is not up and running by winter 2014. Pakistan cannot turn to the US for funding, as the US has strongly opposed this pipeline from the beginning and has long promoted a different pipeline route via Turkmenistan, bypassing Iran. Pakistan, in a severe energy crisis, needs the pipeline, and Iran also stands to profit enormously from it.  In March last year, Pakistan broke ground on its 780-kilometer portion of the $7.5 billion pipeline. Pakistan's portion is estimated to cost around $1.5 billion. The Iranian portion, 900 kilometers, is nearly completed. The pipeline, if completed, would bring Pakistan some 21.5 million cubic meters of gas a day.
•    The Pakistani government has decided to privatize a significant number of Private Sector Enterprises (PSEs), controversially including the profitable Oil and Gas Development Company Limited (OGDCL), Pakistan State Oil Company Limited (PSO), and Pak Arab Refinery Limited (PARCO). For potential investors, here's a look at some of the other companies on the planned privatization list:

Allied Bank Limited (ABL)
Convention Center, Islamabad
Faisalabad Electric Supply Company Limited (FESCO)
Government Holding Private Limited (GHPL)
Habib Bank Limited
Heavy Electrical Complex
Hyderabad Electric Supply Company Limited (HESCO)
Islamabad Electric Supply Company Limited (IESCO)
Jamshoro Power Generation Company Limited
Kot Addu Power Company Limited (KAPCO)
Lakhra Power Generation Company Limited (LPGCL)
Mari Petroleum Limited
National Bank Limited (NBP)
National Insurance Company Limited (NICL)
National Investment Trust Limited (NIT)
National Power Construction Company
Northern Power Generation Company Limited (NPGCL)
Oil and Gas Development Company Limited (OGDCL)
Pak Arab Refinery Limited (PARCO)
Pakistan Engineering Company Limited (PECO)
Pakistan International Airlines Corporation (PIA)
Pakistan National Shipping Corporation
Pakistan Petroleum Limited (PPL)
Pakistan Reinsurance Company Limited
Pakistan State Oil Company Limited (PSO)
Pakistan Steel Mills Corporation
Roosevelt Hotel, New York
Scribe Hotel, Paris
Small & Medium Enterprise Bank
State Life Insurance Corporation
Sui Northern Gas Pipelines Limited (SNGPL)
Sui Southern Gas Company Limited (SSGC)
United Bank Limited (UBL)

MALAYSIA

•    Production has begun at Malaysia's offshore Kapal, Banang and Meranti Cluster fields as of mid-December, production at around 10,000 bpd. Development started in mid-2012. This is being developed by Houston-based Coastal Energy under an 8-year Risk Service Contract with Malaysia's Petra Energy. This is the third RSC in production in Malaysia.  (Earlier this month shareholders of Toronto- and London-listed Coastal agreed to be taken over by Condor Acquisition in a deal valued at USD$2.2 billion.)

For more information on land packages available in this region, as well as on how to get a foothold here, contact OP Tactical. OP Tactical offers detailed information on energy-related and packages in globally and pathways to the gatekeepers.