Cablegate: Chevron Downgrades Petroleum Estimates In

DE RUEHPF #0128/01 0321214
P 011214Z FEB 08





E.O. 12958: N/A


1. (U) This cable contains sensitive and proprietary
business information. It is sensitive but unclassified (SBU)
and not for distribution via the internet.

2. (SBU) Summary: Chevron's analysis of Block A, the
offshore oil block widely believed to have the most heavily
endowed oil reserves in Cambodia, has shown that the area is
much less promising than initially believed and probably not
even profitable if exploited on its own. However, Chevron
General Manager for Exploration Gerry Flaherty believes that
the Overlapping Claims Area (OCA), the disputed waters
between Cambodia and Thailand, is "one of the best areas for
exploration in the world." Chevron and other oil and non-oil
companies are beginning to cooperate on a strategy to
encourage Cambodia and Thailand to resolve their differences
over the OCA and reach a solution which will allow for
exploration and exploitation. The onset of significant oil
revenue now looks to be delayed past earlier estimates of
2010 or 2011, as Chevron seems unlikely to move ahead quickly
with Block A development and other companies lag 2-3 years
behind Chevron in the exploration process. Given Cambodia's
long list of legislative and other preparations needed before
oil revenues trickle in, this delay is likely good news for
the Cambodian people, and for revenue accountability. End

Rumors of Block A Petroleum Bonanza Greatly Exaggerated
--------------------------------------------- -----------

3. (SBU) Flaherty began his January 18 discussion with
Econoff by addressing the question on everyone's minds: How
much oil is there, and how much revenue does Cambodia stand
to gain? Flaherty was clearly uncomfortable with public
discussions of potential oil flows, saying that a 2003 quote
by a Chevron partner, LG Caltex, that there "could be as much
as 400 million barrels" in Block A had fueled unrelenting
speculation and questions about potential oil flows and
revenues. However, the oil executive agreed to summarize the
latest data for the embassy, and explained that Block
A--which is widely viewed as the best resourced of all of
Cambodia's off-shore blocks--has much less recoverable oil
than was first thought.

4. (SBU) Initial projections and plans for Block A were
based on the assumption that the Khmer Trough, which lies
beneath Cambodian waters, would be similar in geology and
resources to the Pattani Basin, which is largely in Thai
waters. Petroleum deposits in the Pattani Basin are
concentrated and relatively easy to access, leading oil
companies to build multiple wells around a central processing
platform. However, data from 15 exploratory wells show that
the Khmer Trough lacks sufficient source rock to get similar
flows, and the petroleum deposits are more dispersed and
harder to access. Flaherty estimated that there could be as
many as 500 million barrels in Block A, but with recovery
rates of only 10-20 percent, development of Block A alone was
unlikely to be profitable. The block could likely produce
15,000 barrels per day, but would cost USD 500 million to
develop. This is a dramatic reversal from Chevron's original
plans to build several wells around a central processing
platform in Block A, as they did in the Gulf of Thailand.
(Note: Flaherty downplayed expectations for Block A more
than a year ago in a conversation with Ambassador (Ref A),
but this is the first time we have heard that production in
Block A alone would not be profitable. End Note.)

5. (SBU) Flaherty added that, in contrast to the Pattani
Basin, which holds more natural gas than oil, the Khmer
Trough is mostly oil with relatively little gas. He
described the Khmer Trough's mix of resources as more
advantageous from a commercial standpoint, but not
significant enough to make exploitation of that block alone

Gunning for the Overlapping Claims Area

6. (SBU) Chevron is now most interested in gaining rights to
a block in the Overlapping Claims Area (OCA), an area of
disputed sovereignty between Thailand and Cambodia, Flaherty

PHNOM PENH 00000128 002 OF 003

revealed. While much of the Pattani Basin is in Thai waters,
one-third of the basin is in the OCA and this area may hold
as much as a "couple hundred million" barrels of oil and six
to eight trillion cubic feet of natural gas--an impressive
deposit. Flaherty was as excited about the OCA as he was
downbeat about the current Cambodian blocks, saying that the
OCA was now "one of the best areas for exploration in the
world" and its revenues could "revolutionize Cambodia."
(Note: Thailand and Cambodia will need to negotiate a
formula for OCA exploitation and work out other legal details
or otherwise overcome the sovereignty dispute before even
exploration begins. End Note.)

7. (SBU) Flaherty revealed that he was scheduled to meet
with Prime Minister Hun Sen on January 29, and planned to use
that meeting to press for a block in the Overlapping Claims
Area. (Comment: We have heard through a third party that
the meeting occurred and that the Cambodians felt it "went
well." We will report on the meeting septel when we are able
to get a readout. End Comment.) Cambodia and Thailand have
made competing tentative assignments to blocks in the OCA.
Companies clearly see a value in pressing each government to
gain access to the blocks in preparation for eventual OCA
dispute resolution. Cambodia has divided the OCA into four
areas. Area 1 was granted to ConocoPhilips, Area 2 to
Japanese firm Idemitsu, Area 3 to BHP and Shell, and Area 4
to BHP and Inpex of Japan. Areas 1 and 2 were granted
indefinitely, but the exploration rights to Areas 3 and 4
expired in October 2007 and have yet to be re-negotiated or
re-assigned, according to Flaherty.

8. (SBU) While Chevron's real interest is in developing the
OCA, the company plans to maintain its rights to Block A and
continue exploration there, albeit at a more moderate pace.
Flaherty stated that the Cambodian government is invested in
Chevron's exploration of Block A--likely the most heavily
endowed block in undisputed Cambodian waters. Publicly
abandoning their interest in Block A would be a big
disappointment to the Cambodian government, Flaherty stated.
Moreover, while Block A extraction might not be commercially
viable alone, in combination with a larger operation in the
OCA, the economies of scale could make it profitable.

Other Companies Hoping for a Drop of the Action
--------------------------------------------- --

9. (SBU) Chevron is not the only company hoping to get in on
the action in the OCA, Flaherty noted. Both large,
established oil companies, including Total, British Gas, and
BHP, and smaller oil companies--essentially speculators--are
interested in claims in the OCA. Flaherty noted that while
the smaller companies might initially seem unlikely to be
awarded an exploration contract, the Cambodian National
Petroleum Authority (CNPA) might award full or partial rights
to these companies, many of which have links to the Cambodian
elite, "if there are financial incentives."

Chevron's Sunny Outlook on OCA Resolution

10. (SBU) Flaherty said that he felt that a number of signs
pointed to potential to resolve the OCA sovereignty issue
quickly. The potential for political unrest to disrupt
Burma's delivery of natural gas to Thailand and rising oil
prices worldwide are hurting both Cambodian and Thai economic
growth, he said. Meanwhile, valuable petroleum reserves sit
untapped. For the first time, Thailand's latest master
energy plan included petroleum from the OCA as a resource it
would tap in the future. Flaherty said that it did not make
sense for the two countries to ignore the OCA sovereignty
issue while pumping so much money into buying foreign oil and

11. (SBU) Meanwhile, Chevron and the companies with licenses
in the OCA have taken preliminary steps to begin coordinating
efforts to encourage resolution of the OCA sovereignty issue.
Flaherty said that the group, which included six oil
companies as well as five other firms with rights to operate
mining, ship building, or other enterprises in the area, met
for the first time recently in Bangkok. He described the
meeting as productive, saying that they made progress in
developing common messages.

PHNOM PENH 00000128 003 OF 003

A Look Inside the Cambodian Government's Petroleum Policy
--------------------------------------------- ------------

12. (SBU) When asked, Flaherty described briefly some of the
internal politics that he and Chevron's advisor to the CNPA,
Mick McWalters, had witnessed within the RGC. Flaherty said
that Te Doung Tara, CNPA Director General, and Ho Vichet,
CNPA Vice President, were rivals, each controlling a separate
team of officials. Each group is working on its own version
of the draft petroleum law, with the key differences being
potential incentives offered to industry and the size of the
government's share of revenues. Nonetheless, Flaherty
predicted that a draft petroleum law would be before Deputy
Prime Minister Sok An "within months." (Note: He did not
specify which team's law he thought was likely to go to Sok
An, nor whether elements from each would be included in the
final. End Note.)

13. (SBU) The oil executive said that the CNPA had made
"lots of progress" in understanding what policy actions need
to be taken in order to start oil production. He hoped that,
in the future, McWalters might be able to help facilitate the
CNPA's collaboration with other ministries. (Note: Chevron
says that McWalters is an independent consultant who,
although paid by Chevron, is providing independent advice to
the CNPA. However, Chevron plans to end their funding in
April and hopes that a donor--perhaps the World Bank or the
Asian Development Bank--will step in to fund McWalters' work,
making it easier for him to be seen as advocating for
Cambodia's best interest. End Note.) Flaherty noted that
the CNPA holds on to petroleum information very tightly, not
even sharing with other Cambodian government ministries.
Instead, these ministries rely on donors for information,
which is not uniformly reliable. (Comment: The CNPA's
information is likely largely coming from Chevron, as the
CNPA has very limited resources to conduct or analyze
studies. Flaherty said that they have shared numbers about
petroleum reserves "in general terms" with the CNPA. End

14. (SBU) In response to Econoff's questions about a
potential state-owned oil company in Cambodia, Flaherty
described this as an "aspiration." He suggested that
Cambodia look to Thailand's PTT and PTTEP as examples, but
said that Cambodia's more ambitious hopes of something
similar to the Kuwait Oil Company or Malaysia's Petronas just
distracted the CNPA from the real issues.

Comment: Longer Wait A Blessing in Disguise?

15. (SBU) Chevron's news that tapping Block A deposits is
not likely to be profitable on its own comes after months of
obvious efforts by the government to tone down expectations
that Block A will be making a big payoff soon. The
international community seems uncertain as to whether the
CNPA's new caution is an attempt to downplay donor concerns
or an accurate reflection of new data. Meanwhile, neither
the Cambodian government nor the donors have focused on the
OCA, even though Te Doung Tara himself told a 2001 conference
that there were estimates of "up to 11 trillion cubic feet of
natural gas" and undetermined amounts of oil in the OCA.

16. (SBU) With Chevron taking a slow approach to Block A
while it tries to pursue its real interest in the OCA, oil
revenue now seems likely to flow later than the 2010 or 2011
projections. Chevron is well ahead of its competitors in
exploring Cambodia's petroleum reserves. While other
companies have begun to explore in their blocks, they are two
to three years behind Chevron. Meanwhile, exploration in the
OCA has not even started due to the sovereignty dispute.
Thus, Cambodia will continue to feel the pinch of high oil
and gas prices for a longer period of time. However, there's
a significant silver lining: Cambodia will gain some of the
time it needs to strengthen the CNPA, pass a Petroleum Law
and Anti-Corruption Law, join the Extractive Industries
Transparency Initiative, and take other steps to prepare for
looming oil revenue. While it appears that Cambodia now has
the time to do some or all of these things, whether it has
the political will to do so remains to be seen.

© Scoop Media

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