Vietnam: Oil And Gas Sector: The New Model Production Sharing Contract

Keywords: PSC, PVN, Decree 139,

In Vietnam, oil and gas exploration and production operations are carried out on the basis of a production sharing contract (PSC) to be entered into with Vietnam National Oil and Gas Group (PVN). The model PSC was first introduced by the government in its Decree 139 dated 11 November 2005 ("Old Model PSC"). Almost eight years later, the government issued a revised model PSC in Decree 33 dated 22 April 2013 ("New Model PSC").

The New Model PSC becomes effective on 8 June 2013 and applies to all PSCs signed after that date, except for blocks for which the Prime Minister has approved basic technical and commercial terms. Below is a summary of the most notable changes contained in the New Model PSC.

Taxes and fees

Taxes

Both export tax and corporate income tax rates are now specified in the New Model PSC (they were not in the Old Model PSC). Read together with the stabilisation clause, this suggests that the contractors are not subject to increases in corporate income tax or export tax rates.

Fees and surcharges

Contractors are now required to pay environmental protection fees and a surcharge imposed on profit oil or profit gas, which may vary from time to time.

Bonuses, training and research fees

Contractors are subject to three new compulsory payments: (i) a signing bonus, (ii) incremental production bonuses (payable upon reaching the average daily production volume), and (iii) a fee to the "fund for scientific research and development of oil and gas technology". These bonuses and fees are not cost recoverable and are not deductible for corporate income tax purposes.

Under the Old Model PSC, if Vietnamese law and regulations allow for more favourable tax rates or preferential treatments for the oil and gas industry, then the contractors, with PVN's support, are entitled to such new rates or treatments. By contrast, the New Model PSC requires that the contractors obtain approval of the competent state agency before they are entitled to such new rates or treatments.

PVN's participation and pre-emptive rights

The contractors remain obliged to carry PVN's participation from day one until PVN decides to participate in the block. Such carried costs are deductible from the contractors' cost recovery oil or gas, although the rate of deduction is open to discussion between the contractors and PVN (in the Old Model PSC, the default position is that the contractors can deduct 100 percent of PVN's carried costs from its cost recovery oil or gas).

The New Model PSC also sets out the procedures for PVN to exercise its pre-emptive rights in case a contractor assigns all or part of its participating interest to a third party, and requires PVN to confirm whether it exercises such rights within 120 days.

The change of control or ownership of a contractor (i.e., an offshore transfer of the contractor's interest) also triggers PVN's pre-emptive rights. Re-organisation, internal financial arrangements and a merger of the contractor's parents are all exceptions to this requirement. However, the New Model PSC fails to clarify the exact meaning of these exceptions (e.g., whether a transfer by a contractor to an affiliate qualifies as an exception).

Stabilisation clause

The stabilisation clause has been narrowed substantially. Previously the contractors enjoy protection against any adverse effects on their "economic benefits" under the PSC; however, the stabilisation clause of the New Model PSC now only covers royalties, corporate income tax, and export tax. Thus, contractors will be exposed to changes to environmental protection fees, profit surcharge, value added tax, and any new taxes or fees which may be imposed by the government in the life of the PSC. This will be of particular concern to a contractor, due to the importance of the stabilisation clause in general and the quick pace of change in the Vietnam legal framework in particular.

Other changes

Termination

PVN has additional rights to terminate under the New Model PSC, namely where the contractor fails to commence development activities, or delays production operations for 12 months after the scheduled time or plan has been approved.

Abandonment

The New Model PSC sets out in more detail the abandonment requirements and procedures. It also requires that the contractor pay a security deposit into reserved funds for abandonment purposes. All of these are consistent with the current regulations on abandonment set out in Decision 40 of the Prime Minister dated 21 March 2007, and are consistent with the approach taken by the government in the mining sector.

Conclusion

Some of the most important legislative developments in the last eight years in the oil and gas sector have been incorporated in the New Model PSC. However, the New Model PSC narrows the rights allowed under the Old Model PSC, and introduces some new obligations for the contractors. This may affect a contractor's decision-making process when investing in Vietnam's oil and gas sector. For instance, since the New Model PSC will not affect existing PSCs, contractors may consider farming into current blocks more attractive than, say, investing in a new block. We would recommend interested parties to watch this space closely in the near future.

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