Vietnam's Petroleum Sector: Technical Assistance for the Revision of the Public Disclosure Authorized Existing Legal and Regulatory Framework December 2003 Public Disclosure Authorized Public Disclosure Authorized Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) Public Disclosure Authorized Contents Acknowledgments .......................................................................................................... vii Abbreviations and Acronyms ..........................................................................................ix Units of Measure ...............................................................................................................ix Preface ......................................................................................................................xi Executive Summary...........................................................................................................1 1. Vietnam's Upstream Oil and Gas Sector.............................................................7 Oil Production...........................................................................................................7 Gas Production ........................................................................................................7 Gas Transmission....................................................................................................8 Exploration in Vietnam .............................................................................................8 2. Structure of Petroleum Legal and Regulatory Regimes – International Experience..................................................................................................11 Petroleum Law – Best Practice .............................................................................12 State Property in Petroleum...................................................................................13 Competent Authority ..............................................................................................13 Conduct of Petroleum Operations .........................................................................14 Petroleum Agreements ..........................................................................................14 Regulations ............................................................................................................15 Qualifications, Duties, and Rights of Rights Holder or Contractor........................15 Taxation of Profits ..................................................................................................16 Other Taxes, Duties, and Exchange Controls .......................................................16 Fiscal Stabilization .................................................................................................16 Environmental and Social Assessments ...............................................................17 Natural Gas Development .....................................................................................17 Decrees/Regulations..............................................................................................18 Competent Authority ..................................................................................18 Petroleum Licensing ..................................................................................18 Petroleum Operations ................................................................................18 Petroleum Agreements ..............................................................................19 iii Fiscal and Financial Regime......................................................................19 Assignment of rights ......................................................................19 Land use.........................................................................................19 Environmental and Social Protection ........................................................20 Model Contract.......................................................................................................20 3. Major Recommendations ....................................................................................21 Project Objective....................................................................................................21 Recommendations .................................................................................................21 Major Recommendation 1: Make Fiscal Terms Simpler and More Competitive ..22 General Concept of Simplifying Fiscal Terms ...........................................22 Increase the Cost Recovery Limit..............................................................23 Competing Countries .....................................................................23 Price Movements ...........................................................................23 Shallow Water Areas and Profitable Fields ...................................24 Competitive Corporate Income Tax...........................................................24 Competitive Tax Rate ....................................................................24 Removal of Ring Fencing ..............................................................25 International Practice.....................................................................25 Exploration Incentive......................................................................26 Status of Recommendations Regarding a Simpler Fiscal System ...........................................................................................26 The Cost Recovery Limit ...............................................................26 Competitive Corporate Income Tax...............................................27 Ring Fencing ..................................................................................27 Major Recommendation 2: Make the Production-Sharing Contract the Principal Form of Petroleum Contract.............................................................27 Joint Ventures in the Petroleum Industry ..................................................28 Status of Recommendations Regarding the Production-Sharing Contract......................................................................................................29 Major Recommendation 3: Facilitate Gas Marketing Opportunities .....................29 Status of Recommendations Regarding Facilitating Gas Marketing Opportunities ..............................................................................................30 Major Recommendation 4: Separate Regulatory Functions: Policy, Regulatory, and Petroleum Rights Management ............................................30 iv Introduction ................................................................................................30 Recommendation: Establishment of SPMA ..............................................32 Status of Recommendations Regarding Separation of Regulatory Functions....................................................................................................32 Major Recommendation 5: Use a Simpler Bidding Process.................................33 Role of SPMA in the Bidding Process.......................................................33 Bidding on Work Units ...................................................................33 Bidding Modes ...............................................................................34 Bidding Criteria...............................................................................34 Status of Recommendations Regarding Simpler Bidding Process...........34 Major Recommendation 6: Consider Price- and Production-Sensitive Royalties...........................................................................................................35 Royalties for Crude Oil and Natural Gas ...................................................35 Status of Recommendations Regarding Price- and Production- Sensitive Royalties.....................................................................................35 4. Other Recommendations ....................................................................................37 5. Conclusions and Next Steps for Vietnam's Upstream Petroleum Regime ...39 Conclusions............................................................................................................39 Next Steps ..............................................................................................................40 Model Contract...........................................................................................40 Downstream Gas Regime......................................................................................40 Appendix A: Steering Committee and Working Group Members and Members of the Project Team...................................................................................43 Appendix B: International Practice Regarding Consolidation of Corporate Income Tax.................................................................................................45 Appendix C: Separation of Regulatory Functions......................................................47 Appendix D: Proposal for Price- and Production-Sensitive Oil and Gas Royalties.....................................................................................................51 Appendix E: Work Units—An Example ........................................................................61 Annex 1: Revised Petroleum Law (Unofficial Translation)........................................65 General Provisions.....................................................................................65