Vietnam - Legal Overview - Oil And Gas

The laws of Vietnam are complex and new legislation is constantly being introduced. What follows is no more than an introductory overview that we hope will assist investors to decide which areas of law they will need to research further.

This summary is, necessarily, selective and is no substitute for detailed legal advice.

1. The Oil and Gas industry plays a vital role in the Vietnamese economy not least as the country's principal source of foreign exchange.

Exploitation of oil and gas reserves, however, requires high levels of capital investment and expertise. For these reasons, and particularly as a result of the decline in the availability of assistance from the old Soviet and Eastern blocs, it is an area which has, since 1988, been opened up to foreign investment.

2. Vietnam Oil and Gas Corporation ("PetroVietnam") came into being in 1975 as an "arm" of the Ministry of Heavy Industry and was responsible for State management and supervision of petroleum exploration and production, trading and refining.

It still maintains these functions today, but following Decision 330 TTG of 29 May 1995 it acquired the equivalent of Ministerial status, becoming an independent entity, responsible for its own activities. It is organised and operated according to its Statute which was issued together with Decree No 38 CP of 30 May 1995. This legislation details, amongst other matters, the rights and obligations of Petrovietnam, its management structure, the member units of the corporation, finances and its relationship with the State.

3. At present Vietnam has 3 producing oil fields; Bach Ho (White Tiger), developed in the mid 1980's by the Vietnamese/ Soviet Government Joint Venture. VietSovPetro; Rong (Dragon), and Dai Hung (Big Bear), which together produce around 170-180,000 barrels per day. Of these Bach Ho is the sole producer of gas in the form of associated gas. Presently, no non associated gas is produced, though significant reserves have been discovered, and are likely to be developed in the Nam Con Son Basin. Dai Hung is currently being operated by a consortium led by the Austi-alian company BHP, with both Rong and Bach Ho operated by VietSovPetro.

4. A number of other blocks are currently under appraisal by a variety of international oil companies, and it is believed that within the next 18 months to 2 years a clearer picture will emerge of the extent of the country's overall reserves, and whether or not Vietnam will ultimately rank as a major global producer.

5. The lifting of the US trade embargo in 1994 quickly brought the mzoor American players back into this field, a presence which seems likely to increase with the naturalisation of relations between the USA and Vietnam.

6. Since the oil and gas industry was opened up to foreign investment, all exploration contracts between Petrovietnam and foreign entities have been by way of Production Sharing Agreements (PSAs), a form of business co-operation contract prevalent throughout the oil industry. B y the end of 1994, some 28 had been entered into. The legislation governing oil and gas matters, the Petroleum Law of 6 July 1993, permits other forms of joint co-operation, but up until now the use of PSAs has, in practice, been mandatory in all cases.

However, in the recent round of bidding for Block 15- 1, it would appear that bidders for the first time were required to submit proposals both by way of PSA, and by way of joint venture. It is believed that this request has been motivated by a desire by PetroVietnam to obtain increased day to day involvement in the exploration process with a view to developing expertise in this area.

No decision has yet been made as to whom the licence for this block will be granted, and the ultimate format to be adopted remains to be determined.

7. The maximum duration of a petroleum contract, of whatever type, is 25 years, of which the Phase 1 exploration period must not exceed 5 years.

In deep water or remote areas this may be extended to 30 years with a maximum 7 year exploration period.

Extensions of up to 5 years may be permitted to the overall contract, with a 1 year extension to the exploration phase permitted. Gas related contracts may not exceed 30 years, with a maximum phase 1 period of 7 years. The same extensions apply.

8. Whatever the chosen vehicle, any petroleum contract. must provide (amongst other matters) for:-

- the duration of the contract;

- commitment on overall work programmes and financial investment;

- conditions applying in the event of early determination or extension of the contract;

- rights of parties to assign their interest in the contract;

- provisions enabling PetroVietnam to " back- in" to the development phase;

- recovery of capital investment, in particular exploration and development costs from future production;

- rights of PetroVietnam to fixed assets upon termination of the contract and recovery of capital investment;

- levels of tax and royalty payments;

- allocation of production after recovery of costs;

- training;

- environmental protection issues;

- dispute resolution.

9. In addition to the usual range of taxes applied to a foreign party to a Business Co-operation Contract, Royalties as a percentage of output are payable in respect of both crude oil and gas production.

The Petroleum Law stipulates a range of Royalties:-

- between 6% and 25% for crude oil; and

- between 0 % and 10% for natural gas.

The actual level in any contract will be a matter for negotiation depending upon the prevailing economic conditions and the production rate.

For gas contracts the absence at present of a gas market within Vietnam is of significance.

- profits tax of 50% is applied to the foreign party to a PSA. In practice no tax holidays or reductions in rates are permitted.

10. All data or information obtained by a foreign operator during the exploration phase, or indeed at all, belongs to the PetroVietnam.

11. At present the only gas produced is associated gas produced by the Bach Ho field, which is piped onshore and used for very limited power generation at Ba Ria, and will potentially form part of a project seeing the linking of PetroVietnam with Mitsui and British Gas in a wider project including a LPG treatment plant, LPG exports, storage, and pipelines to power plants which would buy the gas. A study on a 370 km transport and processing system for gas from the Nam Con Son basin, which will also co-ordinate the transportation needs of other producing fields, is currently under way.

12. The downstream petroleum industry is also presently in its early stages. Only one small refinery with a capacity of approximately 15,000 barrels per day is currently operational. A consortium headed by Total has been awarded the feasibility study to investigate the possibility of building and operating a refinery in Dung Quat Province. Indications are that the Government plan to construct another refinery with assistance from foreign investment.

13. A lack of refining capacity means that the vast bulk of the country's needs must be met by importing finished petroleum products, though there is limited blending of lubricants in 2 main blending plants, using imported base oil, carried out in joint venture operations with Petrolimex.

Aside from the above, foreign investment in lubricant and ancillary products is limited, in the main, to marketing and sales via joint venture agreements with local partners.

All distribution of fuel oils, petrol, diesel, and gasoline is carried out by State controlled enterprises, the largest of which is Petrolimex. No foreign involvement is presently permitted in this area.

NOTE: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

If you would like further advice please contact: David Ellis, Johnson Stokes & Master, 16th Floor, Princes Building, 10 Chater Road, Hong Kong; Tel 2843 4226; Fax no. : 2845 9121. Alternatively do a text search "Johnson Stokes and Master" and "Business Monitor".