Wood Mackenzie: Thailand's Upstream Outlook at Risk from Fiscal Reforms

Wood Mackenzie presented Friday an independent analysis of the opportunities and risks facing Thailand's petroleum exploration and production industry at a public lecture organized by the Petroleum Institute of Thailand. As part of the presentation, Wood Mackenzie discussed findings from a report on potential fiscal reforms in Thailand. Titled 'Thailand's upstream outlook at risk from fiscal reform', the report details how public calls for tougher fiscal policies may not benefit Thailand in the end. As changes create uncertainty and does not incentivise investment, it may risk future exploration activity in Thailand - an already mature petroleum province with a weak supply outlook.

Craig McMahon, Wood Mackenzie's head of APAC Research, explains, "Thailand's recent production growth has been offset by weak exploration performance. As a result, it has replaced less than 25 percent of the 2.3 billion barrels of oil equivalent (boe) reserves produced in the last decade. At current production levels, our analysis shows commercial reserves would be exhausted within nine years. During this timeframe, Thailand's upstream sector will generate $125 billion in revenue, but to boost recovery and maximize the benefit of its oil and gas resources beyond this, there is a need for Thailand to encourage investments into the upstream sector."

Under Thailand's current fiscal terms (Thai III), the country operates a concession regime, consisting of a sliding scale royalty paid to the government based on production, a specified (50 percent) petroleum income tax applied to profits, and a special-remuneratory-benefit windfall profit tax. Based on a 250 billion cubic feet (Bcf) gas field in shallow water (less than 1,312 feet or 400 metres) in a medium cost environment - a standard field-type for offshore Thailand - Thailand's government takes a 67 percent share of oil and gas profits under current terms. This exceeds the global average share of 58 percent.

Craig says, "There have been comparisons made with fiscal terms on offer in other South East Asian countries, but these comparisons must also consider a country's remaining prospectivity. Although Thailand takes less that the South East Asian average of 74 percent government take, its average discovery size is the smallest in the region at only seven million barrels of oil equivalent (MMboe) compared to ASEAN average discovery size of 58 MMboe from 2004-2013. If it is to remain attractive to investors, we do not believe Thailand is in a position to increase its share of oil and gas profits.

"Aside from increased government take, there have been suggestions for Thailand to move from concession to production sharing contract (PSC) regime but we believe that to be counter-effective as well. Historical evidence shows Thailand's current regulatory regime to be one of the most efficient in the region. But the introduction of a PSC regime could lead to additional regulatory requirements, lengthening the time required to bring new fields onstream. Traditionally, it takes an average of only four years from discovery to bring a field onstream in Thailand. This compares to Malaysia and Indonesia where it takes eight to nine years on average, respectively. Despite lack of material new discoveries between 2004 and 2014, output from Thailand has consistently increased in that timeframe demonstrating the effectiveness of the current system.

Taking all things into consideration, Wood Mackenzie's recommendation is for Thailand to consider any fiscal changes in the context of its upstream sector's overall attractiveness. After 2023, Thailand risks a rapidly declining production outlook. Meanwhile, concessions expiring in 2023 currently account for more than 65 percent of Thailand's production. Therefore, Craig concludes, "While the government is coming under pressure to make fiscal terms tougher and increase its share of profits, if Thailand is to attract the necessary investment to sustain production, the priority should not be to create more barriers for investors. Instead, as we have been saying, Thailand moves in the right direction by progressing the delayed 21st licensing round to ensure further acreage is fully explored and offer clarity on extensions of the expiring concessions. If clear guidelines are offered on the future of expiring licenses, the country could stimulate new investment in mature fields, potentially increasing recovery of their remaining resources."


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