Technical Assistance Report Project Number: 40079 December 2006 Kingdom of Cambodia: Institutional Strengthening of the Cambodian National Petroleum Authority (Financed by the Japan Special Fund) The views expressed herein are those of the consultant and do not necessarily represent those of ADB s members, Board of Directors, Management, or staff, and may be preliminary in nature.
CURRENCY EQUIVALENTS (as of 23 November 2006) Currency Unit riel (KR) KR1.00 = $0.000243 $1.00 = KR 4,115 ABBREVIATIONS ADB Asian Development Bank CNPA Cambodian National Petroleum Authority TA technical assistance TECHNICAL ASSISTANCE CLASSIFICATION Targeting Classification General intervention Sector Energy Subsector Energy sector development Themes Capacity development, private sector development, sustainable economic growth. Subthemes Institutional development, public-private partnerships, promoting economic efficiency and enabling markets. NOTE In this report, "$" refers to US dollars. Vice President C. Lawrence Greenwood, Jr., Operations 2 Director General R. Nag, Southeast Asia Department (SERD) Director J. Cooney, Infrastructure Division, SERD Team leader Team member Sujata Gupta, Senior Energy Specialist, SERD Anthony J. Jude, Principal Project Specialist (Energy), SERD
I. INTRODUCTION 1. The Government of Cambodia (the Government) requested technical assistance (TA) from the Asian Development Bank (ADB) to help strengthen the institutional, policy making, and regulatory capacity of the Cambodian National Petroleum Authority (CNPA) so that the authority can deal with emerging issues in the oil and gas sector. The ADB TA Fact-Finding Mission visited Cambodia from 7 10 June 2006 and had discussions with various ministries and stakeholders about the TA. The mission reached an understanding with the Government on the objectives, cost estimates, implementation arrangements, and terms of reference for the TA. 1 The design and monitoring framework is in Appendix 1. II. ISSUES 2. International oil companies started exploration for oil and gas in the late 1950s and continued until the outbreak of conflict in 1970. They found little in the way of significant reserves and suspended activities during the conflict period (1975 1991). Exploration activities resumed in 1991, with Cambodia identifying and bidding out onshore and offshore exploration blocks to international oil companies. In 2005, ChevronTexaco (Chevron) announced that it had found oil in block A of its offshore concession. This oil find is estimated on a preliminary basis at around 400 700 million barrels of oil. 2 Chevron plans further drilling of appraisal wells from September 2006 to March 2007 to establish the reservoir volumes and confirm the reserves. Natural gas deposits, estimated at 3 5 trillion cubic feet, are also reported, both as associated gas and gas pockets. Again, these figures will have to be confirmed following further drilling of appraisal wells and analysis of production tests. Chevron has stated that it intends to commence production from block A in 2010. Blocks B, C, and D are also under exploration, while offshore blocks E and F and onshore blocks 11, 12, 13, and 26 are currently being offered for tender. Thus there seems to be considerable potential for finding oil and gas resources within Cambodia s territory. 3. Estimates indicate that the Government might reasonably receive $500 million to $1 billion a year from oil and gas production. This will largely depend on the oil and gas flows and on the agreed production rates. Nevertheless, compared with total Government revenues of about $665 million in 2005, this revenue is significant and does not include the possible income from other adjoining offshore blocks currently under exploration. This possible huge increase in revenues has generated both hope and concerns in the Government and in the international community. If well managed, the resources could greatly improve the delivery of much needed basic health, education, and water supply services, in addition to improving the country s infrastructure bottlenecks. The Government needs suitable policies and mechanisms for optimal generation of revenue from this resource, and for the equitable distribution of the resulting economic benefits. 4. Therefore Cambodia needs to put appropriate policies and strategic plans in place to direct the development of the sector. The CNPA, which was established by royal decree in 1998, reports to the Council of Ministers and oversees all segments of the petroleum sector. Despite its limited capacity, the CNPA has achieved a good deal since its establishment. It has been able to successfully negotiate a production sharing agreement with Chevron and has made further revisions to the product sharing agreement with regard to other blocks awarded. In 1 The TA first appeared in ADB Business Opportunities on 8 December 2006. 2 These figures are indicative, as the CNPA and Chevron have not provided details. Not all reserves will be economically recoverable and are subject to appraisal and testing. These and the revenue calculations should therefore be taken as orders of magnitude.
2 recognizing its limitations and capacity, the CNPA is taking steps to improve the legal and regulatory environment for the oil and gas sector. It is developing a revised organizational structure with clear descriptions of the roles and responsibilities of departments and sections and envisages that this will be approved by royal decree by early 2007. As a result of Chevron s discovery in block A, the CNPA faces an extremely steep learning curve in relation to inspections; data management; production and cost accounting and auditing; approval of field development plans, environmental management plans, and production permits; and qualification and selection of subcontractors. 5. Developing the oil and gas sector in Cambodia is consistent with ADB s country strategy and program (2005 2009) 3 for Cambodia, which focuses on poverty reduction and continued operations to support the development of infrastructure and the promotion of an enabling environment for private sector participation. 6. In response to the Government s request for policy advice and technical support to develop the sector, a joint ADB and World Bank mission visited Cambodia in May 2006. The mission held various meetings with relevant Government agencies and development partners to discuss emerging issues in the oil and gas sector and the scope for policy advice and technical support from external funding agencies. The mission undertook (i) continued dialogue with relevant Government authorities on issues in the oil and gas sector; (ii) stock taking of current and planned activities in the sector; (iii) discussions with relevant authorities on the need for a petroleum policy framework (inclusive of upstream, midstream, and downstream oil and gas) and a road map for developing the sector; and (iv) discussions with development partners on their planned technical support activities and programs covering policy, institutional, legal and regulatory, financial, technical, and commercial aspects of the oil and gas sector. 7. A donor working group on oil and gas was established in January 2006. This working group comprises ADB, Australian Aid for International Development, the Japan International Cooperation Agency, the International Monetary Fund, the Norwegian Agency for Development Cooperation, the United Nations Development Programme, and the World Bank. ADB is the chair of this working group. Discussions between donors and the Government led to a general understanding of the areas in which the development partners will provide assistance. The United Nations Development Programme, the International Monetary Fund, and the World Bank will provide assistance with (i) developing cross-sector policies and safeguards; (ii) devising petroleum fund options; (iii) drafting tax law amendments for the oil and gas sector; (iv) training staff in the Ministry of Economy and Finance and the Ministry of Industry, Mines, and Energy; and (v) providing capacity building in the fields of public financial management, accountability, and revenue management. Australian Aid for International Development, through the Cambodia-Australia Technical Assistance Facility, is helping the CNPA prepare strategic road maps for the development of upstream segments in the offshore, onshore, and overlapping claims areas and draft a petroleum law. Under the Norwegian Agency for Development Cooperation program, the Norwegian Petroleum Directorate has entered into an agreement with the CNPA to assist with the development of an appropriate legal and regulatory framework for the sector under a 2-year assistance package. ADB will focus on strengthening the CNPA's capacity to professionally manage and develop oil field operations in order to optimize resource utilization. ADB will also strengthen the CNPA s capacity to undertake environmental monitoring of oil and gas exploration and production activities. 3 ADB. 2005. Country Strategy and Program (2005 2009): Cambodia. Manila
3 8. An earlier ADB TA 4 for the oil and gas sector in Cambodia addressed the development of methodologies for energy surveys, data collection, economic evaluation of energy projects, and energy planning techniques; prepared a framework for a mineral and hydrocarbon database; and drafted a petroleum law that addressed upstream operations. Before 1997, the Ministry of Industry, Mines, and Energy had managed the oil and gas sector, but in 1998, the new Government instituted organizational changes that resulted in the establishment of the CNPA. In line with the royal decree on the formation of the CNPA, its upstream duties include overseeing exploration activities; managing data on petroleum resources; defining blocks for exploration; managing bidding for blocks; negotiating conditions for exploration and production; and coordinating legal, economic, and technical standards for the sector. With Chevron s announcement of its oil discovery in its exploration wells in 2005 and with other blocks under development, the CNPA has to fast-track its capacity development and expand its responsibilities beyond the exploration stage to discovery, production, and supply of oil and gas. 9. In recognition of the sector s importance to Cambodia s future development, the Government is committed to putting in place a framework that would attract international oil companies and spur investments in the oil and gas sector (upstream, midstream, and downstream). The Government s program is intended to create a more robust institutional and administrative governance structure and the technical capacity to adequately facilitate investment in and oversight of the sector. III. THE TECHNICAL ASSISTANCE A. Impact and Outcome 10. The main impact of the TA will be optimum exploitation of oil and gas resources in Cambodia through efficient management of field development and the production stages of petroleum operations. This will be achieved by strengthening the institutional, policy making, and regulatory capacity of the CNPA and preparing plans for developing essential physical infrastructure. The TA will provide clarity on the operational framework in the sector, which will maximize the value of petroleum resources, contribute to the development of public-private partnerships, and improve access to energy resources in the region. 11. The TA will address the institutional strengthening and capacity building of the CNPA in the areas of (i) economic modeling; (ii) production and petroleum cost accounting and auditing; (iii) hydrocarbon data management for both contract management and promotion of additional exploration; (iv) evaluation of development plans and applications for production permits according to best industry practices, such as maximum economic recovery, adequate safety planning, protection of the environment, and compliance with specific obligations for employment of Cambodian goods and services; (v) qualification and selection of foreign and national service contractors through transparent and competitive procurement procedures; and (vi) environmental management and inspection during oil and gas field exploration and exploitation. The TA will also plan the development of physical infrastructure required for the petroleum industry, including a domestic supply base. 4 ADB. 1996. Technical Assistance to the Kingdom of Cambodia for Strengthening the Institutional and Legal Framework for the Energy and Mineral Sectors. Manila (TA 2241-CAM, approved in 1996).
4 B. Methodology and Key Activities 12. The TA consultants will review the petroleum agreements for both offshore blocks and onshore blocks, with particular emphasis on block A and the 1991 petroleum regulations, as well as the upstream road maps prepared by the Cambodia-Australia Technical Assistance Facility consultants. As exploration activities expand in Cambodia, an increasing volume of information will be produced, including seismic data, geographic information system data, maps, gravity and magnetic data, and well logs. All such information obtained by different exploration companies has to be shared with and submitted to the CNPA. An efficient database is required to manage and use this information to optimize oil field operations. Therefore a hydrocarbon database needs to be developed and CNPA staff need to be trained in its effective use to store and manage the data. This will include developing a format for hydrocarbon data submission that all petroleum operators will follow. The hydrocarbon database will require dedicated hardware (including a geophysical client and server workstation, a geological workstation, a tape drive, external hard disk drives, computer system interface, a plotter, a network switch, and accessories), proprietary and specialized software (including a data manager and twodimensional and/or three-dimensional seismic interpretation programs), installation, and training. The CNPA and the consultants will identify a suitable package for the hydrocarbon database in accordance with industry best practices. 13. Discussions will be held with the CNPA to develop and implement training programs in relation to inspections, economic modeling, petroleum accounting and auditing, data management, petroleum service contracts, development plans, production sharing contract management, and inspection and management of environmental practices by petroleum agreement operators for CNPA staff and for other relevant officials. The CNPA s information technology capability will be assessed in terms of capability for economic analysis, accounting, and data management. Computer systems and operating software will be acquired to develop the CNPA s technical capacity in these areas. 14. Cambodia has a framework for environmental impact assessment and for the approval of environmental management plans. This existing framework will be complemented by strengthening the CNPA s capacity to inspect and monitor the implementation of environmental management plans in petroleum operations. Establishing consistent environmental standards for contractors is also required. The TA will develop guidelines and checklists for preparing environmental management plans based on the guidelines used by institutions such as the American Petroleum Institute, the Association for Petroleum and Explosives Administration, the US Environmental Protection Agency, and by the Thai authorities. A mechanism for addressing environmental issues related to sensitive areas, like sites of historic and cultural importance, will be developed in consultation with the Ministry of Environment, the Ministry of Agriculture, the Ministry of Defense, and the Apsara Authority. C. Cost and Financing 15. The total cost of the TA is estimated at $1,090,000. The Government has requested that ADB provide $1,000,000 to cover most of the TA cost. The TA will be financed on a grant basis. The TA will be financed by the Japan Special Fund. The Government will finance $90,000 in kind by providing counterpart staff, office space and facilities, technical studies, and support services. The cost-sharing ceiling for this TA is based on ADB s new policy and the Government s share is below the overall country level of 15% for TAs. Detailed cost estimates and a financing plan are provided in Appendix 2.
5 D. Implementation Arrangements 16. The CNPA will be the Executing Agency for the TA. The TA will require assistance of about 22 person months of international and about 8 person-months of national consulting services. ADB will engage an international consulting firm in accordance with the Guidelines on the Use of Consultants (April 2006, as amended from time to time). The international consulting firm will be responsible for making appropriate arrangements for national consultants and will be responsible to ADB for the total scope of the TA. Simplified technical proposals will be requested and evaluated using the quality- and cost-based selection method. The TA will be implemented over a period of 12 months commencing in April 2007 and ending in March 2008. The outline terms of reference for the consultants are provided in Appendix 3. 17. The hydrocarbon database will include proprietary software and requires training of CNPA staff to operate the data management system. The hydrocarbon data management system will require compatible hardware. The data management system will be custom made based on a joint needs assessment by the CNPA and the consultants and will follow best industry practices for the oil and gas sector in terms of functions and price. ADB will approve procurement of the hydrocarbon database management system based on the recommendation of the CNPA. Given the limited number of suppliers of the required software and the integrated data management package identified, limited international bidding will be used. All equipment will be procured by the consultants in accordance with ADB s Procurement Guidelines (April 2006, as amended from time to time) and retained by the CNPA on completion of the TA. IV. THE PRESIDENT'S DECISION 18. The President, acting under the authority delegated by the Board, has approved the provision of technical assistance not exceeding the equivalent of $1,000,000 on a grant basis to the Government of Cambodia for the Institutional Strengthening of the Cambodian National Petroleum Authority, and hereby reports this action to the Board.
6 Appendix 1 DESIGN AND MONITORING FRAMEWORK Design Summary Impact Development of the oil and gas sector in Cambodia. Outcome Improved capacity of the CNPA to manage petroleum sector operations. Performance Targets/Indicators Indicated by the allocation of petroleum blocks for exploration and production and, in the long run, an increase in the sector s contribution to state revenues. Appropriate policies and actions stimulating investment in the sector by 2009. Data Sources/ Reporting Mechanisms Government statistics and financial, industrial, and other reports containing the sector s performance data Official reports and feedback from the CNPA, the Council of Ministers, and private oil companies Consultants working papers and reports ADB missions and back-to-office reports Official reports and feedback from the CNPA, private oil companies, and the Council of Ministers Assumptions and Risks Assumptions Government commitment to improve sector policy and regulation. Availability of oil and gas resources. Assumptions Continued and free functioning of the CNPA. Availability of oil and gas resources in Cambodia. Risk Legislation on oil and gas not submitted to the National Assembly for approval. Outputs 1. Build the capacity of the CNPA to undertake (i) economic simulation modeling to test alternative negotiation positions, (ii) production and petroleum cost accounting, (iii) contract management, (iv) production plan evaluation, (v) qualification and selection of foreign and national service contractors through transparent and competitive procurement procedures, and (vi) environmental management and inspection of petroleum operations. Training programs developed for CNPA staff on technical aspects of petroleum development by May 2007. Acquisition of software and operating systems for economic analysis, hydrocarbon database management, and petroleum accounting by October 2007. Physical infrastructure plan developed by October 2007. Cambodia-Australia Technical Assistance Facility reports Technical assistance progress reports ADB review missions and review of safeguard documents Consultants working papers Reports and training materials Workshops Assumption Continued availability of staff in the CNPA. Risks Government delays approval of associated legislation. Inadequate counterpart staff.
Appendix 1 7 Design Summary 2. Support the development and operation of a hydrocarbon database. Performance Targets/Indicators Data Sources/ Reporting Mechanisms Assumptions and Risks 3. Develop a plan for physical infrastructure required for a domestic supply base. Activities with Milestones Inputs 1. Review road maps prepared by Australian Aid for International Development and identify key areas in which the capacity of the CNPA needs to be built by April 2007. 2. Assess the CNPA s immediate capacity needs and develop and implement a training program that includes (i) economic modeling, (ii) petroleum accounting and auditing, (iii) database management, (iv) evaluation of development plans and production permit applications according to best industry practice, (v) qualification and selection of foreign and national service contractors, and (vi) environmental management and inspection of petroleum operations by April 2007. 3. Develop a physical infrastructure plan by October 2007. 4. Prepare guidelines for environmental management plans by December 2007. 5. Implement training programs: May 2007 January 2008. ADB financing will include 22 personmonths of international and 8 person-months of national consultants ADB grant funding: $1.0 million Government in-kind contributions equivalent to $90,000 to include counterpart staff, office space, and support services ADB = Asian Development Bank, CNPA = Cambodia National Petroleum Authority.
8 Appendix 2 COST ESTIMATES AND FINANCING PLAN ($'000) Total Item Cost A. Asian Development Bank Financing a 1. Consultants a. Remuneration and Per Diem i. International Consultants 450.0 ii. National Consultants 20.0 b. International and Local Travel 100.0 c. Reports and Communications 10.0 2. Equipment b 20.0 3. Training, Seminars, and Conferences 30.0 4. Miscellaneous Administration and Support Costs 5.0 5. Data Management System for Hydrocarbon Database c 285.0 6. Contingencies 80.0 Subtotal (A) 1,000.0 B. Government Financing 1. Office Accommodation and Transport 50.0 2. Remuneration and Per Diem of Counterpart Staff 10.0 3. Studies Undertaken by the Executing Agency s National Consultants 20.0 4. Contingency 10.0 Subtotal (B) 90.0 Total 1,090.0 a b c Financed by the Japan Special Fund funded by the Government of Japan. Three desktop computers, one printer, licensed software for e-mail, financial modeling (risk analysis, including decision-tree analysis and Monte Carlo simulation), accounting and auditing, geographic information system. The equipment, hardware, and software will be turned over to the Executing Agency upon completion of the technical assistance. Purchase, installation, and training for a digital hydrocarbon database management system. The system will include hardware and software; installation and training will also be provided. All hardware and software will be acquired by the Asian Development Bank. The equipment, hardware, and software will be turned over to the Executing Agency upon completion of the technical assistance. Source: Asian Development Bank estimates.
Appendix 3 9 OUTLINE TERMS OF REFERENCE FOR CONSULTANTS 1. Implementation of the technical assistance (TA) will require the services of a multidisciplinary team of international and national consultants. An international consulting firm will be engaged for this assignment and will procure the services of both international and national experts to undertake the various components of the assignment. The international consultancy firm will be responsible for the quality and timely delivery of the entire assignment. The consultants are expected to work closely with the Cambodia National Petroleum Authority (CNPA) and will have access to data and information pertaining to the sector prepared by the CNPA, contractor parties, and other development partners. A. Consultants 2. Consultants with technical expertise in the oil and gas sector will assist with the institutional strengthening and capacity building of the CNPA in relation to the management of petroleum operations in Cambodia. International consultants required are (i) an upstream oil and gas legal and regulatory expert (team leader), (ii) an environment and safety expert, (iii) an upstream oil and gas economist, (iv) a financial expert, and (v) a geologist. The national consultants will assist with national laws and regulations and with training activities, including skill enhancement of CNPA staff in connection with the Internet, e-mail, and other computer-based programs. The tasks of the international and national experts include, but are not restricted to the following: (i) (ii) (iii) (iv) (v) (vi) (vii) Review and assess the capability of the CNPA in relation to (a) carrying out inspections, (b) undertaking economic modeling, (c) accounting and auditing of cost statements and production reports, (d) managing geological and geophysical data provided by international oil companies, (e) evaluating development plans and processing applications for production permits, (f) qualifying and selecting subcontractors engaged for block A, (g) implementing the upstream strategic road map, and (h) monitoring environmental management plans. Build the CNPA s capacity to review and assess project schedules, proposed development plans, and cost estimates as prepared by operators in terms of time frames for approval of work programs, realistic cost estimates, and applications for production permits. Develop the CNPA s capacity to review and assess the data management plan as prepared by contract operators in terms of consistency with the petroleum agreements, petroleum regulations, and good petroleum industry practice. Build the CNPA s capacity to review and assess accounting procedures and conduct audits for consistency with the petroleum agreement, petroleum regulations, and good petroleum industry accounting practices. Build the CNPA s capacity to review and assess the environmental impact reports and environmental management plans to be prepared by contract operators for consistency with the petroleum agreement, petroleum regulations, Cambodia s environmental regulations, and best industry practices. Develop the CNPA s capacity to review and assess the safety plans to be prepared by the contract operators for consistency with the petroleum agreement, petroleum regulations, Cambodia s health and labor regulations, and good industry practices. Develop the CNPA s ability to review and assess the procurement program for oilfield services and materials to be prepared by contract operators and determine its consistency with the petroleum agreement, petroleum regulations, good industry practices, competitiveness, opportunities for local businesses, and employment of Cambodian nationals.
10 Appendix 3 (viii) Build the CNPA s capacity to conduct inspections of petroleum operations to oversee compliance with the petroleum agreement, petroleum regulations, and other relevant laws and regulations. (ix) Develop the CNPA s capacity to adopt international standards under the petroleum regulations. (x) Develop the CNPA s ability to manage the revenues from royalties and profit sharing, including production payments, crude oil lifting and marketing arrangements, and gas balancing agreements and the inspection and testing of equipment at custody transfer points. (xi) Based on the foregoing recommendations, and in consultation with the CNPA, prepare a training program and conduct training programs for CNPA staff in each of the target areas that is consistent with employees position descriptions and task assignments. (xii) Identify detailed user requirements for the hydrocarbon database management system. (xiii) Review the CNPA s information technology systems and recommend and direct the procurement of appropriate software, operating systems, vendor support and training for (a) a hydrocarbon database management system, (b) economic modeling, and (c) petroleum accounting according to the implementing rules and regulations governing public procurement. (xiv) Provide training to CNPA staff to undertake economic modeling. (xv) Develop the physical infrastructure plan for the oil and gas sector. (xvi) Develop projections of development costs, revenues (royalties, production sharing, and taxes) for each contract block as inputs for the financial model. (xvii) Help the CNPA participate in semiannual and special meetings of the Joint Review Committee for each contract block. (xviii) Assist the CNPA to revise and implement the upstream strategic road map. 3. It is envisaged that the international legal and regulatory expert will be engaged for 8 person-months, the environmentalist for 3 person-months, the economist for 3 person-months, the accounting and financial expert for 2 person-months, and the geologist for 5 person-months. The national legal expert will be recruited for 3 person-months and the national information technology expert for 5 person-months. B. Reports 4. The TA consultants will prepare and submit progress and other reports to the CNPA and to the Asian Development Bank as follows: (i) (ii) An inception report outlining the TA consultants work program within 2 weeks of the commencement of the TA indicating the immediate institutional strengthening and training needs of the CNPA along with a detailed program on how information technology and training will be prioritized. The inception report should also indicate how the TA consultants plan to provide on-job-training to CNPA staff and other relevant officials from ministries that coordinate roles and responsibilities with the CNPA. An interim report within 3 months of commencement of the TA. The interim report will describe the status of petroleum operations in each block and the CNPA s progress with management of the respective petroleum agreements, the priority for acquiring software, and the capacity of the CNPA to further utilize the TA provided.
Appendix 3 11 (iii) (iv) (v) (vi) A limited international bidding document for the procurement of a hydrocarbon database and associated hardware, with particular attention paid to the bid data sheet stating detailed user requirements for the system. A bid evaluation report prepared in coordination with the CNPA for the hydrocarbon database. A draft final report incorporating the results of final information technology procurement and training programs. The report should also clearly spell out the types of additional information technology support and external training required and the estimated costs of such systems and training. The report should be submitted within 7 months of commencement of the TA. A final report incorporating final comments from the CNPA, the Asian Development Bank, and the donor working group on the oil and gas sector within 11 months of commencement of the TA. The TA consultants will be required to give a final presentation to the CNPA and other stakeholders.