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Logo of Phnom Penh Post newspaper Phnom Penh Post - Oil spigot set to flow in 2011

Oil spigot set to flow in 2011

Cambodia could earn $174 million from oil production in 2011, with the windfall rising

to $1.7 billion after 10 years, according to a new International Monetary Fund study

in the wake of recent oil discoveries by Chevron off Cambodia's coast.

The figures are contained in an Aug. 20 report that the IMF called a "moderate

scenario." It was based on a variety of assumptions - such as oil production

sharing agreements, size of recoverable resources and oil prices.

The IMF staff report cautioned that it was developed "to demonstrate the policy

challenges of an oil sector" - not to forecast revenues.

Still, the report said 2011 is a realistic date to assume Chevron would begin production

given that oil is already being produced on both sides of Cambodia's waters in the

gulf of Thailand.

It projected that after 10 years of production Cambodia's share of oil revenues would

peak in 2021 at $1.7 billion. Then revenues would begin to decline.

"We are not saying there will be an overwhelming benefit, but it is something

that is not insignificant and it is positive," IMF Resident Representative John

Nelmes told the Post.

"We tried to do a scenario, not an estimate," said Nelmes.

"There are a lot of uncertainties about the amount of oil available, but we

said, 'let's just assume there are 500 million barrels,' " he said.

The government's current revenues are 11.5 percent of current GDP, or $632 million,

so an additional $174 million in new revenues from a new source is a significant

windfall.

"With continued high world oil prices, the net present value of oil wealth would

be around $15 billion - 115 percent of 2011 GDP," the report said.

The scenario relies on variables including:

  • Continuing high world oil prices.
  • That the government's share of oil revenues will come from three sources: royalties,

    a state's share in the profits that is in line with standard Production Sharing Agreements,

    and an income tax rate of 30 percent.

  • There are 500 million recoverable barrels, including 300 million from Block A

    and 200 million from other blocks licensed for exploration but not yet publicly discussed.

  • That foreign direct investment will pay for infrastructure, not the government

A Chevron spokeswoman had no comment on the study.

The energy giant has not yet announced the results of its second round of exploratory

drilling in Block A, covering 1.6 million acres in the Gulf of Thailand. It obtained

the rights to the territory in 2002 with minority partner Mitsui of Japan, and in

2004 it gave its first indication of possibly substantial finds. Chevron has continued

exploratory drilling for the past two years. Meanwhile the government has issued

exploration licenses issued for seven other blocks.

A Chevron official told the Post in June that the corporation faces specific technical

challenges in the Block A. A third drilling campaign was being considered for late

2008-2009.

"The oil and gas in the reservoir is unique for the Gulf of Thailand, in that

the hydrocarbons are dispersed rather than located in one core field," the statement

said.

Despite the optimistic potential for an oil industry, the IMF warned there are many

potential policy pitfalls for the government to address. These range from possible

inflation to the so called oil curse - the corruption and conflict that can come

with new oil wealth in countries with weak institutions.

Oil revenues are complicated to manage, the report said, particularly because of

price fluctuations. Oil dependent economies tend to raise spending when prices are

high, without regard for when prices drop. The top priority for Cambodia policy makers,

the report said, is how the oil sector will be taxed. It said that oil revenues should

be funneled smoothly into the national budget, and not earmarked for special projects.

The paper cited experiences in Nigeria and Azerbaijan where oil discovery did not

lead to general economic improvement, but worked to weaken other thriving sectors

of the economy.

In Cambodia, the garment sector could be at risk if infrastructure improvements,

such as highways or affordable electricity, needed to nurture that industry were

diverted to help a new oil industry.

However the report said that more positive scenarios are possible. For example, larger

reserves could be discovered, particularly if agreement is reached on overlapping

claims with Thailand.

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