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Low oil: Winners, losers

World oil prices hit a five-year low yesterday as crude oil dipped below $53 per barrel.

As oil-producing nations around the world count their losses and scramble to make adjustments for the biggest price slump since 2009, consumers and businesses in Cambodia, which imports all of its oil, look set to win. But at the same time, analysts say, the progress of the Kingdom’s stumbling oil-extraction industry – yet to produce a drop of oil – will be hampered, as potential investors tighten their belts during the price downturn.

“The decreasing price of oil products will provide a very good effect to the Cambodian economy, because it will decrease the amount of import and payment to other countries,” said Hiroshi Suzuki, chief economist at Business Research Institute for Cambodia.

According to data collated by the consultancy Rhodium Group and published in the Wall Street Journal, when oil prices were at $71.30 a barrel, Cambodia stood to save $650 million, or 4.2 per cent of its GDP, if prices remained at that level for much of 2015.

With many companies relying on oil for power generation and transport, all of Cambodia’s primary industries will benefit from lower production costs, Suzuki said. Motorists too will reap the rewards of cheaper prices “Because the international transaction of oil is usually by long-term contracts, the price movement at gas stations has some time lag; however, even in Cambodia, the gasoline price will be decreasing,” he said.

OPEC’s November decision not to cut petroleum production in response to falling prices and weakening in demand has analysts predicting a slow rebound for oil.

“We are forecasting a 2015 price of US$70 [per barrel of Brent crude oil], with a demand-led recovery seeing prices rising through the end of 2015 and into 2016,” said Jamie Taylor, principal upstream analyst with consulting firm Wood Mackenzie.

While the Kingdom is expected to be making a saving on one hand, on the other, trying to gain interest from oil companies to tap into Cambodia’s oil deposits may become difficult.

“Where Cambodia is likely to be negatively impacted by the drop in oil price is if it is looking to attract new investment in the upstream sector, in particular exploration,” Taylor said. “At a time when companies are cutting back on discretionary spending, they are less likely to look for exploration opportunities in frontier plays,” he added.

This does not bode well for the prospects of those onshore and offshore oil fields for which the government is still seeking to attract investment.

“What usually happens is that companies will tend to restrain their capital flow and they will be looking more into an area where the potential of the oil would generate bigger profits to cope with these [declining] oil prices,” Meng Saktheara, secretary of state at the Ministry of Mines and Energy, said yesterday.

“In Cambodia most of the fields are marginal, maybe the oil price will hurt us in that sense,” he added, referring to those lower potential of those oil blocks that are yet to be explored.

But for those that have already been contracted out to oil firms, Saktheara said, he is less concerned, as extraction was still several years away when he expected oil prices to rebound and make production more profitable.

Saktheara is confident that deflated prices today would not impact the tax and revenue sharing negotiations with Singaporean oil and gas firm KrisEnergy, which holds a majority stake in Cambodia’s brightest chance of production – offshore Block A.

“KrisEnergy is an existing operator too, and they seem to have production planning towards the end 2017 or the beginning of 2018, which is quite a while, and nobody believes the oil price will stay where it is – it will go back soon,” he said.

Whether crude oil prices will return to acceptable levels “is a matter of global oil politics”, said Michael McWalter, former oil and gas adviser to the Cambodian National Petroleum Authority.

“As for the planned development of Block A, a lower crude oil price will make it harder to make a profit, and the impact of lower crude prices will mean that the royalty will bite harder into the viability of the development,” he said

“The mix of taxes and commercial terms that the Royal Government deploys aims to capture as much of the value of the produced crude oil as possible, but in order for there to be project viability for the investing oil companies, there will need to be some indication of profit ultimately being able to be achieved,” he added.

Contacted yesterday, KrisEnergy declined to go in to detail on the price impact of extraction prospects, other than to say negotiations with the government were ongoing.

“KrisEnergy and the joint-venture partners have agreed the development concept and this is now under discussions from both technical and commercial view points with the relevant government departments,” said Kelvin Tang, President for KrisEnergy’s Cambodia operations.

ADDITIONAL REPORTING BY HOR KIMSAY

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