Amendments to the Petroleum Law to attract investors

The National Assembly in November passed the revised Petroleum Law, which will take effect from July 1, 2023. Senior partner Dang Duong Anh and associate Bui Viet Anh of Vilaf law firm, analyze major points in the law expected to attract more investors to the industry.

Petroleum Law 1993 No. 18-L/CTN was passed on July 6, 1993 by the National Assembly, amended and supplemented by the Amended Petroleum Law No. 19/ 2000/QH10 and the Amended Petroleum Law No. 10/2008/QH12 (collectively referred to as the Petroleum Law 1993).

The Petroleum Law 1993 has contributed significantly to the country’s socio-economic development, the state budget and national energy security. However, in recent years, there have been several issues caused by the law, triggering the need for change.

On November 14, 2022, the National Assembly passed the Revised Petroleum Law (hereinafter referred to as the “amended law”), which will take effect from July 1, 2023. The amended law is expected to help exploit petroleum resources more efficiently and attract potential investors.

Increase in petroleum contract term, prospecting period

Similar to the Petroleum Law 1993, a “petroleum contract” is defined under the amended law to mean a written agreement between Petrovietnam (PVN) and the relevant contractor in order to carry out “petroleum operations.”

The term “petroleum operations” is defined by the amended law as the operation of exploring of petroleum, prospecting, developing petroleum blocks, exploiting petroleum and cleaning-up petroleum construction work.

The main goal of changes to the provisions regarding petroleum contracts in the amended law is to attract potential investors and encourage existing contractors in longer-term investments. For that purpose, the amended law has increased the term of petroleum contracts to 30 years, instead of 25 years under the Petroleum Law 1993. For petroleum blocks that are entitled to investment incentives and special investment incentives, the maximum term of a petroleum contract is increased up to 35 years, instead of 30 years.

The maximum prospecting period under the amended law is also increased up to 10 years for any petroleum block that is entitled to investment incentives or special investment incentives, instead of seven years under the Petroleum Law 1993.

New regulations regarding contractor selection

The amended law has incorporated (with relevant amendments) several provisions regarding contractor selection stipulated in Decree 95/2015/ND-CP dated October 16, 2015 issued by the government guiding the Petroleum Law 1993 (Decree 95).

The amended law has taken from Decree 95 the forms of contractor selection for implementing a project of petroleum exploration, prospecting and exploitation, including open tender, competitive quotation and direct appointment of the contractor. In addition to these forms, the amended law set out a new form of contractor selection called limited tender, which is applied in case there are special conditions that only a limited number of contractors may satisfy.

According to Article 16 of the amended law, organizations and individuals participating in the tender to select contractors to sign petroleum contracts must satisfy the following conditions:

(i) having registered for establishment and operation in accordance with the law of the country of such organizations (individuals must have full civil act capacity in accordance with the laws of the country of which he or she is a citizen);

(ii) having sufficient financial and technical capacity and experience in petroleum operation; if organizations or individuals do not satisfy this condition, they must form a joint venture with other organizations and individuals to be eligible to participate in the tender.

Article 16 of the amended law requires for less conditions for organizations or individuals to participate in the tender than existing Decree 95. Notably, the amended law has removed the condition specified in Decree 95 that requires contractors or individuals to have performed at least two petroleum contracts before participating in the tender.

In addition, the amended law set out a new case in which contractors will be selected by direct contractor appointment. According to existing Decree 95, the direct contractor appointment method will be implemented in the following cases:

- Only one organization or individual or joint venture of contractors proposes to sign the contract; or

- Special cases relating to national sovereignty, border or island.

The above provisions of Decree 95 have been included in the amended law. Additionally, the amended law sets out a new case where the direct contractor appointment method will also be applied if the contractor who is performing a petroleum contract proposes an additional investment in the same contract area after the term of the current contract expires.

New petroleum contract before the current one's expiration

The amended law has incorporated a new provision that permits the contractor to propose an additional investment plan to PVN two years before the current contract’s expiration date. This additional investment plan is for the contractor to increase reserves, improving the petroleum recovery factor and continuing exploiting petroleum in the same area as the current contract. After receiving such a proposal, PVN will report it to the Ministry of Industry and Trade (MoIT) for the latter to appraise and inform the Prime Minister for obtaining approval on appointment of the contractor to enter into a new petroleum contract with PVN.

The contractor who signs a new petroleum contract will be allowed to continue using, and shall not have to pay for the use of, information, data, documents, samples, petroleum works and other assets installed and invested in the same area as the previous contract. This right must be taken into account when the benefit of the host country in the new contract is determined.

Area used for petroleum activities

According to the amended law, the number of prospecting areas under a petroleum contract has been increased. According to the Petroleum Law 1993, a prospecting area under a petroleum contract could not be granted for more than two blocks, except for exceptional cases as decided by the government. However, according to the amended law, the contract area, including the prospecting area, could include single or multiple petroleum blocks.

New regulation on location to build equipment

As required from practice, the laws should deal with the situation where the equipment systems of a petroleum project have to be built outside of the area specified in the contract for exploitation, treatment and transportation of petroleum. For example, pipelines transporting gas onshore, gas treatment plants, and pipelines transmitting gas to consumers must be built onshore rather than offshore.

The amended law has added a provision that allows the contractor to propose building equipment outside of the area specified under the relevant petroleum contract. This proposal is included in the general plan for petroleum field development, plan for early field exploitation, or plan for field development, which will be approved under the procedure set out in the amended law.

Legal framework supplemented for basic petroleum survey activity

Newly added provisions on basic petroleum surveys

By definition, basic petroleum survey includes researching, surveying, and investigating the geological formation, material composition, conditions, and rules of petroleum generation to assess the potential and prospect of petroleum, which provides the basis for directing petroleum prospecting.

Decree 95 sets out some provisions regarding basic petroleum surveys, which are however only related to the approval procedure for PVN or its subsidiaries to carry out basic petroleum surveys. The amended law now introduces a more comprehensive legal framework for basic petroleum surveys. Investors who satisfy conditions under the laws can carry out basic petroleum surveys and use the information obtained therefrom. Investors are also allowed to access information obtained from the survey carried out by other organizations.

Main contents of basic petroleum surveys

The basic petroleum survey includes the following activities:

(i) Geological and geophysics research and surveys, investigation of geological formations and material composition, parameter drilling for data collection and sampling, making reports and building geological and geophysical maps of the area and thematic maps for petroleum search and exploration, researching geological hazards and environmental geology and other minerals, making relevant thematic maps; and

(ii) Searching for signs of petroleum, assessing petroleum prospects, and classifying by objects and groups of geological structures to identify new petroleum areas and direct petroleum prospecting.

Conditions for conducting basic petroleum surveys

Organizations in charge of basic petroleum surveys must have sufficient financial and technical capacity and professional experience in basic petroleum surveys pursuant to the regulations of the government. Organizations that have not satisfied those conditions must form a joint venture with other organizations or individuals to satisfy those conditions.

Individuals who wish to carry out the basic petroleum survey must form a joint venture with organizations that satisfy conditions to carry out basic petroleum surveys.

Organizing basic petroleum surveys

The MoIT is responsible for creating a list of basic petroleum survey schemes and submitting it to the Prime Minister for approval. The scheme list is based on the master plan on energy and natural resources and the proposal of organizations satisfying conditions to implement basic petroleum surveys. The scheme includes the information of the party responsible for implementing such a scheme.

Forms of organizing the implementation of basic petroleum survey projects include:

(i) Assigning tasks in case state agencies or state-owned enterprises have the primary responsibility for implementing the scheme; or

(ii) Agreement between PVN and other organizations in case such organizations are responsible for implementing the scheme.

Rights of an organization conducting basic petroleum surveys

Organizations conducting basic petroleum surveys are allowed to use information obtained therefrom according to the commitment of confidentiality, to propose cost recovery when participating in the auction and signing of petroleum contracts at petroleum blocks where the basic survey has been carried out.

Rights to use information, data, and result of basic petroleum surveys

Organizations and individuals are allowed to access or use the information, data, and result of the basic petroleum survey to research, assess, and propose to sign the petroleum contract but need to pay fees for the use of petroleum documents in accordance with the law on fees and charges or an approved agreement.

Nevertheless, all samples, information, and data obtained in the course of conducting basic petroleum surveys are managed by the state of Vietnam.

Changes in provisions regarding procedures to approve documents to implement petroleum activities

This content is supplemented and completed based on some provisions of Decree 95 to ensure a sufficient legal basis for the procedures to implement petroleum activities.

Procedures for approving documents during petroleum project implementation

Procedures for approval of documents during the project implementation stage (e.g., procedures to approve reports on petroleum resources and reserves, general plans for the development of petroleum fields, and plans for early exploitation of petroleum fields) are currently specified in Decree 95; however now they are upgraded to be included in the amended law to secure better stability and enforceability.

New procedures and details for existing procedures

To ensure a sufficient legal basis for the approval of documents during the project implementation stage, the amended law provides for new approval-issuing procedures for the petroleum prospecting program; detailing the existing procedures, including, inter alia, procedures to approve reports on petroleum resources and reserves, general plans for the development of petroleum fields, and plans for early exploitation of petroleum fields.

Changes in the party having the authority to approve documents

In some cases, the amended law changes the authority competent to approve documents. For example, under Decree 95, the Prime Minister has the authority to approve reports on petroleum resources and reserves and petroleum field development plans; however, such authority under the amended law has been assigned to the MoIT.

Changes in incentives on petroleum activities

There were many shortcomings concerning the incentive policies for petroleum projects. It is because the regulations on investment incentives for petroleum projects were issued a long time ago (in 2005), and are no longer suitable for the current situation. Also in the current regulations, there has not been any incentive policy for developing and exploiting small and marginal mines nor special investment incentives to encourage petroleum investment in deep-water areas.

The amended law added more criteria to determine petroleum blocks that are entitled to investment incentives with the aim of attracting investors in complicated areas.

Investment incentives

According to Article 3.12 of the Petroleum Law 1993, encouraged petroleum projects are defined as “projects carrying out a petroleum operation in a deep-sea and remote offshore area or a region with especially difficult geographical or complex geological conditions and other areas according to the list of blocks decided by the Prime Minister; and projects carrying out coal bed methane prospecting and exploitation.”

According to the amended law, the petroleum block or field entitled to investment incentives is no longer limited to cases set out in Article 3.12 of the Petroleum Law 1993. For example, under the amended law, petroleum blocks or fields entitled to investment incentives include the following:

(i) The petroleum blocks located in a deep-sea and remote offshore area or a region with especially difficult geographical or complex geological conditions;

(ii) The petroleum blocks without any investment incentives that were auctioned according to the economic and technical conditions of the petroleum contract but no contractor or investor proposed;

(iii) The petroleum blocks formed from the relinquished area under the petroleum contract applying to regular petroleum blocks; and

(iv) Marginal petroleum blocks belonging to the regular petroleum blocks regarding which the contracts have been signed.

Special investment incentives

Special investment incentive is a new term introduced by the amended law. Examples of petroleum blocks or fields entitled to special investment incentives include:

(i) The petroleum block auctioned according to the conditions of the petroleum block entitled to investment incentives but no contractor or investor proposed;

(ii) The petroleum block formed from the relinquished area under the petroleum contract applying to the petroleum block entitled to investment incentives;

(iii) The petroleum block entitled to investment incentives and returned by the contractor before the expiration date of the petroleum contract; and

(iv) Marginal petroleum fields belonging to petroleum blocks entitled to investment incentives and regarding which the petroleum contracts have been signed.

New incentives

According to the laws issued before the Amended Law, the corporate income tax (CIT) rate applied to petroleum prospecting and exploitation in Vietnam is from 32% to 50%, depending on the decisions of the Prime Minister for each project; the cost recovery rate for encouraged petroleum project is up to 70%. However, according to the amended law:

(i) Petroleum contracts for petroleum blocks and fields entitled to investment incentives are entitled to the CIT rate of 32%, the crude oil export tax rate of 10%, and the cost recovery rate of up to 70% of the annual petroleum output; and

(ii) Petroleum contracts for petroleum blocks and fields entitled to special investment incentives are entitled to the CIT rate of 25%, the crude oil export tax rate of 5%, and the cost recovery rate of up to 80% of the annual petroleum output.

Permission to access existing petroleum industry infrastructure

After nearly 40 years of development, the petroleum industry has built infrastructure for petroleum activities (petroleum treatment works, offshore storage/offshore floating treatment, pipeline systems for gas transportation to shore). Given that there is no regulation dealing with the third party’s access to existing infrastructure, the use of existing infrastructure systems cannot be maximized, causing a waste of costs and time in investment, discouraging the development of nearby petroleum projects.

The amended Law has added a policy that permits contractors to access and use existing infrastructure of the petroleum industry based on contracts or agreements with the owner of or the entity managing the infrastructure.

Implementation of petroleum projects in a chain

Vietnam needs a legal framework for investment into onshore sections of petroleum projects, which is necessary to facilitate the investment of petroleum projects in a chain, including both onshore and offshore. Such a legal framework will ensure the uniformity of the whole project and improve economic efficiency.

To meet such a requirement from practice, the amended law has introduced a new policy to facilitate the investment of a petroleum project in a chain. In particular, Article 42 of the amended law provides that during the period of formulating the general plan for petroleum field development, if PVN finds it necessary to build a synchronous chain of offshore and onshore petroleum works and equipment outside of the initial contract area for petroleum exploitation, treatment, and transportation, PVN will report to the MoIT. The MoIT will appraise the project and obtain the in-principle approval of the Prime Minster for the project.

In some special cases set out in Article 42.2.a of the amended law, for example, projects which require changes to the land use purpose of a national park or nature reserves, watershed protection forests:

(i) For onshore petroleum field development projects, the National Assembly will issue in-principle approval of the change to the forest or land use purpose before the general plan for petroleum field development is approved; and

(ii) For petroleum field development projects with a synchronous chain of offshore and onshore petroleum works and equipment, the National Assembly will issue in-principle approval of the change to the forest or land use purpose before the Prime Minister’s in-principle approval of the project is issued.

Except for the special cases subject to the approval of the National Assembly as mentioned above,

- for onshore petroleum field development projects, the Prime Minister will issue the in-principle approval for the change of forest or land use purpose before the general plan for petroleum field development is approved; and

- for petroleum field development projects with a synchronous chain of offshore and onshore petroleum works and equipment, the Prime Minister will issue the in-principle approval for the change of forest or land use purpose simultaneously with the in-principle approval of the project.

The provincial People’s Committee will issue the decision on the change to forest and land use purpose after the in-principle approval of such change and the approval of the general plan for petroleum field development is issued.

The amended law has addressed a number of outstanding critical issues of the petroleum industry in Vietnam. On one hand, it could enhance the stability and enforceability of those provisions already stipulated in Decree 95 on petroleum operation.

On the other hand, it has introduced additional rights and interests of contractors and investors, creating more favorable conditions for petroleum contracts and petroleum operations with the aim to attract more investments in the petroleum industry of the country. These positive changes under the amended law are expected to facilitate the development of this sector in the long-term.