Frontier Market Quietly Waiting
BMI View : Laos may look increasingly attractive as a destination of investment. Nonetheless, for the oil and gas industry opportunities may still be limited. In the upstream segment, Laos remains far too un-risked, owing to a lack of data and below-ground successes in and around Laos, and the returns to investment are further compromised by its landlocked position and relatively undeveloped infrastructure. In the downstream segment, expensive feedstock costs and a small market will disadvantage operations, particularly at a time when the regional oil products market is increasingly competitive. However, the country's need for oil products despite these obstacles in establishing a local industry offers an opportunity for midstream investment, in order to bring foreign petroleum products into the small but growing market.
Among its larger South East Asian neighbours, the People's Democratic Republic of Laos is the smallest of all markets for oil and gas. It has no proven reserves of oil and gas, nor is it a producer of any refined oil products.
However, there is scope for a growing market for refined oil products in Laos. According to data from the US Energy Information Administration (EIA), total oil consumption has risen 26.6% over the period 2000 to 2012. 2011 and 2012 alone saw a 15.2% year-on-year (y-o-y) increase in the country's oil demand.
|Fuelling Economic Growth|
|Laos - Total Petroleum Consumption ('000b/d)|
Further growth in oil consumption is expected as the Laotian economy continues to expand at an average rate of 6.7% per annum over our forecast period from 2014 to 2023, according to our Country Risk team. Large scale investments into the manufacturing sector will support industrial demand for oil. For instance, auto-maker Toyota has planned a US$5.6mn investment to establish its first ever production base in Lao's Savannakhet province. Major power and infrastructure projects, such as a massive road development overseen by Japan's Obayashi and Hazama Corporation, will also support an increase in oil consumption.
Chasing Hydrocarbon Investments
Rising domestic consumption has seen a corresponding increase in oil imports for Laos. In an investor presentation, the Planning Department of Laos' Ministry of Planning and Investment noted a 42% surge in imports between 2011 and mid-2013. Oil products made up 18% of the country's total imports.
This import dependence underscores one of the key reasons behind Laos' promotion of upstream and downstream production in its investment policy, whereby selected industries are made eligible for certain tax exemptions. These include tax holidays on corporate earnings, exemptions from custom import fees and reinvestment tax benefits. Upstream extraction has been listed as a Level 1 investment promotion activity, while downstream oil activities have been classified as a Level 3 promotion activity.
|Zone||Level||Period of Exemption (Years)|
|Source: Laos Ministry of Planning & Investment|
Upstream: The Ultimate Frontier
Laos remains a very risky play for upstream firms, with little seismic data available. Likely opportunities are all located onshore for the landlocked country. At present, oil and gas extraction falls under the purview of the Ministry of Energy and Mines, and is regulated under the country's Mining Law.
Rights to exploration are obtained on a concession basis, through direct application to the central government. Firms have to pay land warranties to secure their rights to the land after their application and the terms of their concession agreement have been approved. For other mining projects, land warranty fees range from US$50,000 for smaller concessions (1-300 square kilometres) and US$100,000 for larger concessions (301-500 sq km). However, oil and gas concessions are likely subjected to customised regulations and fees, given that a typical oil and gas block usually has a larger area than that which has been stipulated.
Only two concessions are publicly known. The first is held by Vietnamese national oil company (NOC) PetroVietnam together with Salamander Energy in the 14,140sq km block located south of central Laos, while the second belongs to Canada-listed Camcan Energy, for a 12,000 sq km block in southern Laos. There has been prior exploration in these blocks, though disappointing results have seen the exit of junior players such as Hunt Oil and Enterprise Oil.
The lack of exploration success, coupled with a lack of seismic data on the country's geology, creates significant uncertainties about Laos' upstream potential. Current concession holders have given mixed outlook of their oil and gas prospects in Laos. PetroVietnam was looking to drill a well in its central Laos block in 2013, though Salamander stated that it was not supportive of any new wells until beyond 2014. On the other hand, Camcan Energy, which only signed on to the block in October 2013, is optimistic about its block's prospectivity. Although it possesses the acreage previously abandoned by Hunt, Enterprise and Salamander, chief executive Peter Haverson stated that these exploration efforts have left behind useful 2D seismic and well data that points towards some potential.
There could be reason for optimism. Salamander had conducted a drilling campaign in its Savannakhet concession in 2010 and abandoned the Bang Nouan-1 prospect in the same year. However, the firm had cited the prospect's tight formation as an obstacle to the well's commerciality, rather than the lack of hydrocarbons. Indeed, the well had encountered some gas during the drill. Technological advances in tight drilling have increasingly helped to support production from tight formations worldwide. Further progress could be made that could make it commercially viable for such technology to be deployed in Laos.
Risks To Outlook
Nonetheless, we note that this remains a long-term prospect. Moreover, further exploration drilling will be required to determine if there are sufficient quantities of hydrocarbons to justify the deployment of expensive technology. In addition, Laos' infrastructure deficit, coupled with its landlocked location, will raise the costs of bringing any oil and gas produced to the export market, given the country's small domestic demand. Hence, we do not see much upside in the Laotian upstream segment in the short to medium-term, unless existing players in the country make an exploration breakthrough.
Downstream: Small Market Limits Opportunities In A Competitive Region
The prospects for refining investments into Laos look to be limited at present. The country has three key disadvantages with regard to the development of a downstream industry:
Lack of domestic crude oil supplies;
Landlocked nature restricts its access to crude oil supplies via sea;
With crude oil prices forecast to remain above US$90 per barrel (bbl) through to 2018, this means that feedstock for a refinery in Laos will be costly. In addition, its relatively small market size reduces opportunities for potential investors to capture economies of scale of a large plant. This situation is further complicated by its location between two big neighbours: Thailand and Vietnam.
Thailand is already a major refiner, with a refining surplus of about 68,900b/d in 2013. Although high consumption growth could see the country turn into a net importer by the end of our forecast period in 2023, this could be slightly balanced out by a likely increase in Vietnam's refined output, which is expected to more than double by 2023 when two new refineries are brought online.
|Larger Neighbours Have Better Scale|
|Thailand & Vietnam - Refining Capacity & Total Oil Products Net Import Requirement ('000b/d)|
Moreover, we have highlighted that East Asia in general is set to see an increasingly competitive oil products market, as emerging markets such as India and China build up their own refining capacities even as traditional refiners such as Singapore, South Korea and Taiwan maintain their existing production capacities. We forecast that this will put downward pressure on prices, which would further depress the margins of a refinery in Laos disadvantaged by expensive feedstock but without the returns to scale available in a larger market and one that is close to export routes via sea.
|Asian Product Prices|
|Singapore - Average Yearly Price Of Selected Oil Products (US$/bbl)|
Midstream: Opportunities Arise From Demand Needs
Given weak prospects for downstream development at present, Laos' midstream segment could be the recipient of investment by the oil and gas industry. For instance, Laos' representative at the ASEAN Council on Petroleum (Ascope) expressed during an Ascope meeting in November 2013 that the country is looking into a 'national oil pipeline', though no specifics on the pipeline were given. There had also been proposals for a pipeline to transport fuel from Vietnam to Laos.
While none of these proposals have moved ahead, Laos' growing oil demand and Vietnam's downstream expansion provides a rationale for the development of a fuels pipeline. Not only will it be more cost-effective than truck deliveries, it also opens up a market for Vietnamese oil products, which only had access to the Laotian border to date.