Sixteen years ago French outfit Totalentered the nascent Cambodian oil andgas market; now its initial investment is looking more than likely to be a winner
There’s money to be made in risk and there’s money to be made in oil. Play the two just right and you could make more money than some countries generate in a year, get it wrong and you’ll lose out substantially. In Cambodia, the rules are no different, says Jean-Pierre Labbé, general manager of Total EP (Exploration and Production) Cambodge: “Risk and reward is our business.”
For the French oil giant, 2009 is proving to be a case in point. Following more than three years of discussions with the Cambodian government, Total was awarded two hydrocarbon concessions by Hun Sen, the prime minister. Area III, the 2,430sq km offshore block awarded to Total, was within a 27,000sq km area of seabed believed to be rich in oil and gas deposits.
Total EP’s investment seemed to be promising rich reward. But then the long-standing sea border dispute between Cambodia and Thailand re-erupted, stalling all exploration and production plans for the foreseeable future.
Labbé appears to be untroubled by the dispute, which is preventing Total EP from hazarding further investment. The sea border between the two countries has never been drawn because the 19th century colonial border commissions were only interested in land demarcation. “We have always known the area was in dispute,” Labbé admits.
“The upstream segment – exploration and production – is by far the most lucrative and will always generate the most interest,” he adds, saying that 90% of Total’s profits and investment goes into the two activities. “It is the industry’s money-spinner.”
Established in 1993, Total Cambodge is a subsidiary of the world’s fifth-largest publicly traded oil and gas company with more than 97,000 employees in 130-plus countries. In 2008 its global operations generated more than $15 billion in profit. “We couldn’t ignore the market of 10m people in a high-growth area,” Labbé says of Total’s decision to invest in Cambodia after the signing of the Paris Peace Accords. “We go where we believe there is oil and gas and a promising market.”
Moving into an undeveloped market in the early 1990s has allowed Total to establish itself as a big-time player in Cambodia at a time when the country’s hope of becoming a global energy exporter is moving closer to reality.
Total EP, the company’s exploration arm began acting on Cambodia’s oil potential in 2006, Labbé says. Around that time experts indicated the presence of a huge oil-and-gas reserve off Cambodia’s south coast. Te Duong Tara, a Cambodian energy official, was quick to announce that the 6,278sq km “Block A” could contain as much as 700m barrels of oil, nearly twice as much as had been earlier predicted. In the same year the World Bank said it believed Cambodia’s total energy reserves maybe as high as 2 billion barrels of oil and 10 trillion cubic feet of natural gas. That could have generated annual revenues upwards of $2 billion, dwarfing the country’s current domestic revenue and foreign aid receipts.
Two years on, Labbé believes those figures are a gross overestimation, saying that one-tenth of the prediction is more accurate. “The government has wisely not made a public statement, but we believe the initial estimation to be optimistic. We are still unsure of the quality of the reserve.” For this reason, he understands the government’s delay in signing up to the extractive industries transparency initiative (EITI), which calls for independent audits, active civil society monitoring and publication of revenues from oil, gas and mining.
“The government has said it agrees with the general principles of EITI and recognises the importance of establishing a strong and transparent financial system before petroleum revenue begins to flow. But if Cambodia is not in a position to pump oil until 2014, there is no real need to sign up just yet,” he says.
While Labbé has no idea how long the dispute over Area III will drag on, he insists it is not Total’s place to intervene: “It could be three, five, 10 years. Nobody knows. If they require our technical expertise we will assist them, but it is not our place to get involved in negotiations between two governments.” In the meantime it’s business as usual. The company says the delay is not costing it any money.
The learning curve has, though, been quite an education. “Khmer is not a business language, it is not a technical language, so some meanings get lost in translation,” continues Labbé. “And we were communicating in English, a second language for our Cambodian interpreters and us. We had to spend a lot of time with interpreters and had to adapt to local traditions and customs. In Cambodia it is not common to challenge your boss or to discuss problems. It is a source of embarrassment. When I talk to my boss, we never discuss things that are going well, only the things that are not going well, so we can improve them.”
Total feels it has made progress in paving the way for future negotiations. “It has been an exercise in lessons learned,” he says. “The Cambodian government selected Total from nine other contenders because it respects our expertise and global reputation in the oil industry. They know we will build the country’s technical capacity and help develop a national company like we did with the national company PTT EP of Thailand. When our upstream segment is in full swing we’ll be investing more, but also in capacity.”
“Since we moved to Cambodia we have shown a strong level of commitment and have helped develop the market quite considerably,” Stéphane Dion, Total Cambodge’s managing director adds. With an overall investment of $30m to date, Total has spent the past 16 years developing its commercial outlets with 30 petrol stations, 15 of which are in the capital, and nine Bonjour sundry shops employing a total of 400 staff – only three of whom are expatriates. “We introduced an international standard of product and customer service to the country, and our successful models have been emulated by local companies.”
He says it is important to have a commercial presence in Cambodia as it is a rapidly expanding market for oil and gas. In recent years there has been a visible increase in high-end luxury cars. In lieu of official figures, he believes that prior to the economic crisis, petrol consumption increased in line with the growth of the country – at 10% per year. “Cambodians love cars, so it is a good market for gas and lubricants.”
In its quest to meet the changing demands of its customers, Total introduced Excellium 95 in June. “Cambodia was our country of choice to launch Excellium 95 to the Asia-Pacific region because of the market’s growth potential and heavy presence of high-end cars,” says Dion. What he describes as the “new generation fuel” has replaced Super Premier in all service stations in the kingdom and, he claims, reduces fuel consumption by an average of almost 4%.
“The economic slump is a great time to introduce a more efficient fuel,” says Dion. “Everyone wants to cut costs, especially when fuel is so expensive here compared to neighbouring countries.”
Besides Total, there are three other major players in the local oil and gas market: Caltex, of the Chevron Corporation of America, Cambodian-owned and CPP-affiliated Tela Petroleum and Sokimex, Cambodia’s leading conglomerate, majority-owned by Sok Kong, former president of the Phnom Penh chamber of commerce.
Despite the latent potential of the Cambodian market, there’s a tough road ahead. “It is a very small and competitive market,” says Dion, “and the problem with such a tight market is everyone sells their fuel at the same price. There is a maximum difference of 2% in fuel prices across the board.” Undeterred, he believes Total’s quality products and standards give it the edge over its competitors. “We work within the law and maintain standards in Cambodia that brought us so much international recognition.”
He added that Total’s strict code of conduct and obedience of domestic and international laws protect the company from corruption charges, accusations of political patronage and price-rigging that have been directed at local companies.
The Sam Rainsy opposition party habitually charges Tela Petroleum and Sokimex with failing to lower domestic oil prices in line with global prices and has also accused the two companies of tax and customs-duty evasion on imported petroleum products.
“As an international company we pay taxes as stipulated by law,” says Dion declining to give a figure, but suggesting taxes eat up a significant part of the company’s profits. Dion is unable to comment on the assertion that local oil companies escape appropriate taxation: “I wish I knew to what extent other [local] companies pay tax, but I cannot speculate”
Considering the emphasis Total Cambodge places on high-quality products and services combined with slim profit margins and high taxes, Dion says “without a doubt” local companies are more profitable, especially as Sokimex has the rights to lucrative state energy concessions. Faced with similar obstacles Shell, the first international company to re-establish itself after the civil war, withdrew in 2006 and Total was quick to buy up the majority of its service stations and other fuel distribution services. “We decided to cement our activities by buying Shell’s assets.”
The launch of Cambodian Angkor Air is also good for business. In March this year Total opened a new aviation fuel storage plant at Siem Reap international airport to replace the ageing facility it inherited from Shell. The new plant has two Jet A-1 fuel tanks with a capacity of 850 cubic metres, a gantry for refuelling trucks and an office complex including a laboratory.
“The investment is in response to the significant expansion in tourism there,” says Dion. “Its opening marks an important step in our development in the country. Total is here to stay. We have invested heavily in Cambodia and the region. We believe the risk will pay off.”