Petroleum Authority of Thailand (PTT) used a cable crane to lay the portion of the controversial Yadana pipeline that traversed the hilly area near the Thailand-Myanmar border. Photo courtesy of PTT.A slowdown in Thailand's natural gas demand, triggered by a region-wide economic crisis, has forced state firm Petroleum Authority of Thailand (PTT) to drastically revamp its master gas transmission plan for 1997-2006.
It has decided to slash 40 billion baht ($1 billion) from its planned gas pipeline investment of 124 billion baht during the period. This will be accomplished by delaying, downsizing, and canceling a number of projects.
Next year, PTT will invest only in the Ratchaburi-Wang Noi which will link Thailand's main grid to gas supplies from neighboring Myanmar. PTT has committed to take deliveries of 725 MMcfd of gas from the Yadana and Yetagun gas fields in Myanmar's Gulf of Martaban under 30-year contracts, although its ability to honor those commitments is now in doubt because of the economic crisis.
The Thai state oil firm has given immediate and top priority to proceed with the Ratchaburi-Wang Noi pipeline because of the key role it will play in transporting Myanmar gas to other consumers elsewhere in the kingdom. Currently, use of Myanmar gas is restricted by the limited gas use of the Ratchaburi power station.
At present, gas from Yadana is transported to the Ratchaburi power plant, about 130 km southwest of Bangkok, by a 260-km pipeline originating in the western Thai province of Kanchanaburi. Deliveries of Yadana gas from Myanmar, which started on July 1, are greatly reduced from the contract rate because of delays in the construction on the Ratchaburi plant.
The reasons for PTT's inability to follow through on existing purchase agreements, such as the one for Yadana gas, are not difficult to fathom. The economic crisis had wreaked havoc on Thailand's energy sector.
Since the depreciation of the baht began in July 1997, Thailand's domestic annual demand growth for natural gas has declined to 5% from 10%. The economic downturn also has forced PTT to cut at least $750 million from its budget for gas supply procurement and new gas transmission projects.
For PTT, the fallout resulting from the slump in gas demand is considerable.
A disagreement has developed between PTT and Unocal Thailand Ltd. regarding PTT's inability to take the requisite volumes of gas from Yadana and Erawan fields PTT agreed to purchase under supply contracts. And Premier Oil plc, developer of the Yetagun gas field, has severely curtailed its drilling in the area because it fears a similar problem developing.
Among other PTT pipeline projects now in jeopardy is a planned pipeline from the Malaysia-Thailand Joint Development Area (JDA) to Songkhla, Thailand, which PTT has called off for the moment. Also in question is Thailand's ability to use gas from the JDA field developments that are under way.
Meanwhile, the power sector, where the vast majority of all Thai gas is consumed, is also in dire straits. Power consumption growth to 2001 is expected to be 15% below previous estimates.
The Electricity Generating Authority of Thailand (EGAT) now projects that overcapacity will go from 56% in 2001 to 61% in 2004. In response to the slower growth projections, EGAT has postponed a number of projects and delayed the next solicitation for power purchases from independent power producers by a year.
It remains to be seen whether PTT's woes will serve to accelerate the planned liberalization of Thailand's gas markets. For the moment, the sector's market reforms are on track for completion in 2002.
Curbed pipeline projects
Under its revised plan, PTT will now invest only 84 billion baht in the expanded gas pipeline network, said Piti Yimprasert, president of PTT Gas.Piti said it is necessary to revise the state enterprise's gas pipeline master plan to match Thailand's lower-than-expected economic growth. The Thai economy is expected to contract at least 8% this year, although optimists predict 1% growth in 1999.
PTT's revised gas transmission plan sees the cancellation of two projects, and delay and downsizing of at least three other schemes. Some of the key changes are:
- Pailin pipeline (offshore)-Reducing the pipeline diameter to 24 in. from 42 in., delaying the completion to 1999-2000 from 1998, and slashing investment costs to 2.46 billion baht from 6.82 billion baht.
- JDA-Erawan line (offshore)-Trimming the pipeline diameter to 40 in. from 42 in., rescheduling the completion date to yearend 2003 from 1999, and increasing the estimated investment to 24.74 billion baht from 15.70 billion baht.
- Ratchaburi-Wang Noi line (onshore)-Reducing the pipeline diameter to 30 in. from 36 in., deferring the completion date to May 2000 from 1999, and trimming the investment to 10.66 billion baht from 15.78 billion baht.
- Ratchaburi/Wang Noi-South Bangkok power plant line (onshore)-Delaying construction indefinitely from 2002 (pipeline diameter of 36 in. and estimated investment of 4.19 billion baht remain unchanged).
- Benchamas line (offshore)-Reducing the pipeline diameter to 18 in. from 24 in., advancing the completion date to mid-1999 from 2000, and trimming investment to 535 million baht from 2.44 billion baht (as a result of reduced investment by PTT's joint-venture partners).
- Pailin-Songkhla line (offshore)-Canceling construction altogether. (Its planned diameter was 24 in.; it was scheduled for completion in 2005 and was expected to cost 8.78 billion baht.)
Reduced offtake PTT has cut payments on purchases of natural gas from Erawan field in the Gulf of Thailand. Erawan is operated by Unocal.
The move is considered an attempt to force the U.S. concessionaire to negotiate new contract terms.
Unocal executives confirmed that payments for Erawan gas have fallen short by 7.5% since August. They declined to confirm the amount involved, but PTT officials have indicated that the shortfall is 100 million baht/ month.
PTT officials said they made the unilateral decision to cut payments because Unocal had ignored its request, made in a few letters sent to the company, to negotiate for new pricing terms for Erawan gas.
The Thai state oil firm sees the need to revise the terms, as the price of Erawan gas is becoming less competitive with that of fuel oil, the reference fuel, under the contract established nearly 2 decades ago, largely because of the depreciation of the baht.
PTT buys the Erawan gas in U.S.-dollar equivalent and sells the gas to users in the local currency, which has depreciated from 26 baht/dollar to about 40 baht/dollar since July 1997.
What has made the situation worse is that PTT has not been able to raise the price on gas it supplies to the Electricity EGAT, which consumes the bulk of indigenous natural gas. PTT therefore has incurred significant losses.
PTT officials suggested that PTT has lost 10 billion baht under gas contracts with Unocal ever since the baht was depreciated, and another 5 billion baht under several contracts with other gas field operators.
PTT is concerned that, if indigenous natural gas prices become too high, consumers will turn to other, cheaper fuels-especially fuel oil.
PTT Chairman Preecha Attavipat told reporters that the time is high for PTT to renegotiate for new terms with Unocal, due to the changed situation.
Due to the slowdown in Thailand's gas demand spurred by economic turmoil and the availability of natural gas supplies from other local sources, PTT could be less dependent on Unocal gas. Yet it has more bargaining power to persuade the U.S. concessionaire to ease the terms, said Preecha.
In response to PTT's claims, a Unocal executive insisted that Unocal did not ignore PTT's letters, and that Unocal did indeed respond to the letter recently.
He declined to disclose the content of Unocal's response.
"We need to talk and try to strike a compromise," he said.
Unocal is delivering 260 MMcfd of natural gas from Erawan field to PTT.
Industry sources have suggested the renegotiations PTT is trying to pursue would cover not only Erawan, but also other gas sales contracts it has entered into with Unocal-namely the so-called second gas sale contract and the Pailin deal.
Unocal Thailand currently operates 11 natural gas fields in the Gulf of Thailand. Production from these fields is expected to average nearly 1 bcfd this year, an amount equivalent to almost two-thirds of Thailand's natural gas use.
Yadana setbacks
The Yadana gas project in Myanmar is facing yet another setback as Thailand is forced to further postpone taking commercial delivery of the gas until April of next year, 8 months behind the original schedule. The further delay is primarily due to the failure of Mitsui & Co. of Japan and its U.S. supplier, General Electric Co. (GE), to finish installation of the Ratchaburi power station,which will be the only buyer of Yadana gas for the next few years (OGJ, Oct. 19, 1998, p. 36).The latest move will postpone commercial operation of Myanmar's largest known offshore gas field by another 4 months from December 1998, as previously expected by PTT, the Yadana gas buyer. PTT was supposed to begin receiving 65 MMcfd of Yadana gas in July this year, but only 5 MMcfd is being shipped.
The 5 MMcfd of Yadana flow that began on July 30 was made possible by the installation of a small 25-MW gas turbine that EGAT removed from the northern Kamphaeng Phet province and installed at the Ratchaburi plant as a temporary gas burner.
Senior EGAT officials said GE seems to have had problems delivering the initial units for the Ratchaburi plant on time.
Mitsui had earlier informed EGAT that the first two 200-MW gas turbines at Ratchaburi would be ready for commissioning in November or December of this year.
"They (GE) seemed to have problems with components manufactured by their production facilities in Third-World countries," said an EGAT official.
The delay in delivering the first two 200-MW units will also affect completion of the subsequently planned generating units at Ratchaburi. That means the completion of the entire 1,800-MW complex will be 8-9 months behind original schedules.
As a result, EGAT and PTT will not be able to take the Yadana gas at the originally agreed rates and time schedules, EGAT pointed out.
EGAT recently notified Mitsui that it will be subject to a penalty of 1 billion baht for the Ratchaburi construction delays. The amount was the maximum fine EGAT can claim from Mitsui under the contract, which was worth about 10 billion baht.
EGAT recently informed PTT about these problems, which have a far-reaching effect on the Thai state oil firm's continuing negotiations with the Total-led Yadana consortium, aimed at relaxing the terms of its gas purchases. PTT is pleading force majeure for its failure to fulfill the contractual supply rate and dates, in order to avoid heavy contractual penalties under the 30-year take-or-pay deal.
Under the contract PTT entered into with the Yadana consortium, PTT was committed to gradually raise its offtake of gas from Yadana, which lies 240 km south of Rangoon in the Gulf of Martaban. A plateau level of 525 MMcfd was to be reached 15 months after production start-up, originally slated for July 1.
PTT wants to pay only for the amount of gas it receives, but it is bound by the contract to also pay for the undelivered gas at the end of the year.
A local legal expert, however, said the attempt by PTT to plead force majeure had come too late. Panas Tassaneyanont, former dean of Thammasat University's College of Law, said the move should have been made while the protest against the pipelaying in Kanchanaburi was under way. The government could have ordered PTT to stop the project by invoking the so-called Act of Government clause, he noted.
Pibhob Dhongchai, an adviser to the Kanchanaburi Conservation Group, an organization that protested the laying of the Thai section of the Yadana line, said, "Had PTT listened to the environmentalists, we would not have wasted a large amount of money (for damage) while saving our fertile forest (in Kanchanaburi)."
Thai environmentalists opposed the project on the grounds that it cuts through rain forests and has displaced animals, including elephants. PTT insisted that the only loss incurred would be interest for the payment of the full 65-325 MMcfd it had agreed to take during July-December this year.
Meanwhile, Myanmar's ruling junta, through state-owned Myanma Oil & Gas Enterprise (MOGE), which has a 15% stake in the $1 billion Yadana gas project, has so far been adamant that PTT adhere to the established terms on Yadana gas supply contract.
A senior PTT official involved in the negotiation said, "(Myanmar) is very unhappy with us because they have had high expectation of steady and sizable revenues from the Yadana gas sale to Thailand and (hoped to) use the money to turn its economy around."
PTT Vice-Pres. Vichit Yambunruang was quoted by Thai newspapers as saying the circumstance around PTT's failure to take the Yadana gas may not fit the force majeure clause contained in the gas sales agreement. The clause pertains to events such as war and natural disaster.
However, Vichit said PTT is trying to negotiate to relax some other conditions that were not written in detail in the contract, such as payment and gas deposit terms.
Unocal Corp. Pres. John Imle said PTT's request for easing terms needs to be addressed to the entire Yadana consortium. "I'm sure it would be worked out because we invested $1 billion among us to have this gas," said Imle.
Yadana interests are Total 31.24%, Unocal 28.26%, PTT's upstream unit PTT Exploration & Production plc (Pttep) 25.5%, and MOGE 15%.
Yetagun delays
Elsewhere, Premier Oil faces a grim prospect: Thailand has asked a consortium led by the U.K. independent to defer the start-up of delivery of natural gas to Thailand from its Yetagun field off Myanmar.PTT is essentially seeking a "slight" postponement in offtake of Yetagun gas in order to cushion possible delays in the laying of a new domestic pipeline linking Yetagun to PTT's national gas grid, according to Piti.
The so-called west-east gas line, stretching 150 km from Ratchaburi to Wang Noi, will be crucial, as it will enable PTT to transport Yetagun gas to other Thai consumers along PTT's natural gas distribution network. Without the Ratchaburi-Wang Noi connection, all the offshore Myanmar gas that Thailand is under contract to buy-from Yadana and Yetagun fields-would end up at EGAT's Ratchaburi power station.
But the Ratchaburi power plant, with an ultimate generating capacity of 4,600 MW, will not have the capacity to take all the gas coming from the two Myanmar fields in the next few years.
In fact, the EGAT facility is not able to take the entire contractual delivery rate from Yadana for the next couple of years.
Although the Ratchaburi-Wang Noi pipeline project has already received approval from the National Economic and Social Development Board, the state planning agency, it has yet to be finally approved by the Cabinet, which is necessary before PTT can kick off the project.
Amid rising concerns over the ability of Thailand to honor the terms of its Yetagun gas purchase agreement, Premier has canceled the remaining 4 months of its contract for the Kan Tan 3 semisubmersible with the Shanghai Ocean and Marine Geological Survey operating in Yetagun field.
The semi had just completed Yetagun East 3 well in Block M-12, and was pulled off location the week of Oct. 12, even though it was under contract through January.
According to industry sources, Premier and its partners in the development were growing concerned over the ability of PTT to buy the gas when the field comes on stream in 2000.
Kan Tan 3 was under contract for a 9-month period beginning May 24 and had completed drilling four wells: Yetagun East 4, Yetagun North I, Ang Tay Za, and Yetagun East 3. Results from the drilling were very encouraging and succeeded in increasing Yetagun's proven reserves to 1.5 tcf from 1.1 tcf.
Industry observers said that Premier was confident that further drilling could have proved up reserves in excess of 2 tcf, but became increasingly concerned about the security of future sales.
"The economics of further development just don't make sense if you don't have a secure purchase contract," said one oil industry executive. "The fact is, as viable as the project may be technically, this region is gas-rich, and you have to find a buyer that can take the gas. Thailand is really the only potential market, and they are obviously having problems with falling demand."
The Yetagun field, 270 km west of Thailand in Blocks M-12, M-13, and M-14, is due to begin supplying 200 MMcfd to Thailand in 2000 under a 30-year agreement between PTT and the Yetagun group. The consortium includes MOGE, Petronas Carigali, Premier Oil, Nippon Oil, and Pttep.
JDA development to slow?
Although development of the Malay-Thai JDA is proceeding apace, analysts are beginning to wonder where the market for the JDA gas will be (see related story, p. 30).Two months ago, PTT announced that it was suspending plans to build a pipeline that would deliver gas 186 miles from the JDA to the southern Thai city of Songkhla. While Petronas has publicly professed support for the project, recently it has also displayed signs that it is getting cold feet.
PTT and Petronas signed an agreement in 1996 to purchase JDA gas at an initial rate of 600 MMcfd beginning in 2000 and increasing to 1.5 bcfd by 2003. The gas was to be used to support a number of joint-venture projects in northern Malaysia and southern Thailand, such as a gas separation plant, power station, and industrial gas distribution system.
With its pipeline project stalled, however, PTT is in the process of negotiating with Malaysian authorities to postpone the natural gas delivery date from 2002. Given Thailand's numerous sources of natural gas, many observers believe it will be at least a decade before the JDA gas is purchased.
"The Thais can't even meet their commitments purchasing (Myanmar) gas, and the pipeline has already been completed," said one executive. "I don't see them being in any position to follow through on JDA purchases for a long time."
Petronas is in a similar position. Gas demand is down, paralleling the economic contraction. And sources of supply abound. LNG Tiga already is cutting output before it comes on stream, and 250 MMcfd of gas from Phase II development of Block PM-3 in the Commercial Arrangement Area (CAA) between Malaysia and Viet Nam is due to come on stream in 2000. The gas will be piped 135 km to the Malaysian city of Kerteh.
The CAA gas is thought to be in direct competition with that from the JDA. "It's far lower in CO2, and the pipeline is shorter," said one executive in Kuala Lumpur. "Given the economic situation, Petronas must be seriously concerned about bringing the gas on line. It appears that they will not be able to take both."
Petronas executives also say that JDA gas purchases will be hard to justify, and if the economy fails to rebound at least moderately by the time production starts, they may have to be suspended.
"It is something that will be considered very carefully indeed," one Petronas official said.
But others contend that the JDA project is too important politically for Petronas not to follow through.
But whether and/or when all of the successful development will yield cash flow is the ultimate question. Development costs for Cakerawala field alone are projected at $600 million.
"It would be unfortunate if, after all this time and effort-politically as well as technically-this project becomes an economic casualty," said one executive. "But I'm afraid that is a distinct possibility."
TTM pipeline
PTT and Petronas agreed last April to jointly invest, on a 50:50 basis, an estimated $825 million in the 400-km Trans-Thailand-Malaysia (TTM) gas pipeline, which would traverse Songkhla province. The project would also include a two-train gas separation plant in the province.These support facilities are essential to the development and exploitation of natural gas from the disputed Malay-Thai continental shelves in the Gulf of Thailand, known as the JDA.
Not to repeat the same mistakes over the Yadana gas line project, PTT has moved to quell opposition to the Malaysia-Thailand gas pipeline and separation plant projects in Thailand by organizing a series of public information forums.
The first was due to take place in Songkhla in mid-November and largely deal with the effects the multi-billion-baht projects will have on the environment of southern Thailand.
Since early this year, Songkhla environmental activists have begun to raise concerns over the environmental impacts the project would create, in a way likened to the Thai section of PTT's Yadana gas pipeline.
According to PTT Gas's Piti, the planned meetings will provide a forum for several parties, including local communities, academics, and nongovernmental organizations, to voice their opinion on what the environmental impact assessment (EIA) of the project should cover.
Six issues were to be addressed at the first forum, including project details, environmental assessment, potential pipeline routes and gas plant sites, and environmental protection measures to be adopted during construction and implementation.
Piti said PTT has assigned the environmental management team of Prince Songkhla University to conduct the EIA, which is due to start at the end of this year and be completed within 1 year.
PTT has chosen a tentative route for the onshore Thai section of the pipeline, which is the subject of the Thai environmental activists' scrutiny. This section is 86 km in length and 30 in. in diameter. It would extend from Songkhla to the Malay border at Sadao.
PTT officials have said the area that the proposed pipeline will traverse is not environmentally sensitive.
Meanwhile, Malaysian officials have assured their Thai counterparts that the current political problems in Malaysia have not affected the JDA and related gas projects.
Thailand's liberalization
Liberalization of Thailand's long-standing monopoly on natural gas supply is on course. The plan is for the market to be reformed and open to competition in 2002.Specific action plans and schedules for implementation of a new gas market structure were spelled out for the first time, and clearly, by the National Energy Policy Office (NEPO), the de-facto energy regulatory body.
The Thai government is advancing its privatization master plan for the energy sector, which includes decontrol of domestic LPG trade (see story, p. 28).
According to the latest revised master plan, there will be six requirements crucial for achieving reform of the Thai gas industry:
- Separating the natural gas transmission and trading divisions of PTT, which, with only a few minor exceptions, acts as the sole purchaser, transporter, and distributor of natural gas in Thailand.
- Providing outside access to natural gas supply systems now in the hands of PTT.
- Establishing common pipeline tariffs.
- Setting up an independent regulatory body.
- Inspiring competition in trading.
- Offering competitive tendering for construction and ownership of new transmission and distribution lines.
There are two essential issues in the model that need to be given further consideration. The first is the separation of PTT's gas transportation and trading functions.
The NEPO report said that separation of PTT's gas transmission function, either in accounting or legal terms, from its gas trading division is a precondition to promoting competition. Full legal separation into an independent corporate entity would be preferable in order to facilitate transparency and regulation.
The most important point here is that most gas sales in Thailand are to power plants under long-term contracts. With this in mind, the establishment of a competitive market for further sales, and based on flexible supply arrangements, is anticipated to evolve over a fairly long time.
In the interim, PTT will be the dominant trader, in addition to providing transmission services. This will result in a gradual transition to a competitive market, which is needed in order to phase out PTT's long-term purchase commitments. Also, this transition will give comfort regarding gas security concerns, the report said.
NEPO said it struck an agreement with PTT on the legal separation of its gas transportation (transmission) and trading businesses on Aug. 25. This agreement was also endorsed by the Department of Mineral Resources.
The second issue requiring further scrutiny is third-party access to gas supplies.
The primary aim of promoting competition in certain market areas of the gas industry is to increase industry efficiency and ultimately yield benefits to end users in the form of lower prices and improved service. The establishment of third-party access to gas transmission pipelines is seen as a means of facilitating the development of competition in gas supply.
The provision of access to these facilities by third parties on fair terms and conditions potentially allows end users to purchase gas from upstream producers, or continue to purchase the bundled service of gas transmission and supply from the pipeline owner. Currently, the issue of third-party access is under review. Analysis is required on this and other possible options.
Another approach
While common (predefined) charges are appropriate for common-carrier transmission pipelines, a more flexible approach may better support ongoing investment in gas infrastructure. The basis for this approach would be that the developers of new pipelines would be granted a franchise under terms that will allow them to negotiate use of the pipeline with customers.This alternative approach would be relevant for special-purpose pipelines with a limited number of customers.
Under this approach, the broad framework for access would be well defined, but the actual setting of terms and conditions (such as tariffs) would be subject to negotiation. This allows for a level of commercial control on the part of the owner.
On the other hand, there is potential for abuse of this position, in terms of monopolistic pricing of the transmission service. To balance these matters, a process would need to be established to address disputes arising from the negotiation process, with recourse under a predefined means of arbitration.
PTT and NEPO have agreed to develop a third-party access code to set the terms of access to common-carrier pipelines. This code will be developed by the end of 1998, with implementation expected in 1999 in preparation for the introduction of competition into the gas sector in 2000.
NEPO said that a recommendation by Arthur Andersen Consulting that access to these special-purpose pipe- lines be provided through individual negotiation is subject to further review, and consequently does not constitute policy for the gas supply industry at this time. PTT's network of gas pipelines currently stretches 1,512 km, linking all commercial offshore gas fields to EGAT's power plants, its four gas separation plants, and other industrial users. All of PTT's contracts, whether with suppliers or consumers, are on a long-term (20-30 years) minimum take-or-pay basis.
EGAT is by far the largest gas user in Thailand. In 1997, 75% of natural gas consumption went for power generation, 14% for the production of LPG and petrochemical feedstocks, and 11% was consumed as industrial fuel. Thailand has no retail gas industry as yet.
The future
With Thailand's woes, what lies ahead for Myanmar's blossoming new gas sector is anything but clear.After fretting for years about securing gas resources, Thailand is now spoiled for choice. Gas abounds in the Gulf of Thailand, as well as in the Joint Development Area with Malaysia. The fact remains that Myanmar gas appears too expensive by comparison.
Industry observers conclude that, while Total's Yadana project will go ahead under less-attractive terms, there seems little hope for Yetagun, at least in the medium term.
"The situation is that Thailand is the only market feasible, and it is saturated for the foreseeable future," said one industry executive. "Eventually, demand growth there will increase, but it will take several years of that before both projects are brought on stream, let alone at previously contracted values and flow rates."
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