1 NATIONAL ECONOMICS UNIVERSITY CENTER FOR ADVANED EDUCATIONAL PROGRAMS =========== ========== BACHELOR’S THESIS OF FINANCE TOPIC: “THE IMPACT OF OIL PRICE ON PRODUCTION SHARING CONTRACT BLOCK 12WEST IN NAM CON SON OF PETROVIETNAM EXPLORATION PRODUCTION CORPORATION” Student’s name Student’s ID Class Intake Internship guide Supervisor : Le Lan Khanh : 11121951 : Advanced Finance 54A : 54 : Mrs Nguyen Ngoc Mai : PhD Nguyen Thi Hai Duong Hanoi, 2016 TABLE OF CONTENTS ACKNOWLEDGEMENTS STATUTORY DECLARATION TABLE OF CONTENTS ABSTRACT ABBREVIATION LIST OF TABLES LIST OF FIGURES TABLE OF CONTENTS Abstract 1.1.3.1.Definition .16 1.1.3.2.Features .16 1.4.3.Sensitivity analysis 25 CHAPTER II: SITUATION OF FINANCIAL PERFORMANCE OF THE PROJECT “PSC 12WEST” .28 2.1.Introduction of PetroVietnam Exploration Production Corporation 28 2.1.1.Foundation, History and Development 28 2.1.2.Organizational Structure and Functions 29 2.1.3.Petroleum contract in PetroVietnam Exploration Production Corporation 31 2.2.Project No 12West in Nam Con Son 34 2.2.1.Government take and contractor take in project no 12.west – Financial performance 34 2.2.1.1.Terms and conditions in the production sharing contract offshore block 12West in Nam Con Son basin 34 2.2.1.2.Economic evaluation 40 40 2.3.Assessing the impact of oil price on the project 44 2.3.1.The oil price trend from 2006-2016 44 2.3.2.Sensitivity analysis 46 2.4.Assessment 52 2.4.1.Impact of the decreasing oil price on the project Block 12West in Nam Con Son 52 2.4.2.Other difficulties .55 CHAPTER III: RECOMMENDATIONS ON DECREASING OIL PRICE 58 3.1.Operation plan 58 3.2.Factors affecting a petroleum project .60 3.3.Orientation 62 3.4.Recommendations .62 REFERENCES 66 10.Patrick R Delaney (2007), Business Environment and Concepts .66 15.Colin Drury (2006), Management and Cost Accounting .67 16.Average Annual Inflation Rates by Decade Address: http://www.inflationdata.com/inflation/inflation/decadeinflation.asp 67 Abstract Author Le Lan Khanh Tittle The impact of oil price on production sharing contract Block 12West in Nam Con Son of PetroVietnam Exploration Production Corporation Year 2016 Language English Pages 61 Supervisor PhD Nguyen Thi Hai Duong The main objectives of this research is to understand how a production sharing contract of oil and gas works as well as evaluate the economic efficiency and the impact of decreasing oil price on the petroleum project Block 12West in Nam Con Son Readers will get clearer picture of petroleum upstream sector, especially the most popular type of petroleum contract _ production sharing contract, understand more about how the profit is divided between government and investors as well as the role oil prices play in a particular oil and gas project ACKNOWLEDGEMENT First and foremost, this work is dedicated to my supervisor, lecturer Nguyen Thi Hai Duong, for being a very thoughtful, supportive teacher and advisor Without her help, I could not have finished this graduate internship report Secondly, it is a great pleasure for me to work and submit my report on the graduate internship at PetroVietnam Exploration Production Corporation For this, I am sincerely thankful to my sponsor, Ms Nguyen Ngoc Mai for spending lots of her time guiding me at work And to all of PVEP’s employees at project finance department, I would like to thank them for treating me as a friend, a family member, and giving me wonderful experience during the time of my internship Last but not least, I would like to thank all my respectable lecturers at National Economic University for providing me with essential knowledge of Corporate Finance STATUTORY DECLARATION I herewith formally declare that I myself have written the submitted Bachelor’s Thesis independently I did not use any outside support except for the quoted literature and other sources mentioned at the end of this paper Hanoi, ./ /2016 Signature LIST OF TABLES Table 1.2 Minimum work and financial commitment 35 LIST OF FIGURES Figure 1.1 Types of Petroleum Agreement 15 Figure 2.1 Organizational chart of PVEP 29 INTRODUCTION Rationale of the research Oil is one of the most important energy sources in most economic activities, therefore the volatility of oil prices has a significant impact on the economy Fluctuating oil prices in history had led to high inflation and prolonged recession in several countries around the world Since the record of dramatic growth in oil price for the first time in the 1970s and its unpredictable changes after that, oil has become a major concern for policy-makers to strengthen oil efficiency and diversify alternative resources Besides, oil price has also become one of the main indicators when it comes to economic analysis In Vietnam, the impact of oil prices on the economy cannot be overlooked because although Vietnam is a crude oil exporter, our country still imports oil-related products Moreover, Vietnam's economy is more open these days It is clear that the sharp increase in oil price, along with that of other commodities, has resulted in a sharp growth in domestic inflation, which makes it difficult for efforts to control inflation of the State Bank of Vietnam in 2014 The current low oil prices (about $35 per barrel) create a new challenge for oil exploration and exploitation companies to maximizing theirs revenue These days, there is nobody seems to be able to forecast with any confidence the oil price in long term Prices may go up significantly, as they did in the period of years (2009-2014) or may continue to decrease dramatically to levels lower than most analysts expect (below $30 per barrel) There is no doubt that in most of the time, oil analysts have been consistently wrong about forecasting oil prices fluctuations On behalf of Petro Vietnam, PVEP performs business operations and capital investment in other enterprises operating in the field of oil & gas exploration and exploitation PVEP’s activities of oil & gas exploration and exploitation are taking place both domestically and aboard The Corporation carries out the function of investment attraction, studying hundreds of kilometers of seismic, promoting the Contractors' drilling and exploration process There have been a number of appraisal wells which are being exploited in order to contribute in Vietnam’s reserves addition and increasing of mining output Nowadays, since investing in exploration and production abroad costs a large amount of money, and the oil and gas reserves in Vietnam are gradually declining, PVEP has been expanding its exploration Investing a petroleum field in Nam Con Son basin is to follow the strategic development of the corporation in this period Objective and question of the research • Objective The study aims at analyzing a case study in which data have been collected regarding an opportunity to invest in Nam Con Son basins With finance knowledge gaining at university, I shall perform an analysis on whether or not economically feasible the project is in order to have a general picture about the impact of oil price fluctuations on a 10 particular petroleum project • Research questions In order to further understand how the objectives of this study will be achieved, these following research questions are introduced: - What is the petroleum contract? - What are the fiscal components being stated in a petroleum contract? - What is the role of oil price when it comes to following financial activities negotiated in the petroleum contract? - What are the terms in the petroleum contract Block 12West in Nam Con Son? - How does the fluctuating oil price affect the project Block 12West in Nam Con Son? - How can PetroVietnam Exploration and Production can improve the current situation? Scope and methodology of research • Scope of research This thesis focuses on evaluating the petroleum contract block 12West in Nam Con Son, which has duration of 25 years (2009-2034), especially to evaluate the impact of currently decreasing oil prices on the project in terms of financial activities • Source of data Input data including financial terms in the contract and minimum commitments, estimated product quantity, estimated cost for CAPEX and OPEX Besides, some previous research papers on the same topic and information acquired from the Internet and textbooks are carefully selected as references • Methodology The study focuses on statistical analysis as a tool for evaluating efficient project Economic feasibility shall be evaluated base on the following methods: Net Present Value (NPV), Internal Rate of Return (IRR).The report also includes evaluation on sensitivities of factors affecting the economic feasibility of the project Literature review Although the consumption of energy around the world gradually decreases since the 1970s and oil is gradually replaced with other types of energy, oil still plays the key role on the manufacture and business process of enterprises along with other manufacturing factors such as capital, labor, land… Hence, the aggregate demand of the world economy 53 barrel, it is reasonable and acceptable However, because oil prices are less than 50, even $36 / barrel as now, irrational issues will arise According to Corporate Income Tax Law and Circulars on Corporate Income Tax Law guide, the tax rate applied to oil and gas exploration activities is 32-50%, which is more than 1.6-2 times the tax level of millions of other businesses in the country What's more, it is noteworthy that this tax is levied immediately when oil is taken up from wells without considering whether the market price offsets other expenses or not An expert in the petroleum industry has taken a calculation: If the price of one barrel of oil being extracted at the wellhead is 25,5USD, while the selling price is defined as 54USD / barrel, after adding all taxes, the price of is still up to 54,7USD/ barrel As such, PVEP will lose 0,7USD / barrel Obviously, with such a calculation, no business can continue its operations and development To answer the question that, where profits earned in the years of high oil prices were or how they were spent, we look at the current regulations Annually, based on changes in world oil price, the government will set a certain rate on the budget assigned for the petroleum industry with its oil and gas exploration activities In the case of low oil prices as 2015, for example, the estimated revenue being generated from crude oil was $ 100 / barrel, but in terms of the whole year, it was just about $ 70 / barrel In that case, the National Assembly will consider and adjust the amount of money collected from crude oil revenues If crude oil price goes up, and the petroleum industry makes a profit, for example, revenue from crude oil is VND100 trillion, but at the end of the year, PVEP gains VND110 trillion, which exceeds 10 trillion, then 75% of this excess revenues must be paid back to the state budget This problem has been reported to the leaders of the Petroleum Group, the Ministry of Industry and Trade, the Ministry of Finance and the Government by PVEP A thorough discussion on this issue will be held in order to adjust the financial mechanism so it will be in line with the actual situation for the companies working in the field of exploration and production of oil and gas • Impact on production costs and production quantity: In the years 2017, PVEP expects to produce 12 thousands of barrels of oil in project in Block 12West in Nam Con Son with the estimated oil price is 85.46 USD / barrel, oil sales in 2016 is expected to reach $1,025, 520, and Vietnam's take reaches $461, 484 However, with oil price is just above $ 30 / barrel these days, oil sales will be reduced by almost 50% With the cost of producing one barrel of oil is about $24 of PVEP in 2015, 54 the low level of oil prices will be difficult for this project to generate profit To cut costs, PVEP might have to suspend or stall some high-cost exploration activities in order to have enough money to spend for the urgent work ahead With costs on the grounds, spend only for those truly necessary and practical projects Moreover, with the purpose of drilling and exploring oil and gas is to increase reserves, delaying exploration work will also be risky because PVEP will have no products to sell in the future when oil prices rise again The postponement of oil drilling and exploration like that will affect the strategic development and long-term stability of the project However, in this context, no one would dare to give up hundreds of millions of dollars to just focus on drilling and exploring • Impact on the future of the project Dramatic declines in world oil price are creating strong impacts on the world market, both advantages and disadvantages It does not only bring difficulties and challenges but also brings the opportunity to develop, expand markets, increase oil and gas reserves of PVEP That opportunity is the falling price of petroleum services For instance, the price of renting a rig, which was USD 140,000/ day before, has dropped to USD 70,000/ day and can continue falling Another point is that, in the context of oil prices decreasing for a long time, many corporations and companies are forced to close the petroleum fields or sell them, if PVEP has enough economic potential and capital, they may acquire the fields with an amount of money which is much lower than before Costs in the negotiation of petroleum exploration and production contracts will fall sharply accordingly However, to succeed, PVEP definitely need a breakthrough in the State management in terms of petroleum industry As PVEP, in 2015, if applying the tariff of other enterprises, the corporation would only have to pay VND 3.3 trillion instead of VND 8.3 trillion If these VND5 trillion difference were left for the use of their business to reinvest, there is no doubt that future benefits will be extremely large when the world oil market rebounds • Geological uncertainty with respect to structure, reservoir seal: Technical study both through documentations and fieldwork provided oil output figures of the project which enormously affect economic feasibility In a petroleum project, when 55 exploration and production oil companies have found oil and gas, it doesn’t mean the pay day is coming yet These companies have to check whether or not the amount of hydrocarbons found is economical to develop and produce Financially, as per minimum work to be committed with the state, foreign contractors shall carry out first exploration phase with total cost from USD 270 million However, PVEP doesn’t have to bear any costs occurred in this exploration phased Therefore, in the worst scenario that the exploration phase fails, the lost will be in a huge amount, and contractors will have to bear all the loss • Uncertainties in development phase: In the case of the exploration phase is successful, the development and production stages embody a high level of uncertainties in relation to their critical variables (infrastructure, production schedule, quality of oil, operational costs, reservoir characteristics, ) Those uncertainties originated from geological models and coupled with economic and engineering models involve high risk decision scenarios, with no guarantee of successfully discovering and developing hydrocarbons 2.4.2 Other difficulties Input data are not diverse and precise enough is also a problem The gathering of basic documents especially the project’s input data is inaccurate and inadequate The reason is that the information are generally from Internet, partners, governmental organizations… But some sources of information from the internet and literature are not sufficient and reliable, and there’s almost no governmental supplement information from some strictlypolitical countries such as North Korea and Myanmar Besides, the Corporation doesn’t always have enough money to get information from service companies Such situation binds the staff to have a lot of presumptions with low credibility of the figures that easily lead the project to failure However, at the present time the Corporation has not yet build up a specific plans regarding the gathering documents and information about investment environment and legal basis of the areas where the projects are taking place PVEP lacks software used for project assessment and financial figures analysis The mostly used criteria are NPV, IRR In assessing the safety of the project finance, PVEP has only considered the sensitivity analysis of NPV, IRR through the elements of oil price, total production but not the certainty of capital source or the credit-worthy The 56 reason for these drawbacks is that PVEP has not bought specializing software for the sake of project formulation These soft-wares allow the sensitivity analysis of elements affecting the target factors, the relationship of the factors and clearly demonstration of their weight Overestimate the probability of success: For some reason, this situation happens a lot It results from the management provisions of Contractors or external causes Hence, the economic efficiency of the project will be exaggerated which lead to false assumptions It can be seen that, in a period of 30 year when oil prices also had been down to the bottom, for instance, it decreased to the level of $9.20 / barrel in 1999, but then it rebounded very strongly As a result, the fall of oil prices these days should be considered as normal The problem is that PVEP must have a positive attitude and professional behavior with the change in oil prices to adapt to every oil price scenario proactively Of course, there are some other reasons, which cannot be failed to mention, lead to the difficulties of the intrinsic PVEP In recent years, with the dramatic fall in the world's oil price, corporations as well as the world's leading companies in the oil and gas sector face many difficulties in the petroleum activities such as declining revenues, unprofitable oil and gas exploitation activities, closure risks But the difference here is that, if other corporations in the world can close their fields, reducing petroleum output when oil price falls, the story of the PVEP is not that simple Even though revenue being collected to the State from crude oil can be reduced, it still accounts for a high proportion in the structure of annual revenue, at about 10% Meanwhile, the activities of PVEP are also a guarantee for the operation of thermal power plants, the production of urea, Moreover, PVEP is a State-owned enterprise; therefore, all of its profits and revenue being used must be planned, reported and approved before being implemented The appropriation of profits and revenue in exploration and production funds of PVEP and its unit members must comply with the provisions of the Petroleum Law and Circulars of the Government, the Ministry of Finance Vietnam now is in the market capitalism, in the context of international economic integration, however, the management mechanism of production and sales toward PVEP cannot be considered as "open" All investment activities and development of production ones in PVEP have to be based on development 57 strategy which is approved by the government If the sharp decrease of crude oil price brings enormous benefits to net importers of oil and to the EU, China, Japan and US, which have a large amount of oil consumed, this dramatic decline have negative impacts on net oil exporters and especially, on oil exploration and production companies PVEP is not an exception Its investment activities are seriously affected The corporation also has to face with the problems of selling oil and gas assets reluctantly, as well as the likelihood of restructuring or dissolution Downsizing the operations in exploration and exploitation areas, extending or even cancelling petroleum projects, reducing its output, etc… are other issues In addition, despite the Stage budget’s deficit and the significant decrease in natural resources, PVEP still has to increase production in some local fields to export oil and gas Some others also forecast brent oil price could drop to 25 USD / barrel, which is equal to the price that OPEC wanted almost 10 years ago, and it takes at least years (until 2020) for oil price to recover to $ 90 USD / barrel This forecast is classified as pessimistic but it is not unreasonable In order to eliminate their competitors, countries such as Saudi Arabia may be willing to spend billion barrels / year to sell at $ 25 / barrel for a few years without hesitating that this decision might have negative impact to their economies However, with this price, Russia, the US, Venezuela and Vietnam (PVEP) a lot of mines will be closed because the average cost of oil production in these countries exceed USD 30/barrel Since crude oil is a non-renewable resource which decreases gradually, after eliminating their rivals, these countries can raise prices above $100/barrel as in 2011 in order to recover the amount they lost in the past, while the countries being lost in the war of oil prices might take several years to restore their oil production quantities As a result, the price of crude oil and oil products remaining low for a long period of time brings more disadvantages to PVEP than benefits Unpredictable situation in East Sea, complicate petroleum geology in Vietnam and inadequate potential reserves, a variety of small oil fields, high exploration and exploitation costs, low financial strength and technology development, more and more competitions in the region are major challenges that PVEP has to face 58 CHAPTER III: RECOMMENDATIONS ON DECREASING OIL PRICE 3.1 Operation plan First, oil exploration and production companies like PVEP will keep on drilling new wells on the grounds that the government seriously require tax revenue which is taken from selling oil to finance government programs These nations have a tendency of low exploration and exploitation costs; almost all the difference between the market oil price and the value required to operate the oil organizations will be paid in taxes Accordingly, there is an incentive to enhance production to make extra tax revenue, if price decreases This is the case of Saudi Arabia and numerous other OPEC countries These companies will have a tendency of ignoring price drops for as long as these contracts are in place There is also the issue of employee retention One might say, an organization's most noteworthy resources are its workers Once these workers are lost, it will be difficult to procure and retrain new representatives As a result, employees are kept on as long as possible Second, oil demand cannot increase considerably after a drop in price from high level It is believed that the trend from low to high price is the opposite of going from a high price to a low price, in terms of the effect on the economy This is, in fact, not really the case When oil prices experience an increase after a period of low price, this generally means that production has been inadequate, with only the production that could be obtained at the prior lower price The price must rise to a higher level with the intention to encourage additional production The reason why the cost of oil production tends to rise is that the cheapest-to-extract oil is removed first Thus, oil producers must keep adding production that is ever-more expensive for one reason or another: harder to reach location, more advanced technology, or needing additional steps that require additional human labor and more physical resources Growing efficiencies somehow can offset this trend; however, the overall trend in the cost of oil production has been upward since about 1999 59 The rising price of oil has an adverse impact on affordability The usual pattern is that after a rise in the price of oil, economies of oil importing nations go into recession phase This happens due to the fact that workers’ wages not rise at the same time price of oil increases As a result, workers find that they cannot buy as many discretionary items and must cut back These cutbacks in purchases create problems for businesses; and, the reason is that businesses generally have high fixed costs including mortgages and other debt payments If these businesses are to continue to operate, they will be forced to cut costs in one way or another Cost reduction occurs in many ways, including reducing wages for workers, layoffs, automation, and outsourcing of manufacturing to cheaper locations For both employers and employees, the impact of these rapid changes often feels like a rug has been pulled out from under foot It is very unpleasant and disconcerting When prices fall, the situations that occurs is not the opposite of the above trend Employers find that thanks to lower oil prices, their costs are a little lower Very often, they will try to keep some of these savings as higher profits Governments may choose to raise tax rates on oil products when oil prices fall Businesses have no motivation to give up cost-saving techniques they have adopted, such as automation or outsourcing to a cheaper location Few businesses will construct new factories with the expectation that low oil prices will be available for a long time, because they realize that low prices are only temporary They know that if oil prices not go back up in a fairly short period of time (months or a few years), the quantity of oil available is likely to drop precipitously If sufficient oil is to be available in the future, oil prices will need to be high enough to cover the true cost of production As a result, current low prices are at most a temporary benefit–something like the eye of a hurricane Due to these issues, the jobs added to the economy are likely to be mostly in the service sector The shift toward outsourcing to lower-cost countries and automation can be expected to continue Citizens will get some benefit from the lower oil prices, but not as much as if governments and businesses weren’t first in line to get their share of the savings The benefit to citizens will be much less than if all of the people who were laid off in the last recession got their jobs back 60 Third, we will lose the energy products upon which our economy depends There are a number of different ways that oil production can be lost if low oil prices continue for an extended period In oil exporting countries, there can be revolutions and political unrest leading to a loss of oil production In almost any country, there can be a sharp reduction in production since oil companies cannot obtain debt financing to pay for more services In some cases, companies may go bankrupt, and the new owners may choose not to extract oil at low prices There can also be system-wide financial problems that indirectly lead to much lower oil production For instance, if banks cannot be depended upon for payroll services, or to guarantee payment for international shipments, such problems would affect all oil companies, not just ones in financial difficulty Oil is not the only case in its problems Coal and natural gas are also experiencing low prices They could experience disruptions indirectly because of continued low prices Fourth, the economy cannot get along without an adequate supply of oil and other fossil fuel products Articles we read seems to suggest that the economy could get along without fossil fuels For example, the impression is given that renewables are “just around the corner,” and their existence will eliminate the need for fossil fuels Unfortunately, at this point in time, we are nowhere near being able to get along without fossil fuels Food is grown and transported by using oil products Roads are made and maintained with the help from oil and other energy products Oil is our single largest energy product Experience over a very long period presents a close tie between energy use and GDP growth Nearly all technology is made using fossil fuel products, so even energy growth ascribed to technology improvements could be considered to be available to a significant extent because of fossil fuels 3.2 Factors affecting a petroleum project • Staff qualification This factor plays an important role that influences the effectiveness of the project’s implementations Participants of these activities must properly understand about the project, its procedure and necessity to be established with specialist knowledge in the 61 field respected to the project PVEP’s staff include geological engineer, bachelor of economics as well as first-class PhD or specialist of exploration and economic evaluation of oil and gas projects Therefore, the quality of PVEP’s projects are mostly guaranteed Nevertheless, there are still some shortcomings as the Corporation’s staff are not provided with the most advanced equipment, nor many chances to be in a fact-finding tour; these shortcomings in information gathering may result in the ignorance of the environment where the project are taking place and its potential evaluation • Source of information used for the project preparation Sources of information must be sufficient and reliable in order to ensure the accuracy of project formulation Only a diverse source of information are able to avoid the subjective assessments of projector and mistakes that can make the project failed Currently, at the Corporation, information are generally taken form the Internet, business partners, governmental organizations, service companies,…that could partly meet the requirement of the Corporation’s project establishment • Budget of the projects establishment Due to the complexity of oil & gas projects, PVEP has been spending a huge amount of money to invest in machinery, technology equipment as well as salary for staff and experts It is difficult to use the budget properly within the estimated number and no more Lack of budget will make staff and experts come up against an obstacle to have a deeply understanding of information related to the project and data source to have effective and accurate assessments of the project However, the exceedingly use of budget is also a waste For this reason, the budget must be used adequately in order to facilitate the formulation and efficiency of the project • Legal basis: A project will never be established without legal basis Oil & gas projects are not only domestically but also overseas conducted Therefore, thorough knowledge of legal basis in Vietnam and other countries where the projects are taking place is extremely significant It not only shows the project establishment is appropriate for the plan, development strategy of the industry, the Corporation as well as other investors; but also relates to the provisions of royalties, income tax, profit oil sharing ratio… that directly 62 influence the economic efficiency of the project In other words, thorough knowledge of legal basis will make the objective and accurate assessment 3.3 Orientation From the above analysis, it is recommended that further in-depth steps should be taken before final decision to be made: • Set up an internal appraisal committee or external international consultancy to verify all input data and to advice on final decision to be made by PVEP • Negotiate with Vietnam government for more favorable terms and conditions of the Petroleum Sharing Contract, for example oil profit sharing ratio, preferential taxation regime for PVEP • Negotiate with agents on oil sales contract in order to reach oil price higher than 50USD/barrels because oil price is evaluated as the most sensitive factor that affects Net Present Value and Internal Rate of Return of the project • Carry out technical study on several more scenarios of other reserves in the field in order to analyze economic feasibility of the project on larger scale • Call for partnership with other foreign oil companies to ease the burden of financing and for experience sharing purpose • Final decision should be made in consideration of the Corporation’s financial and human resources and in comparison with economic effectiveness of other projects, particularly those abroad With such difficulties, PVEP set out some solutions which are as follows: • Continue to review and propose investment scenarios for exploration, basin development scenarios for each oil price possibilities ($30/ barrel, US $40/ barrel and $50 / barrel) • Focus on implementing field development projects to ensure economic efficiency within the EDP / FDP / RFDP approved as the White Lion - Phase & DH FG Phase 2, Southwest Gas, KNV / KNT, Block B , 48/95 and 52/97, Red Dragon Fish, BRS Phase / MOM • Recommend and develop legal frameworks, incentives and application / development of technology for the development of marginal fields 3.4 Recommendations • Rebalance production output of the project 63 The balance of production quantity mainly depends on assessment of the project's efficiency as well as its technical elements They should increase producing oil at wells with lower costs and reduce or stop exploiting in those with higher costs However, the increase in output could affect the maintenance of producing production quantity economically during the next years In addition, when it comes to reducing or stopping some wells, PVEP also needs to take into account the fixed costs incurred during this time or the expenditure necessary to maintain and re-launch the exploitation after that Moreover, PVEP should not plan to enhance oil and gas production quantity when crude oil market price is lower than the rate of return What’s more, the corporation should not produce domestic oil to export so that it can save resources for future demand when oil price become higher again Therefore, PVEP will not only be able to lower its production costs but also to expand production lines, which helps increase the competitiveness of Vietnam oil-related goods when it comes to regional and international integration PVEP should also take into consideration all factors and possibilities before deciding to enhance exploration activities – in deep water areas as well as in other countries Giving up these projects can help PVEP tackle the lack of investment capital and be able to minimize risks because they require high costs and their profits might not be commensurate with these costs • Improve the terms and forms of petroleum contract In the domestic upstream activities, PVEP should sum up the efficiency of all types of contract forms applied along with research to find out new type of petroleum contract or ones which haven’t been applied in Vietnam This allows the diversification in the forms of cooperation and as a result, these new types of contract can be applied consistently to meet geological conditions, geographical features, potential value, the security situation, international relations, national interests… in each nation, each sedimentary basin In terms of operating activities, PVEP should focus on investment in exploration activities to increase our reserves of recovery and to discover new potential aquifers, new fields on land and on the continental shelf Also, enhancing cost oil and cost gas recovery ratios by scientific and technological approaches should be taken into account Apart from carrying out new research, PVEP ought to re-analyze the synthesis of geological, geophysical, drilling, exploring data of its previous works in a variety of hypotheses to choose the optimal model technically and economically 64 • Strengthening the collaboration among key divisions The effectiveness of the project depends heavily on collaboration assignments among PVEP departments Currently, the collaboration among these departments is not high, which scatters capability of the staff working in the operating corporation Scattered working is also a factor hindering the effectiveness of the operator focus which has an impact on the quality of the oil and gas project Since one petroleum project needs to be undergo analysis by multiple department, hence if there is no coordination between the parties, the duration of the project will be extended and inefficient, causing conflicts Therefore, PVEP should establish a professional board including representatives of departments Prior to undertaking any project, a meeting is required to be held in order to inform general information and the specific assigned tasks of each department Thus, the capacity to mobilize the creative work of all committees skilled professionals will be exploited, and at the same time the project would be in line with the direction and development goals of the company • Carry out research on investingment environment carefully When it comes to investingment environment research, this is indispensable process when establishing a petroleum project The research includes information about the geographical conditions, political factors, socio-economic, institutional mechanisms to manage the sector, legal contracts and investment evaluation in the region that the project carried out Understanding the investingment environment has been keen on but yet still very simple, some projects not have the analysis, neither a proper information analysis process nor accurate assessment of the environmental investment Sometimes, parts of the investmeningt environment in the research are overlooked, inadequate, especially national projects Therefore, PVEP should establish a dedicated team responsible for analyzing the investment environment of the project, who fully understand the area having the project undertaken By doing that, the analysis could be more specialized and efficient Improving the effectiveness of collecting information systems by modernizing machinery and equipment, investors buy the information from reputable service, collect information from the Embassy, from government organizations to provide input data sources rich and accurate for the project Another point is that PVEP should not invest in development period activities without 65 having the knowledge and professional experience Focus on the principle of considering science-technology shall be the key to specific tasks Use various ways to pay special attention to the training in terms of professional knowledge, working skills, discipline, including elect employees to work in the foreign oil companies for to 10 years to become experts on condition that they are eligible to attend international contests Use the right personnel, encourage the development of talented and good personalities people For the solutions to reach the desired results, PVEP will have to restructure its system During the recent decrease in oil prices, the number of fired personnel in the oil industry in the world is up to hundreds of thousands However, the views of leaders PVEP is different PVEP will not let its employees lose their jobs, but it's compulsory to reorder their positions Low oil prices give PVEP an opportunity to look back its activities and decisions Therefore, it is necessary for the corporation to evaluate the entire petroleum fields and shall classify those fields’ ranks in which their levels must be consistent with suitable measures With the projects, it must calculate the efficiency of emergency to minimize the damage to a minimum • Negotiate with Vietnamese government to have a more reasonable tax policy In regard of the state management as well as sector management, the government and PVN should change the contents in the petroleum laws that are not suitable for the new situation in time Congress should enact legislation in terms of using revenue, earnings, cash budget of the oil companies to prevent inefficient use of revenues being generated in exploiting resources in the project which are not really urgent or less national benefit In regard of organizations, we should learn from Russia's experience by reducing state capital in joint stock companies, making strong cut of 100% state owned companies and encouraging establishment of private owned ones according to professional fields or the area of operation All these things need to be done based on the principle of respect for the system, synchronization It cannot be too dispersed or fragmented, which leads to internal competition and consequently, all the strength and advantages of organizations lying in the same production system, business, and management will be lost Or else, investment and advantages in making use of human resources might be wasteful 66 REFERENCES Vietnamese Đoàn Tiến Quyết, Lê Việt Trung (2014), Tạp chí dầu khí Vũ Công Ty (1996), Phương pháp lựa chọn phương án đầu tư có hiệu doanh nghiệp Tập Đoàn Dầu Khí Việt Nam (2010), Quyết đinh 4028/QĐ-DKVN Tiêu chí đầu tư Tập Đoàn Dầu Khí Việt Nam (2013), Quyết đinh 7069/QĐ-DKVN Quy định tiêu chí đánh giá, thẩm định định đầu tư dự án tìm kiếm – thăm dò – khai thác dầu khí Tổng Công ty Thăm dò Khai thác Dầu khí (2009), PVEP Legal – Edition English Bindermann, K (1999), Production Sharing Agreements John (2000) oil contract Johnston, D (2003), International Exploration Economics, Risk, and Contract Analysis Nesvisky (2009), Understanding the crude oil prices 10 Patrick R Delaney (2007), Business Environment and Concepts 11 PetroVietnam Exploration Production Corporation (2006), Production Sharing Contract of Block 12West 12 13 14 Joseph Dawha (2015), Oil projects to suffer delays over crude price decline 67 15 Colin Drury (2006), Management and Cost Accounting Website 16 Average Annual Inflation Rates by Decade Address: http://www.inflationdata.com/inflation/inflation/decadeinflation.asp 17 NangluongVietnam Online, et al 2016 Thị trường dầu khí giới suy nghĩ ngành dầu khí Việt Nam Address: http://www.nangluongvietnam.vn/news/vn/nhan-dinhphan-bien-kien-nghi/thi-truong-dau-khi-the-gioi-va-suy-nghi-ve-nganh-dau-khi-vietnam-ky-1.html 18 NangluongVietnam Online, et al 2016 Thị trường dầu khí giới suy nghĩ ngành dầu khí Việt Nam Address: http://www.nangluongvietnam.vn/news/vn/nhan-dinhphan-bien-kien-nghi/thi-truong-dau-khi-the-gioi-va-suy-nghi-ve-nganh-dau-khi-vietnam-ky-2.html 19 Giá dầu 2016 ứng phó PetroVietnam Address: http://www.pvep.com.vn/Pages/pages-details.aspx?itemId=144130507&pagesId=25