The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™

Ratings update: Repsol, Vietnam

Vietnam has cancelled Repsol’s major Red Emperor oil project in Vietnam, endangering $200m of investment. The move is a response to pressure from China, which lays claim to 90% of the oil and gas-rich South China Sea. This latest climbdown by Vietnam has dented investor confidence in the country’s offshore concessions.

Key developments

  • Vietnam’s state-owned PetroVietnam has ordered Spanish energy company Repsol to suspend activity at its Red Emperor project off the country’s southeast coast, just as preparations for commercial drilling had started. Prospects for reviving the project are poor, leaving partners PetroVietnam, Repsol and Mubadala Petroleum at risk of writing off $200 million of investment made so far. The suspension has important implications for investors in the region. Red Emperor’s Block 07/03 is estimated to contain significant oil and gas reserves, and is seen as a key potential asset to help slow the decline of Vietnam’s stalling oil and gas production. However, it is located in disputed waters near the vaguely demarcated ‘nine-dash line’ claimed by China.
  • Under Chinese pressure, Vietnam has blocked other projects in the area, including Repsol’s adjacent block in July 2017. This illustrates how China’s influence in the South China Sea has been expanding since 2010, combining stealth and diplomacy. Tensions with Vietnam and other global and regional powers have recently risen following China’s move to quietly deploy weapons to the Spratly Islands. The current climate leaves oil and gas companies with interests in the region at risk of being displaced by Chinese interests; and this latest climbdown by Vietnam reveals its lack of willingness – or ability – to resist pressure from its northern neighbour.

Evaluation

  • Repsol has been caught up in the crossfire of global politics. Initially, the prospects for Repsol’s Red Emperor project looked good – Vietnam is one of the most powerful military nations in the South China Sea; it had previously seemed willing to resist pressure to ‘jointly develop’ its oil and gas reserves with China. Moreover, Vietnam authorised both Exxon and Repsol to start drilling at the Blue Whale and Red Emperor projects despite protests from China. However, with no coherent strategy for developing its oil and gas industry, Vietnam has failed to hold the line in the face of pressure from Beijing to halt Repsol’s project, leaving investors in doubt of the country’s attractiveness as an investment destination.
  • This latest climbdown by Vietnam has unnerved investors in the region. It appears that there was little Repsol could have done to alter this outcome, although one could point to the danger signals on the horizon, as another Repsol project was cancelled in 2017. The company has initiated talks with PetroVietnam over compensation for the suspension of activity, but it is unlikely to walk away satisfied. After last year’s suspension at Repsol’s adjacent Block 136/03, also located in the disputed ‘nine-dash line’ area where China claims rights over oil and gas resources, the hold-up of the Red Emperor project has been tipped as a key indicator of China’s intents in the region.
  • Indeed, companies operating in Vietnam face significant political risks. Vietnam is increasingly isolated and insecure in standing up to China partly due to recent changes of leadership in its two key allies, the United States and the Philippines. US President Donald Trump seems less committed to protecting Vietnam in the event of an attack from China than former President Barack Obama. Since President Duterte took power in 2016 in the Philippines, the country has become more reticent to stand up to China. Vietnam’s other ASEAN neighbours such as Malaysia and Brunei are also reluctant to rock the boat by openly defying China. With Vietnam’s regional clout weakened, investors are increasingly sceptical of its resolve and ability to resist pressure from Beijing.
  • As foreign countries vie for control of the huge resource potential of the South China Sea, investments can fall victim to geopolitics, as the region is also strategically important for military bases and global shipping routes. In 2015, Chinese President Xi Jinping made a much-publicised pledge that his country “did not intend to pursue militarisation” of the Sea. Nevertheless, for the past eight years, China has been slowly but surely extending its presence, for example through island-building and increased passage of ships. So far, these moves have been met with a limited response from the US or regional powers, leaving Beijing unchallenged in its pursuit of claims over oil and gas resources and regional dominance. The implications are concerning for any operators of blocks located in disputed waters in the Sea.
  • Nevertheless, some positive examples leave room for hope and indeed many appear willing to take on the risks associated with investing in the South China Sea. There are currently 22 new oil and gas projects, $8.5 billion of capital investment and 28 exploration wells spread across Indonesia, Malaysia, Brunei, Vietnam and the Philippines. Some companies have managed to operate successfully in the region in cases where their projects were in non-disputed areas, or their global clout or economic potential was high. For example, Chevron continues to operate off the coast of Vietnam, though it now keeps its activities within undisputed territory following Chinese protests in 2007. Exxon is also still operating its Blue Whale gas concession. These cases go to show that Vietnam must not necessarily be considered a no-go zone for investors, and oil and gas projects in the region can still be attractive – although operators need a deep understanding of the geopolitical and commercial dynamics at the local, national and regional level and of the relations between the host country, its regional neighbours and China.

 

This article uses Critical Resource’s LicenseSecure™ model to assess the likely level of political and stakeholder risk. Our updates provide a rapid overview of new or updated ratings in our database, with a focus on projects in the news. Please note that these ratings updates are provisional, based in part on open source analysis and are not from client projects. Full LicenseSecure analyses are in-depth, involve extensive intelligence gathering and are confidential.

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