US embassy cable - 05HOCHIMINHCITY104

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000104 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT PLEASE PASS USTR, ELENA BRYAN 
USDOC FOR 6500 AND 4431/MAC/AP/OPB/VLC/HPPHO 
 
E.O. 12958: N/A 
TAGS: ENRG, ETRD, EPET, ECON, EINV, PGOV, VM, SOE 
SUBJECT: STATE TRADING IN VIETNAM - PETROVIETNAM A 
PROBLEM FOR U.S. OIL AND GAS 
 
 
1. (U) This is the first in a series of cables on 
industry perspectives in southern Vietnam on the role 
of the state in the economy. 
 
SUMMARY 
------- 
2. (SBU):  Vietnam's oil and gas industry is 
completely controlled by the state-owned Vietnam Oil 
and Gas Corporation, known as PetroVietnam.  U.S. 
companies in Ho Chi Minh City are critical of 
the company that is simultaneously a partner, manager, 
service provider and regulator.  They are unanimous in 
the view that PetroVietnam is poorly managed, lacks 
transparency and often displays ignorance of basic 
business principles.  These weaknesses constrain U.S. 
companies' ability to do business in the oil and 
gas sector and hinder Vietnam's capacity to fully 
exploit its oil and gas resources.  END SUMMARY. 
 
MANAGEMENT WITH SKEWED PRIORITIES 
--------------------------------- 
3. (SBU) In a series of meetings with senior U.S. 
energy company leaders (protect,) Econoff heard that 
that PetroVietnam officials are primarily concerned 
with control and make poor management 
decisions as a result.  A case in point is the state- 
owned enterprise's recent decision to reduce the oil 
production of one venture.  ConocoPhillips has a 25 
percent stake in a consortium that is approved to 
produce 65,000 barrels per day.  However, the 
field has developed better than expected, and the 
consortium has been producing oil 88,000 bpd.  In 
December, Conoco received a written order from 
PetroVietnam requiring that production be 
immediately reduced from 88,000 to 65,000 bpd. 
PetroVietnam's stated rationale was that Conoco was 
removing resources too quickly and irresponsibly. 
Conoco maintains it is producing in accordance with 
international standards, and says that privately 
PetroVietnam's technical employees are satisfied with 
Conoco's methods and do not understand their 
superiors' rationale. 
 
4. (SBU) Conoco has already contracted for future 
sales based on the 88,000 bpd rate.  If production is 
cut immediately, Conoco would pay hefty penalties. 
After Conoco told PetroVietnam that the state company 
would be responsible for these penalties, 
PetroVietnam ordered Conoco to produce 88,000 bpd 
until future sales commitments were fulfilled before 
eventually dropping production to 65,000 bpd. 
 
5. (SBU) Conoco speculates that PetroVietnam is 
"saving" resources to prduce at100 percent ownership 
in the future, when the foreign investor contracts 
expire.  Conoco has a 20-year operating license for 
this block, so the loss of revenue if the production 
cap is maintained will be considerable.  PetroVietnam 
has a 50 percent stake in the consortium and stands to 
lose revenues by capping production.  Further, the GVN 
loses tax revenues.  The tax rate for this field is 
the highest of those in operation - at the height of 
production, the GVN benefits from an 80 percent tax 
rate. 
 
LACK OF ECONOMIC SENSE AND PROFESSIONAL EXPERTISE 
--------------------------------------------- ---- 
6. (SBU) U.S. companies cite numerous examples to 
illustrate PetroVietnam's ignorance of international 
standards and economics.  Unocal reports that it has 
been negotiating with PetroVietnam for more than two 
years on a development agreement and expects to sign 
a contract by the end of January.  Ironically, the 
final contract is virtually identical to the original 
proposal.  From Unocal's perspective, PetroVietnam was 
incapable of evaluating its offers or of understanding 
standard industry practices or terms in comparable 
contracts. 
 
7.  (SBU) Unocal offered to model its development 
contract on a similar agreement between British 
Petroleum (BP) and PetroVietnam.  (Note:  BP's 
negotiations took 10 years to finalize.  End Note.) 
Unocal's discovery was two large, but separate, gas 
deposits within two exploration blocks and the company 
proposed developing both deposits as a unified area to 
lower capital costs and maximize efficiency. 
PetroVietnam viewed this as a divergence from the 
original contract and insisted on each deposit being 
developed separately.  Unocal attempted to explain 
that PetroVietnam would lose millions following this 
route.  According to Unocal, one PetroVietnam engineer 
said,  "We don't care about economics!  We want to put 
the platform where there is the most gas."  Unocal 
eventually spent $30,000 to hire a third-party 
industry consultant to explain gas development methods 
and analyze Unocal's proposal for PetroVietnam. 
Unocal reports PetroVietnam was receptive to the 
consultant, but the company was frustrated 
at having to educate PetroVietnam's employees about 
both the science and economics of the industry. 
 
8. (SBU) ConocoPhillips reports that it has also been 
overruled on production decisions by PetroVietnam 
without any technical or financial reasoning.  For 
example, to maintain well pressure in its field, 
Conoco proposed injecting 20,000 barrels of water/day 
into five wells at a cost of $75 million. 
PetroVietnam forced Conoco to drill eight or nine 
water injection wells at a cost of $200 million, 
without any technical explanation. 
 
SUBSIDIARIES HELP PETROVIETNAM RETAIN CONTROL 
--------------------------------------------- 
9. (SBU) U.S. companies report that PetroVietnam uses 
an interlocking network of subsidiaries to maintain 
its complete control of the oil and gas sector.  In 
the past, PetroVietnam has created subsidiary 
companies to compete with Halliburton, which 
provides services to the industry.  PetroVietnam has 
announced plans to divest three subsidiaries by the 
end of 2005:  the Petroleum Technical Services 
Company, the Drilling and Well Services Company, and 
the Drilling Mud Company.  However, the state will 
retain a more than 50 percent stake in the companies, 
limiting foreign ownership to 30 percent. 
ConocoPhillips and Unocal both report that 
PetroVietnam frequently prohibits foreign 
companies from bidding on projects that are then 
awarded to subsidiaries and frequently requires 
foreign companies to use PetroVietnam subsidiaries as 
suppliers.  According to Halliburton, these 
subsidiaries are often poorly organized and managed, 
and their employees lack the appropriate skills and 
knowledge.  All the companies agreed PetroVietnam is 
run like an opaque government ministry rather than a 
business enterprise. 
 
COMMENT 
------- 
10. (SBU) As U.S. companies point out, PetroVietnam is 
in an enviable position.  It is able to capture rents 
and revenues at every step in the process - royalties, 
taxes, service fees, etc.  And as oil and gas are 
Vietnam's top exports, bringing in $5.6 billion in 
2004, PetroVietnam is the GVN's largest revenue 
generator.  However, lack of industry experience, 
professional expertise, and business understanding by 
PetroVietnam is preventing both U.S. investors and the 
GVN from reaping maximum benefits.  If PetroVietnam 
continues to forego profit and experience in the 
interest of complete industry control, foreign 
participation in the oil and gas sector will become 
even more difficult. 
 
WINNICK