March 2008

THAI PETROLEUM CONCESSIONS

Industry and Legislative History

Prior to 1954, the right to explore for petroleum was reserved exclusively for government agencies, and exploration by the Defense Energy Department led to discovery of the Fang basin in Chiang Mai Province. Between 1954 and 1960, exploration permits were awarded under the mining laws to two private Thai companies, who were not successful.

In the early 1960’s, agreements were signed with Union Oil and Raphael Pumpelly for areas in northeastern Thailand, under the general provisions of the mining law. In 1964, the offshore areas in the Gulf of Thailand also attracted the attention of major international oil companies.

In 1967, the government introduced a concession system, under a document entitled “Consideration Bases in Applying for Petroleum Exploration and/or Production”. The Ministry of National Development then invited applications to explore, and the Council of Ministers approved the award of rights to six major oil companies. Agreements in an abbreviated form were signed with those companies in 1968. Under these agreements the Ministry agreed to issue concession agreements when a new petroleum law came into effect.

In 1971, Thailand promulgated the Petroleum Act (PA) and the Petroleum Income Tax Act (PITA). The PA established a concession system based on the Consideration Bases, and nine Ministerial Regulations were issued in 1971 dealing with major subjects under that act. The PITA established an income tax system applicable only to concessionaires, with tax rates between 50% and 60%. A tax rate of 50% was prescribed by a Royal Decree. Three Ministerial Regulations were issued in 1971 under the PA.

The Petroleum Act (No. 2) was enacted in 1973. It relaxed area limitations, restrictions on transfer of obligations, mandatory relinquishment requirements and royalty rates for offshore blocks with water depths over 200 meters (deep water blocks). The Petroleum Income Tax Act (No. 2) was also promulgated in 1973. It provided for increased discounts on posted prices for tax purposes of petroleum produced from deep water blocks. Exploration in deep water blocks of the Andaman Sea has, so far, proved unsuccessful.

In 1973, Union Oil Company made the first natural gas discovery, in the Erawan Field in the Gulf of Thailand. The company was concerned about the creditability of Thai taxes under U.S. law, as the PITA prohibited the deduction of “interest” in the calculation of taxable income. After negotiations between the Thai government and the US Internal Revenue Service, the Petroleum Income Tax Act (No. 3) was enacted in 1979. [Its provisions applied only to Union Oil.]  Thereunder, “interest” is recognized as a deductible expense, provided the concessionaire has withheld tax at the rate of 50% on payments of interest income. Income tax rates for concessionaires falling within that Act are fixed at 35% to 48% (presently 35%) on profits and 23.08% on dividends or other after-tax remittances. The effective rate thus remains 50%, as prescribed for all other concessionaires.

In 1980, the government announced a one-year ban on the export of petroleum in the context of negotiations with concessionaires for the purchase of condensate and to prevent the diversion of oil supplies under long-term contracts. This ban was renewed annually through 1990, but it has not been imposed since then. In 1981, Shell discovered crude oil onshore in the Sirikit Field, in Kamphaeng Phet Province.

In 1982, new terms were prescribed as “conditions of bidding” for onshore blocks, in a period of rising oil prices. Additional concessions were awarded, but following the drop in oil prices and the discovery of small and marginal fields, those terms deterred further onshore activity.

The fall of oil prices in 1986 and other circumstances led the government to review its concession terms. Another factor was the difficulty of some companies to obtain permission to produce marginal or isolated wells, due to the need to demonstrate commerciality according to certain economic criteria. For crude oil, for example, each well had to demonstrate a recovery of costs within 12 years. In July 1987, Ministerial Regulation No. 13 under the PA was announced. It allowed wells in the same structure to be consolidated for purposes of applying the economic test. The definition of “production area” was also broadened, to include geological, seismic and other information, in addition to drilling data.

In 1989, the Petroleum Act (No. 4) and the Petroleum Income Tax Act (No. 4) were enacted and substantially amended the PA and the PITA. These changes were reflected in the terms of the 13th bid round invitation for concession applications, issued in July 1990.

After adoption of Thailand III terms for new petroleum concessions in 1989, there were no major amendments to the Petroleum Act until 2007. [Petroleum Act (No. 5) B.E. 2534 (1991) dealt only with a consequential amendment to Section 70 (import free of duty) arising from introduction of VAT and deletion of business tax under the Revenue Code.] However, significant new terms were introduced by way of conditions of bidding.

In 2007 the Petroleum Act (No. 6) and the Petroleum Income Tax Act (No. 6) were enacted and amended the PA and the PITA. However, the fiscal terms, as modified for the 20th bidding round, remain largely unchanged, and are set forth in Annex 2.

Purposes of amendments in PA (No. 6) include:

Administration

Until 2002, the Petroleum Act was administrated by the Ministry of Industry through the Oil Fuels Division of the Department of Mineral Resources. On 1 October 2002, responsibility for administrative of the Petroleum Act was transferred to a new ministry, the Ministry of Energy. [See Dr. Twarath Sutabutr, “Establishing of Thailand’s New Energy Ministry”, PTIT Special Annual Issue 2002.]

The Petroleum Income Tax Act is administered by the Ministry of Finance through the Revenue Department. Section 7 of the Investigation Division, Revenue Department, is responsible for concessionaires under the PITA.

Most decisions under the PA are made by the Petroleum Committee, an inter-ministerial committee established under Section 15 of the Act with the specific powers listed in Section 16.

Concessions

Although not expressly required by law, the Thai practice is to award concessions only following the publication of an international invitation, usually on at least 45-days’ notice. Applications were evaluated on a points system by the Petroleum Committee, which forwards its recommendations to the Cabinet for approval.

New Procedures in 18th Bid Round

On 19 July 2000, the Department of Mineral Resources issued a letter enclosing an announcement of the Ministry of Industry dated 11 July 1000 inviting applications for petroleum concessions. However, unlike all previous rounds, applications could be filed during a period of three years, and would be considered monthly after the 15th day of each month. The last day for the first submission was 15 August 2000. An application for a block subject to a previous application would not be accepted until consideration of the earlier application is completed.

The invitation prescribed the usual conditions applicable to recent rounds. Successful applicants were required to register a limited company under Thai law, with paid up capital of at least Baht 100 million.

Applications and supporting documents were submitted to the Department of Mineral Resources. If an applicant did not have adequate equipment, personnel and financial resources to perform the exploration program, a guarantee from an entity which did have those resources had to be submitted.

Detailed description of the exploration blocks, and the geological constant factors and special reductions of each block were set forth in the announcement.

New Procedures in 19th Bid Round

The Minister of Energy issued an announcement dated 1 July 2005 inviting applications for petroleum concessions. Applications could be filed during a period of one year, and would be considered monthly after the 15th day of each month. An application for a block subject to a previous application will not be accepted until consideration of the earlier application is completed.

The invitation prescribed the usual conditions applicable to recent rounds. However, the condition that applicants must register a limited company under Thai law with paid up capital of at least Baht 100 million was omitted.

Applications and supporting documents must be submitted to the Department of Mineral Fuels. If an applicant did not have adequate equipment, personnel and financial resources to perform the exploration program, a guarantee from an entity which had those resources must also be submitted. Applicants could also propose to provide a bank guarantee.

New Procedures in 20th Bid Round

The Minister of Energy issued an announcement dated 28 May 2007 inviting applications for petroleum concessions. Applications may be filed during a period of one year, and will be considered monthly after the 15th day of each month.

The invitation prescribed the usual conditions applicable to recent rounds, with the following changes:

Each application will be graded according to the following system:

As of March 2008, [____] applications for [____] blocks have been filed during the 20th bid round, and [____] blocks have been awarded.

Gas Supply Industry Reform

Currently, PTT Public Company Limited (formerly, the Petroleum Authority of Thailand), with few exceptions, acts as the sole purchaser, transporter and distributor of natural gas in Thailand, through a [2,763] km pipeline system.

PTT was corporatized (converted from a state enterprise to a public limited company) in October 2001.

Disputed Area (Thailand/Cambodia)

Conclusion

Websites for current information concerning the energy sector: 

Attachments:

Annex 1:  Outline of Thailand I terms

Annex 2:  Outline of Thailand III terms

Annex 3:  List of Petroleum Legislation

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