Preliminary evaluation on a petroleum exploration project in Uzbekistan

The organization structure and management mechanisms have been built up and improved in the direction of the professional of the internationally operated company; - The system of State m

TR NG I H C M TP.HCM UNIVERSITÉ LIBRE DE BRUXELLES

MBAVB3

Dang Hong Nhat

PRELIMINARY EVALUATION ON A PETROLEUM EXPLORATION PROJECT IN UZBEKISTAN

MASTER PROJECT MASTER IN BUSINESS ADMINISTRATION

Acknowledgement

First, I would like to express my deep gratitude to Dr NGUYEN KIM THU, who is my advisor for this research paper, for her kindness and willingness as well as valuable comments and advice that have enabled this accomplishment

Second, I would like to send my thanks to all of our professors who have delivered priceless theoretical and practical lessons which pave the foundation for my final thesis

Third, tremendous gratitude is extended to my colleagues who provided me internal data

of limited publicity, without which the study shall never be realized and fulfilled

Last, without the love and sacrifice of my family (my husband who is also this MBAVB3 classmate and my little daughter), I could not have completed this thesis or the whole course

Statement of Original Authorship

I certify that the substance of this thesis has not been already submitted for any degree and is not currently being submitted for any other degree I also certify that to the best of

my knowledge any assistance received in preparing this thesis, and all sources used, have been acknowledged and referenced in this thesis

Signed: Date:

Hong Nhat

Contents

Acknowledgement i

Statement of Original Authorship ii

Contents iii

Abstract iv

Chapter 1 Introduction 1

1.1 Rationale of the research study 1

1.2 Problem statement 1

1.3 Research methodology 1

1.4 Limitation of the research 2

Chapter 2 Strategy towards Oversea Investment 3

2.1 About PVEP 3

2.2 Strategy for investment overseas 7

2.3 Planning for 2011-2015 Period 9

2.3.1 Exploration 9

2.3.2 Field Development and Production 11

2.4 Planning for period 2016-2025 12

2.4.1 Exploration 12

2.4.2 Production 14

Chapter 3 Project Introduction 16

3.1 About Uzbekistan 16

3.2 Project approach 18

Chapter 4 Economics Evaluation Model 19

4.1 Methodology 19

4.2 Input data 19

4.3 Economic Evaluation 24

4.4 Sensitivity analysis 26

4.5 Potential Risks 27

Chapter 5 Conclusion and Recommendation 28

5.1 Strategic review 28

5.2 Conclusion & Recommendation 29

References 31

Abstract

PetroVietnam Exploration Production Corporation (PVEP) is the main force of the Vietnam Oil and Gas Group (PETROVIETNAM or “PVN”) in the upstream sector – the Group’s core businesses

It is set forth in the Corporation’s development Strategies to 2015 and orientation to 2025 that investment abroad shall be reinforced to achieve the objective of reserves and to ensure sustainable development and increased oil and gas production

The year 2010 witnessed a breakthrough with several remarkable events: putting into production the D30 field, block SK305 in Malaysia, PVEP’s second producing project internationally; signing the Contract for Incorporation and Administration of the Mixed company PetroMacareo, block Junin 2, Venezuela - the biggest venture ever in terms of investment value that PetroVietnam/PVEP have carried out abroad So far, PVEP has been investing in 56 projects, one third of which is located overseas as highlighted in the following map:

Such study on a potential project in Uzbekistan has been in line with the

Corporation’s strategy towards expansion into the world’s oil and gas reserves With information from working trips to Uzbekistan and thanks to year long experience in exploration and exploitation at home and abroad, this thesis shall provide preliminary evaluation on the project and recommend way forward in prudent and cost effective manners

The below image is an expression of the corporate pride: first success in discovery overseas (Bock - 6 bis Well, Block 433a&416b, Algeria)

Chapter 1 Introduction

1.1 Rationale of the research study

In view of the declining oil & gas reserves in Vietnam, PVEP has been expanding its

exploration & production abroad Investing in a petroleum field in Uzbekistan is to follow the strategic development of PVEP set for period to 2015 and orientation to 2025

The study aims at analyzing a case study in which preliminary data have been collected regarding an opportunity to invest in Uzbekistan With knowledge gained from MBA and seven year long experience working in PVEP, I shall perform an independent analysis on whether or not to invest in the project

1.2 Problem statement

Sourcing from internal database, petroleum reserve in Vietnam is estimated to be

at 2,7 billion barrels With production output of 0.370 million per day, the reserve shall be adequate for consumption for 7,297 days (equal to above 20 years) Therefore, it is imperative that we go out of Vietnam to seek for replacement of reduced reserve for the purpose of long term energy security

Middle Asia is one of main areas that PVEP has been targeting Therefore, such investing in Uzbekistan is considered the right way towards solving the described problem

1.3 Research methodology

- Input data including financial terms in the Contract and minimum

commitments, estimated production quantity, estimated cost for CAPEX, OPEX,…

- Economic feasibility shall be evaluated based on main methods: Net Present

Value (NPV), Internal Rate of Return (IRR), Payback Period;

- Evaluation of sensitivity of factors affecting economic feasibility of the project

1.4 Limitation of the research

- All input data are collected by a working team dedicated to the project through

business trips to Uzbekistan BUT not verified by another independent

entity

- There have been no thorough lessons learnt from failed projects of same type

- Since this is a capital – intensive project and is located overseas with huge inherent uncertainty, it is critical that a more thorough and systematic risk analysis shall be further deepened

Chapter 2 Strategy towards Oversea Investment

2.1 About PVEP

PVEP was established on May 4, 2007 in accordance with Decision No DKVN of the Management Board of PetroVietnam on the basis of merging two Members of the Group, PetroVietnam Exploration and Production Company (PVEP old) based in Ho Chi Minh City and PetroVietnam Investment Development Company (PIDC) based in Hanoi

1311/QD-Achievements from five year planning (2006-2010)

Five year period from 2006 to 2010 records successful accomplishments, namely:

- New discoveries of oil and gas: 24 discoveries, in which 14 in the country and 10 abroad

- Reserves Increase gained high results: (i) completed targets to increase reserves in the country; (ii) completed in excess of planned increases in oversea reserves With assistance of the Government and PVN, PVEP has been granted for investment of Junin-2 field in Venezuela;

- Putting 12 new fileds into production, in which, 09 domestic fields, including: Rong Doi / Rong Doi Tay (block 11-2), Yellow Tuna (block 09-2), Eastern (block 15-2), Golden Lion (block 15-1), Doc Rivers (block 46-02), gas and oil Bunga Orkid (block PM-3 CAA), Nam Rong-renovation (block 09-3 and 09-1 ), Pearl (batch 01-02); and 03 oversea fields, including: Cendor lot PM

304, Dana mine, mine D30 batch SK 305 - Malaysia Deploying field development Northeast Black Lion, White Lion, Topaz, Stage-2 field development Dai Hung, phase-3 filed development Lan Do (block 06-1), White Rhinoceros (block 16-1), BRS Field Block 433a & 416b - Algieria;

- The first production of oil and gas in foreign countries from Cendor field, Block PM-304 - Malaysia on September 2006 (to 2010 PVEP will have 03 fields from PM304 and SK 305 to be put into operation) Safe and effective

production of existing fields with 5 year production results: crude oil - 40.1 million tons, gas - 33.7 billion m3;

- Revenue plan and state budget contribution completed: revenue reached 126,320 billion VND (about 7,560 million USD) Contribution to State budget reached 47,200 billion VND (about 2,840 million USD);

- PVEP has been investing actively and strongly in oil and gas exploration and production in and outside the country, rapid growth both in quality (ability to manage and operate oil and gas projects) and on the number and scale of oil and gas projects at home and abroad;

PVEP’s Performance Result Period 2006-2010 is generalized as below:

2 Donation to State budget 47.186 40.259 117%

3 After Tax Profit 36.167 24.437 148%

4 Investment and Costs 98.403 111.822 88%

Sources: Report on PVEP’s business result of 2006-2010 period in general and of

Sources: Report on PVEP’s business result of 2006-2010 period in general and of

2010 in particular (December, 2010)

The Corporation’s favorable conditions are as follows:

- Prestige of Vietnam in general and Vietnam National Oil and Gas Group in

particular is increasingly confirmed internationally;

- PVEP as a member of PVN, always get the attention and close direction of the

relevant authorities, and the active support of the ministries and localities Policies and mechanisms to facilitate the development of PVEP are well supported by PVN;

- Opportunities to invest in countries/areas with large oil and gas potential

through the state / government relationships, cooperation with national oil companies and based on prestigious position of PVN/PVEP and Vietnam;

- Having undergone construction and development process, PVEP:

 has initially developed a professional staff, qualified professional, managerial and operational experience in the international environment;

 has accumulated potential technical, technological, financial and management experience in the oil and gas projects at home and abroad;

 created and have increasingly confirmed the position and prestige of PVEP

in the international oil and gas community

- With the application of the Model of the parent company – subsidiary, it has initially created legal framework and mechanisms for PVEP to act as a real oil

and gas company The organization structure and management mechanisms have been built up and improved in the direction of the professional of the internationally operated company;

- The system of State mechanisms and policies related to domestic and oversea

investment in petroleum exploration and production has been improved significantly towards creating conditions and opportunities for business, especially for investment activities and domestic and abroad petroleum operation activities;

- World oil and gas industry continue to work actively, bringing high profit, energy

security is always a top concern of nations and becomes trends of economic globalization;

- Increase opportunities to buy petroleum assets in the context of world

economic recession

However, there are difficulties and challenges having facing PVEP as follows:

- The completion of targets on the production of crude oil is always a huge

challenge in the past 5 years and coming years The remaining area of petroleum potential becomes narrower

- Exploration and production conditions become increasingly difficult, particularly, in Vietnam it should be reaching out to deep water/far offshore, taking into consideration development of marginal fields, and gas fields with high CO2 content;

- Competition in the world exploration and production field becomes increasingly

fiercer, and with strict investment conditions;

- Intensive needs of investment capital while the financial capacity of the group /

PVEP limited; difficult financial arrangement whereas costs for petroleum activities are increasing higher

- The system of mechanisms and policies of the state relating to petroleum

activities remain in the process of completion, especially for areas of abroad petroleum investment;

- Shortage of capable and experienced Human resources, especially as work

experience in the international environment to meet the expanding requirements petroleum activities in both domestic and oversea; The satisfaction of requirement of highly qualified human resources for petroleum activities to ensure business development is a big challenge;

- Organization and Management Experience and skill on the international scale

is still limited; the management and administration of PVEP had initially positive changes in the direction of professionalism, but still not meet requirements of

an international oil company;

2.2 Strategy for investment overseas

From the corporate vision as to develop PVEP to be an international oil company standing first in Vietnam and as one of the leading 3 oil companies in the region (in terms of reserves, annual production, reserve replacement rate and return on equity) with potential economic, financial strength and highly competitive capability, it is strategically set forth to accelerate PVEP's development domestically and abroad with the aim to discover new fields and to increase petroleum reserves and production

Regions of the world where PVEP has evaluated highly potential oil and gas reserves include (the number of potential reserves from the source of U.S Geological Survey Department, 3/2000):

- Asia Pacific (about 4.6% of world oil reserves and 8% of world gas reserves);

- The former Soviet Union countries (about 18% of world oil reserves and 35%

of world gas reserves);

- Middle East and North Africa (about 35% of world oil reserves and 29% of world gas reserves);

- Africa, the sub-Saharan continent (about 11% of world oil reserves and 5% of world gas reserves);

- Central and South America (about 16% of world oil reserves and 10% of world gas reserves);

Sources: U.S Geological Survey (USGS), (March/2000)

World Oil Reserve

Russia and the former Soviet Union

Middle East and North Africa (MENA)

Asia Pacific

Euro

North America (not including USA)

Middle and South America

Africa (sub-Sahara) and South Pole

World Gas Reserve

Russia and the former Soviet Union

Middle East and North Africa (MENA)

Strategically, PVEP will maximize bilateral political relationship at state-level, and

in partnership with other oil companies to expand investment activities in the following areas/countries:

- Southeast Asia and Oceania: consolidate / strengthen relations with Petronas, Pertamina (has cooperation agreements) for development projects

in Indonesia, Malaysia, Australia; actively consider implementing opportunities in Brunei Formation of regional investment in Southeast Asia with Malaysia as the central field of action;

- Russia and the countries of the former Soviet Union: to continue strengthening relations with Gazprom, Zarubeznheft and try to win high-ranking level relations to have a chance in Russia and other CIS countries, focusing on Kazakhstan, Azerbaijan, Uzbekistan Formation of regional investment in the FSU with Russia as the central field of action;

- South America: implementation of cooperation agreements at all levels for new E&P projects in Venezuela, Peru, Ecuador, Bolivia, Nicaragua Formation of regional investment in South America with Venezuela as the central field of action;

- Africa: Proceeding with investment in countries Algeria, Angola, Tunisia, Libya, Nigeria Pay attention to implementing the Protocol on cooperation with the Angolan oil and gas, build-up of alliance partnerships to invest in the areas with partners (Total, Petronas, PTTEP ) Formation of reginal investment in Africa with Algeria / Angola as the central field of action;

- Middle East: Being positive in development of investment in Iran, Iraq, Oman , focusing on build-up of alliance partnerships to invest in the areas with regional partners (Petronas, PTTEP, Total ) Formation area Investment

in the Middle East with Iraq / Iran as the central field of action

2.3 Planning for 2011-2015 Period

2.3.1 Exploration

Being positive in abroad oil and gas E&P investment aims at ensuring to reach the goal in increasing reserves and concurrently to offset the shortage in the country Priority shall be given to purchase reserve / new fields to increase reserves and production targeted in the strategy.

- Increasing the share of oil reserves abroad in the period 2011-2015 to strive

to reach 80 million tons of oil equivalent;

- Implementing effectively the E&P projects being existed;

- Implementing selective Investment of new E&P projects as mentioned above; additional 2-3 new E&P projects annually; maintaining at 14-16 E&P permanent projects for the period

- From the existing projects and annually added ones, it is forecasted to increase storage capacity of about 44-55 million tons of oil equivalent The remaining increase in reserves is from the acquisition of 30 million tons of oil equivalent Therefore, in this period, the special priority to solution of purchasing fields will be given:

Expected Increase in Foreign Reserves 2011 - 2015

Unit: Oil equivalent ton

The amount of exploration work necessary to be performed to achieve increased foreign reserves of 44-55 million tons of oil equivalent in the period 2011, PVEP’s total investment for abroad E&P activities in the period 2011-2015 is about 1,250 million USD

2.3.2 Field Development and Production

According to the approved strategy, the total oversea output of oil and gas exploitation of PVEP period 2011-2015 is 24.6 million tons of oil By 2015, PVEP exploitation of oil would reach to 6.75 million tons oil per year

Based on production forecast of the oversea projects under production and to be put into operation, including Junin-2 Project and the forcast of having 6 successful projects to be put into development, the total output of oil from foreign of PVEP period 2011-2015 could reach 14 million tons of oil equivalent (not including the case of purchasing fields), in which oil yields more than 13 million tons of oil and gas production reached nearly 1 billion m3 Thus, compared with the target output oil production strategy, oversea oil production during this period is still in deficit of

11 million tonnes The main causes of the deficiency against the strategy are: (i) having not acquired fields from 2009 as set out in the strategy, (ii) slow progress

on some development projects: SK-305, Algeria (Bir seba)

Only solution for PVEP to increase production during this period is to buy fields However, annual production deficit is huge, about 2-3 million tons per year and to offset this deficiency, to increase production from 2-3 million tons per year respectively; that is necessary have to buy field from the 2010 with reserves scale

of approximately 50-60 million tons (about 400-450 million barrels), with a total investment cost is estimated at 6.4 to 7.2 billion As market conditions in field purchasing is fiercely competitive (particularly from companies of China and India), and shortly required deployment and large scale of capital to acquire the field and the further large investment for development phase, so that the acquisition of field

in right 2010 to be put into production in order to gain production target in

2011-2015 is not feasible

The feasible plan for PVEP is to strive to acquire from 2 to 3 fields having reserves with an average recovery of 100 million barrels per each (total 30-40 million tons of reserves) in the period 2011-2015 and projected fields can be exploited for the production of 6 million tons of oil in this period

Thus, the objective of production yield from oversea of PVEP will be adjusted as follow: the total output of oil and gas exploitation in the period 2011-2015 is 20.0 million tons of oil equivalent By 2015, production yield of PVEP strives 7.5 million tons of oil per year

To achieve the target output from foreign exploitation as aforesaid, PVEP need:

- Promote and expand existing fields and the fields to be put into operation, including PM304, SK305 Ensure development progress to put the fields within the block PM-304 into Stage-2 production in 2012, evaluating the overall oil and gas exploitation of fields in the Block SK305;

- Ensure the progress of field development to put Bir Seba field into production

Objective to increase reserves for this period is 150 million tons of oil equivalent

At this stage exploration area in the world expected to become more and more narrow, petroleum costs would be higher and more risky than the last period To